SOUTHERN MINERAL CORP, 8-K, 1996-01-04

SOUTHERN MINERAL CORP
8-K, 1996-01-04
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) December 20, 1995
-----------------------

SOUTHERN MINERAL CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)

Nevada
-------------------------------------------------------
(State or other jurisdiction of incorporation)

0-8043 36-2068676
- --------------------------------- ---------------------------------
(Commission File Number) (IRS Employer Identification No.)

500 Dallas, Suite 2800, Houston, Texas 77002-4708
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (713) 658-9444
------------------------

17001 Northchase, Suite 690 Houston, Texas 77060-2138
---------------------------------------------------------------
(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS

On December 20, 1995, Southern Mineral Corporation (the "Company" or
"Registrant") purchased from Stone & Webster, Incorporated ("S&W") and Stone &
Webster Oil Company, Inc. ("SWOC" and together with S&W, "Sellers"), certain of
SWOC's oil and gas assets, and the outstanding capital stock of three
wholly-owned subsidiaries of S&W and SWOC engaged in oil and gas related
businesses, including production, marketing and pipelines. The aggregate
purchase price was $16,500,000 and after giving effect to production since
September 1, 1995, the aggregate cash purchase price paid was $16,200,000.

The Company financed the acquisition with internally generated funds
and two loans aggregating $15,200,000 made by Compass Bank-Houston on December
20, 1995. The Company borrowed $3,500,000 pursuant to a term loan due July 1,
1996. The Company also borrowed $11,700,000 pursuant to a revolving loan with
an initial borrowing base of $12,500,000, due June 1, 1998. The term loan
bears interest at a floating per annum rate equal to the highest prime rate
published in the Wall Street Journal's "Money Rates" table ("Floating Prime
Rate") plus two percent. Revolving loans bear interest, at the Company's
option, at either the Floating Prime Rate or at a per annum LIBO rate
determined by reference to Telerate Page 3750 (or if unavailable, similar
service) plus (i) two and one-half percent until the term loan is paid in full,
and thereafter (ii) two and one-quarter percent. The loans are secured by
substantially all assets of the Company and its subsidiaries.

This summary is qualified in its entirety by the October 31, 1995
Purchase and Sale Agreement between the Company and Sellers filed as an exhibit
to Registrant's Form 8-K dated October 31, 1995, and the December 20, 1995
Compass Bank-Houston loan documents filed herewith as exhibits. The December
20, 1995 News Release of the Company concerning the subject transactions is
attached hereto as an exhibit and incorporated herein by reference.

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements of Businesses Acquired.

At the time of filing this Form 8-K, it is
impracticable for Registrant to provide the required financial
statements for acquired businesses. Registrant will file the
required financial statements as an amendment to this Form 8-K
as soon as practicable, but not later than March 4, 1996.

(b) Pro Forma Financial Information.

At the time of filing this Form 8-K, it is
impracticable for Registrant to provide the required pro forma
financial information. Registrant will file the required pro
forma financial information as an amendment to this Form 8-K
as soon as practicable, but not later than March 4, 1996.

2.1 Purchase and Sale Agreement, dated as of October 31,
1995, by and among Stone & Webster, Incorporated,
Stone & Webster Oil Company, Inc. and Southern
Mineral Corporation (incorporated by reference to
Exhibit 2.1 to Form 8-K of Registrant dated October
31, 1995).

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2.2 Escrow Agreement, dated as of October 31, 1995, by
and among Southern Mineral Corporation, Stone &
Webster, Incorporated, Stone & Webster Oil Company,
Inc. and Texas Commerce Bank National Association
(incorporated by reference to Exhibit 2.2 to Form 8-K
of Registrant dated October 31, 1995).

10.1 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company,
Inc., and Compass Bank-Houston for Reducing Revolving
Line of Credit of up to $25,000,000 (filed herewith).

10.2 Promissory Note, dated December 20, 1995, in the
original principal amount of $25,000,000, made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, and Spruce Hills Production
Company, Inc. in favor of Compass Bank-Houston (filed
herewith).

10.3 Credit Agreement, dated December 20, 1995, between
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, Spruce Hills Production Company,
Inc., and Compass Bank-Houston for Term Loan of
$3,500,000 (filed herewith).

10.4 Promissory Note, dated December 20, 1995, in the
original principal amount of $3,500,000, made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture
Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company, and Spruce Hills Production
Company, Inc. in favor of Compass Bank-Houston (filed
herewith).

99 News Release of Southern Mineral Corporation dated
December 20, 1995 (filed herewith).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

January 3, 1996 SOUTHERN MINERAL CORPORATION

By: /s/ Steven H. Mikel
-----------------------------------
Steven H. Mikel, President

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EXHIBIT INDEX

2.2 Escrow Agreement, dated as of October 31, 1995, by
and among Southern Mineral Corporation, Stone &
Webster, Incorporated, Stone & Webster Oil Company,
Inc. and Texas Commerce Bank National Association
(incorporated by reference to Exhibit 2.2 to Form 8-K
of Registrant dated October 31, 1995).

99 News Release of Southern Mineral Corporation dated
December 20, 1995 (filed herewith).

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Exhibit 10.1

================================================================================

CREDIT AGREEMENT

BETWEEN

SOUTHERN MINERAL CORPORATION

SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

AND

SPRUCE HILLS PRODUCTION COMPANY, INC.

AND

COMPASS BANK-HOUSTON

DECEMBER 20, 1995

-----------------------------------------------------------------------
REDUCING REVOLVING LINE OF CREDIT OF UP TO $25,000,000
-----------------------------------------------------------------------

================================================================================
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TABLE OF CONTENTS

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ARTICLE I DEFINITIONS AND INTERPRETATION
1.1 Terms Defined Above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Additional Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Undefined Financial Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.4 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 Articles and Sections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.6 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.7 Incorporation of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE II TERMS OF FACILITY
2.1 Revolving Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Use of Loan Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4 Repayment of Loans and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5 Outstanding Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6 Time, Place, and Method of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.7 Borrowing Base Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.8 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9 Voluntary Prepayments and Conversions of Loans . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.10 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.11 Engineering Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.12 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.13 Loans to Satisfy Obligations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.14 Security Interest in Accounts; Right of Offset . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.15 General Provisions Relating to Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.16 Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.17 Limitation on Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.18 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.19 Regulatory Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.20 Limitations on Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.21 Letters in Lieu of Transfer Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.22 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ARTICLE III CONDITIONS
3.1 Receipt of Loan Documents and Other Items . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.2 Each Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ARTICLE IV REPRESENTATIONS AND WARRANTIES
4.1 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.2 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3 Valid and Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.4 Security Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.5 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.6 Scope and Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.7 No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.8 Liabilities, Litigation, and Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>

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4.9 Authorizations; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.12 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.13 Compliance with Federal Reserve Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.14 Investment Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.15 Public Utility Holding Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.16 Proper Filing of Tax Returns; Payment of Taxes Due . . . . . . . . . . . . . . . . . . . . . . . 34
4.17 Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.18 Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.19 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.20 Casualties or Taking of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.21 Locations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.22 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

ARTICLE V AFFIRMATIVE COVENANTS
5.1 Maintenance and Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.2 Quarterly Financial Statements; Compliance Certificates . . . . . . . . . . . . . . . . . . . . 36
5.3 Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.4 Financial Statements of Diverse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.5 Oil and Gas Reserve Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.6 Title Opinions; Title Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.7 Notices of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.8 Letters in Lieu of Transfer Orders; Division Orders . . . . . . . . . . . . . . . . . . . . . . 39
5.9 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.11 Payment of Assessments and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.12 Maintenance of Corporate Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . 40
5.13 Payment of Notes; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.14 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.15 Initial Fees and Expenses of Counsel to Lender 41
5.16 Subsequent Fees and Expenses of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.17 Operation of Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.18 Maintenance and Inspection of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.19 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.20 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

ARTICLE VI NEGATIVE COVENANTS
6.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.2 Contingent Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.4 Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.5 Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.6 Loans or Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.8 Dividends and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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6.9 Issuance of Stock; Changes in Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . 45
6.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.11 Lines of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.12 Plan Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.13 New Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.14 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.15 Cash Flow Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ARTICLE VII EVENTS OF DEFAULT
7.1 Enumeration of Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

ARTICLE VIII MISCELLANEOUS
8.1 Transfers; Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
8.2 Survival of Representations, Warranties, and Covenants . . . . . . . . . . . . . . . . . . . . . 49
8.3 Notices and Other Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
8.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.5 Rights of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.6 Renewals; Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.7 No Waiver; Rights Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.8 Survival Upon Unenforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.9 Amendments; Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.10 Controlling Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.11 Disposition of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.12 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.13 JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.14 WAIVER OF RIGHTS TO JURY TRIAL 51
8.15 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.16 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>

LIST OF EXHIBITS

Exhibit I - Form of Note
Exhibit II - Form of Opinion of Counsel
Exhibit III - Form of Compliance Certificate
Exhibit VI - Disclosures

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CREDIT AGREEMENT

THIS CREDIT AGREEMENT is made and entered into this 20th day of
December, 1995, by and between SOUTHERN MINERAL CORPORATION, a Nevada
corporation, (the "Borrower"), SMC PRODUCTION CO., a Texas corporation, SAN
SALVADOR DEVELOPMENT COMPANY, INC., a Texas corporation, VENTURE RESOURCES,
INC., a Texas corporation, VENTURE PIPELINE COMPANY, a Texas corporation,
VENGAS PIPELINE COMPANY, a Texas corporation and SPRUCE HILLS PRODUCTION
COMPANY, INC., a Delaware corporation ("Co-Borrowers") and COMPASS
BANK-HOUSTON, a state chartered banking institution (the "Lender").

W I T N E S S E T H:

In consideration of the mutual covenants and agreements herein
contained, the Borrower and the Co- Borrowers and the Lender hereby agree as
follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

1.1 Terms Defined Above. As used in this Credit Agreement,
the terms "Borrower", "Co-Borrowers" and "Lender" shall have the meaning
assigned to them hereinabove.

1.2 Additional Defined Terms. As used in this Credit
Agreement, each of the following terms shall have the meaning assigned thereto
in this Section, unless the context otherwise requires:

"Additional Costs" shall mean costs which the Lender determines
are attributable to its obligation to make or its making or maintaining
any Fixed Rate Loan, or any reduction in any amount receivable by the
Lender in respect of any such obligation or any Fixed Rate Loan, resulting
from any Regulatory Change which (a) changes the basis of taxation of any
amounts payable to the Lender under this Agreement or the Note in respect
of any Fixed Rate Loan (other than taxes imposed on the overall net income
of the Lender), (b) imposes or modifies any reserve, special deposit,
minimum capital, capital rates, or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, the Lender (including Fixed Rate Loans and Dollar deposits
in the London interbank market in connection with LIBO Rate Loans), or any
commitments of the Lender hereunder, or (c) imposes any other condition

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affecting this Agreement or any of such extensions of credit, liabilities,
or commitments.

"Adjusted LIBO Rate" shall mean, for any LIBO Rate Loan, an
interest rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) determined by the Lender to be equal to the sum of the LIBO
Rate for such Loan plus the Applicable Margin, but in no event exceeding
the Highest Lawful Rate.

"Affiliate" shall mean any Person directly or indirectly
controlling, or under common control with, the Borrower and includes any
Subsidiary of the Borrower and any "affiliate" of the Borrower within the
meaning of Reg. Section 240.12b-2 of the Securities Exchange Act of 1934,
as amended, with "control," as used in this definition, meaning
possession, directly or indirectly, of the power to direct or cause the
direction of management, policies or action through ownership of voting
securities, contract, voting trust, or membership in management or in the
group appointing or electing management or otherwise through formal or
informal arrangements or business relationships.

"Agreement" shall mean this Credit Agreement, as it may be
amended, supplemented, or restated from time to time.

"Applicable Lending Office" shall mean, for each type of Loan, the
lending office of the Lender (or an affiliate of the Lender) designated
for such type of Loan on the signature pages hereof or such
other office of the Lender (or an affiliate of the Lender) as the Lender
may from time to time specify to the Borrower as the office by which
Loans of such type are to be made and maintained.

"Applicable Margin" shall mean as to each LIBO Rate Loan, two and
one-half percent (2 1/2%). Such margin shall reduce to two and
one-quarter percent (2 1/4%) when the Term Loan has been paid in full.

"Available Commitment" shall mean, at any time, an amount equal to
the remainder, if any, of (a) the Borrowing Base in effect at such time
minus (b) the Loan Balance at such time.

"Borrowing Base" shall mean, at any time, the amount determined by
the Lender in accordance with Section 2.7 and then in effect.

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<PAGE> 7
"Borrowing Request" shall mean each written request, in
substantially the form attached hereto as Exhibit II, by the Borrower
and/or the Co-Borrowers to the Lender for a borrowing, conversion, or
prepayment pursuant to Sections 2.1 or 2.9, each of which shall:

(a) be signed by a Responsible Officer of the Borrower
and/or the Co- Borrowers;

(b) specify the amount and type of Loan requested,
and, as applicable, the Loan to be converted or prepaid and
the date of the borrowing, conversion, or prepayment (which
shall be a Business Day);

(c) when requesting a Floating Rate Loan, be delivered
to the Lender no later than 10:00 a.m., Central Standard or
Daylight Savings Time, as the case may be, on the Business Day
of the requested borrowing, conversion, or prepayment;

(d) when requesting a LIBO Rate Loan, be delivered to
the Lender no later than 10:00 a.m., Central Standard or
Daylight Savings Time, as the case may be, two Business Days
preceding the requested borrowing, conversion, or prepayment
and designate the Interest Period requested with respect to
such Loan.

"Business Day" shall mean (a) for all purposes other than as
covered by clause (b) of this definition, a day other than a Saturday,
Sunday, legal holiday for commercial banks under the laws of the State
of Texas, or any other day when banking is suspended in the State of
Texas, and (b) with respect to all requests, notices, and
determinations in connection with, and payments of principal and
interest on, LIBO Rate Loans, a day which is a Business Day described
in clause (a) of this definition and which is a day for trading by and
between banks for Dollar deposits in the London interbank market.

"Cash Flow" shall mean, for any period, Net Income of the
Borrower and the Co-Borrowers for such period plus depreciation,
amortization, depletion, and other non-cash expenses less non-cash
revenue of the Borrower and the Co-Borrowers for such period.

"Closing Date" shall mean the date of this Agreement.

3
<PAGE> 8
"Collateral" shall mean the Mortgaged Properties and any other
Property now or at any time used or intended as security for the
payment or performance of all or any portion of the Obligations which
is subject to a Security Instrument.

"Commitment" shall mean the obligation of the Lender, subject
to applicable provisions of this Agreement, to make Loans to or for the
benefit of the Borrower and the Co-Borrowers pursuant to Section 2.1.

"Commitment Amount" shall mean the amount equal to the
Borrowing Base.

"Commitment Fee" shall mean each fee payable to the Lender by
the Borrower and/or the Co- Borrowers pursuant to Section 2.10.

"Commitment Period" shall mean the period from and including
the Closing Date to but not including the Commitment Termination Date.

"Commitment Termination Date" shall mean June 1, 1998.

"Commonly Controlled Entity" shall mean any Person which is
under common control with the Borrower within the meaning of Section
4001 of ERISA.

"Compliance Certificate" shall mean each certificate,
substantially in the form attached hereto as Exhibit III, executed by a
Responsible Officer of the Borrower and the Co-Borrowers and furnished
to the Lender from time to time in accordance with Section 5.2.

"Contingent Obligation" shall mean, as to any Person, any
obligation of such Person guaranteeing or in effect guaranteeing any
Indebtedness, leases, dividends, or other obligations of any other
Person (for purposes of this definition, a "primary obligation") in any
manner, whether directly or indirectly, including, without limitation,
any obligation of such Person, regardless of whether such obligation is
contingent, (a) to purchase any primary obligation or any Property
constituting direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any primary obligation,
or (ii) to maintain working or equity capital of any other Person in
respect of any primary obligation, or otherwise to maintain the net
worth or solvency of any other Person, (c) to purchase Property,
securities or services primarily for the purpose of

4
<PAGE> 9
assuring the owner of any primary obligation of the ability of the
Person primarily liable for such primary obligation to make payment
thereof, or (d) otherwise to assure or hold harmless the owner of any
such primary obligation against loss in respect thereof, with the
amount of any Contingent Obligation being deemed to be equal to the
stated or determinable amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith.

"Debt Service" shall mean an amount equal to (i) actual
principal amounts paid on debt other than this facility during each
quarter plus (ii) 1/20 of the sum of the Loan Balance of this facility
and the Term Loan at the end of such quarter.

"Default" shall mean any event or occurrence which with the
lapse of time or the giving of notice or both would become an Event of
Default.

"Default Rate" shall mean a per annum interest rate equal to
the Index Rate plus five percent (5%), but in no event exceeding the
Highest Lawful Rate.

"Diverse" shall mean Diverse GP III.

"Dollars" and "$" shall mean dollars in lawful currency of the
United States of America.

"Engineering Fee" shall mean each fee payable to the Lender by
the Borrower and/or the Co- Borrowers pursuant to Section 2.11.

"Environmental Complaint" shall mean any written or oral
complaint, order, directive, claim, citation, notice of environmental
report or investigation, or other notice by any Governmental Authority
with respect to (a) air emissions, (b) spills, releases, or discharges
to soils, any improvements located thereon, surface water, groundwater,
or the sewer, septic, waste treatment, storage, or disposal systems
servicing any Property of the Borrower and/or the Co- Borrowers, (c)
solid or liquid waste disposal, (d) the use, generation, storage,
transportation, or disposal of any Hazardous Substance, or (e) other
environmental, health, or safety mattersaffecting any Property of the
Borrower and/or the Co-Borrowers or the business conducted thereon.

5
<PAGE> 10
"Environmental Laws" shall mean (a) the following federal laws
as they may be cited, referenced, and amended from time to time: the
Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the
Comprehensive Environmental Response, Compensation and Liability Act,
the Endangered Species Act, the Resource Conservation and Recovery Act,
the Occupational Safety and Health Act, the Hazardous Materials
Transportation Act, the Superfund Amendments and Reauthorization Act,
and the Toxic Substances Control Act; (b) any and all equivalent
environmental statutes of any state in which Property of the Borrower
and/or the Co-Borrowers is situated, as they may be cited, referenced
and amended from time to time; (c) any rules or regulations promulgated
under or adopted pursuant to the above federal and state laws; and (d)
any other equivalent federal, state, or local statute or any
requirement, rule, regulation, code, ordinance, or order adopted
pursuant thereto, including, without limitation, those relating to the
generation, transportation, treatment, storage, recycling, disposal,
handling, or release of Hazardous Substances.

"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations thereunder
and interpretations thereof.

"Event of Default" shall mean any of the events specified in
Section 7.1.

"Facility Fee" shall mean the fee payable to the Lender by the
Borrower and/or the Co- Borrowers pursuant to Section 2.12.

"Final Maturity" shall mean June 1, 1998.

"Financial Statements" shall mean statements of the financial
condition of the Borrower and the Co-Borrowers as at the point in time
and for the period indicated and consisting of at least a balance sheet
and related statements of operations, common stock and other
stockholders' equity, and cash flows for the Borrower on a consolidated
and consolidating basis with the Co-Borrowers and statements of the
financial condition of Diverse GP III as provided by Diverse GP III
and, when required by applicable provisions of this Agreement to be
audited, accompanied by the unqualified certification of a
nationally-recognized firm of independent certified public accountants
or other independent certified public accountants acceptable to the
Lender and footnotes to any of the foregoing, all of which shall be
prepared in accordance with GAAP consistently applied and in

6
<PAGE> 11
comparative form with respect to the corresponding period of the
preceding fiscal period.

"Fixed Rate Loan" shall mean any LIBO Rate Loan.

"Floating Rate" shall mean an interest rate per annum equal to
the Index Rate from time to time in effect, but in no event exceeding
the Highest Lawful Rate.

"Floating Rate Loan" shall mean any Loan and any portion of
the Loan Balance which the Borrower and/or the Co-Borrowers have
requested, in the initial Borrowing Request for such Loan or a
subsequent Borrowing Request for such portion of the Loan Balance, bear
interest at the Floating Rate, or which pursuant to the terms hereof is
otherwise required to bear interest at the Floating Rate.

"GAAP" shall mean generally accepted accounting principles
established by the Financial Accounting Standards Board or the American
Institute of Certified Public Accountants and in effect in the United
States from time to time.

"Governmental Authority" shall mean any nation, country,
commonwealth, territory, government, state, county, parish,
municipality, or other political subdivision and any entity exercising
executive, legislative, judicial, regulatory, or administrative
functions of or pertaining to government.

"Hazardous Substances" shall mean flammables, explosives,
radioactive materials, hazardous wastes, asbestos, or any material
containing asbestos, polychlorinated biphenyls (PCBs), toxic substances
or related materials, petroleum, petroleum products, associated oil or
natural gas exploration, production, and development wastes, or any
substances defined as "hazardous substances," "hazardous materials,"
"hazardous wastes," or "toxic substances" under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Superfund Amendments and Reauthorization Act, as amended, the Hazardous
Materials Transportation Act, as amended, the Resource Conservation and
Recovery Act, as amended, the Toxic Substances Control Act, as amended,
or any other law or regulation now or hereafter enacted or promulgated
by any Governmental Authority.

"Highest Lawful Rate" shall mean the maximum non-usurious
interest rate, if any (or, if the context so

7
<PAGE> 12
requires, an amount calculated at such rate), that at any time or from
time to time may be contracted for, taken, reserved, charged, or
received under applicable laws of the State of Texas or the United
States of America, whichever authorizes the greater rate, as such laws
are presently in effect or, to the extent allowed by applicable law, as
such laws may hereafter be in effect and which allow a higher maximum
non- usurious interest rate than such laws now allow.

"Indebtedness" shall mean, as to any Person, without
duplication, (a) all liabilities (excluding reserves for deferred
income taxes, deferred compensation liabilities, and other deferred
liabilities and credits) which in accordance with GAAP would be
included in determining total liabilities as shown on the liability
side of a balance sheet, (b) all obligations of such Person evidenced
by bonds, debentures, promissory notes, or similar evidences of
indebtedness, (c) all other indebtedness of such Person for borrowed
money, and (d) all obligations of others, to the extent any such
obligation is secured by a Lien on the assets of such Person (whether
or not such Person has assumed or become liable for the obligation
secured by such Lien).

"Index Rate" shall mean the prime rate established in The Wall
Street Journal's "Money Rates" or similar table. If multiple prime
rates are quoted in the table, then the highest prime rate will be the
Index Rate. In the event that the prime rate is no longer published by
The Wall Street Journal in the "Money Rates" or similar table, then
Lender may select an alternative published index based upon comparable
information as a substitute Index Rate. Upon the selection of a
substitute Index Rate, the applicable interest rate shall thereafter
vary in relation to the substitute index. Such substitute index shall
be the same index that is generally used as a substitute by Lender on
all Index Rate loans.

"Insolvency Proceeding" shall mean application (whether
voluntary or instituted by another Person) for or the consent to the
appointment of a receiver, trustee, conservator, custodian, or
liquidator of any Person or of all or a substantial part of the
Property of such Person, or the filing of a petition (whether voluntary
or instituted by another Person) commencing a case under Title 11 of
the United States Code, seeking liquidation, reorganization, or
rearrangement or taking advantage of any bankruptcy, insolvency,
debtor's relief, or other similar law of the United States, the State
of Texas, or any other jurisdiction.

8
<PAGE> 13
"Intellectual Property" shall mean patents, patent
applications, trademarks, tradenames, copyrights, technology, know-how,
and processes.

"Interest Period" shall mean, subject to the limitations set
forth in Section 2.20, and with respect to any LIBO Rate Loan, a period
commencing on the date such Loan is made or converted from a Loan of
another type pursuant to this Agreement or the last day of the next
preceding Interest Period with respect to such Loan and ending on the
numerically corresponding day in the calendar month that is one, two,
three, or, subject to availability, six months thereafter, as the
Borrower and/or the Co-Borrowers may request in the Borrowing Request
for such Loan.

"Investment" in any Person shall mean any stock, bond, note,
or other evidence of Indebtedness, or any other security (other than
current trade and customer accounts) of, investment or partnership
interest in or loan to, such Person.

"LIBO Rate" shall mean, with respect to any Interest Period
for any LIBO Rate Loan, the lesser of (a) the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the average
of the offered quotations appearing on Telerate Page 3750 (or if such
Telerate Page shall not be available, any successor or similar service
selected by the Lender and the Borrower and/or the Co-Borrowers) as of
approximately 11:00 a.m., Central Standard or Daylight Savings Time, as
the case may be, on the day two Business Days prior to the first day of
such Interest Period for Dollar deposits in an amount comparable to the
principal amount of such LIBO Rate Loan and having a term comparable to
the Interest Period for such LIBO Rate Loan, or (b) the Highest Lawful
Rate. If neither such Telerate Page 3750 nor any successor or similar
service is available, the term "LIBO Rate" shall mean, with respect to
any Interest Period for any LIBO Rate Loan, the lesser of (a) the rate
per annum (rounded upwards if necessary, to the nearest 1/100 of 1%)
quoted by the Lender at approximately 11:00 a.m., London time (or as
soon thereafter as practicable) two Business Days prior to the first
day of the Interest Period for such LIBO Rate Loan for the offering by
the Lender to leading banks in the London interbank market of Dollar
deposits in an amount comparable to the principal amount of such LIBO
Rate Loan and having a term comparable to the Interest Period for such
LIBO Rate Loan, or (b) the Highest Lawful Rate.

9
<PAGE> 14
"LIBO Rate Loan" shall mean any Loan and any portion of the
Loan Balance which the Borrower and/or the Co-Borrowers have requested,
in the initial Borrowing Request for such Loan or a subsequent
Borrowing Request for such portion of the Loan Balance, bear interest
at the Adjusted LIBO Rate and which is permitted by the terms hereof to
bear interest at the Adjusted LIBO Rate.

"Lien" shall mean any interest in Property securing an
obligation owed to, or a claim by, a Person other than the owner of
such Property, whether such interest is based on common law, statute,
or contract, and including, but not limited to, the lien or security
interest arising from a mortgage, ship mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt, or a lease,
consignment, or bailment for security purposes (other than true leases
or true consignments), liens of mechanics, materialmen, and artisans,
maritime liens and reservations, exceptions, encroachments, easements,
rights of way, covenants, conditions, restrictions, leases, and other
title exceptions and encumbrances affecting Property which secure an
obligation owed to, or a claim by, a Person other than the owner of
such Property (for the purpose of this Agreement, the Borrower and/or
the Co-Borrowers shall be deemed to be the owner of any Property which
it has acquired or holds subject to a conditional sale agreement,
financing lease, or other arrangement pursuant to which title to the
Property has been retained by or vested in some other Person for
security purposes), and the filing or recording of any financing
statement or other security instrument in any public office.

"Limitation Period" shall mean any period while any amount
remains owing on the Note and interest on such amount, calculated at
the applicable interest rate, plus any fees or other sums payable under
any Loan Document and deemed to be interest under applicable law, would
exceed the amount of interest which would accrue at the Highest Lawful
Rate.

"Loan" shall mean any loan made by the Lender to or for the
benefit of the Borrower and/or the Co-Borrowers pursuant to this
Agreement.

"Loan Balance" shall mean, at any time, the outstanding
principal balance of the Note at such time.

"Loan Documents" shall mean this Agreement, the Note, the
Security Instruments, and all other documents and instruments now or
hereafter delivered pursuant to

10
<PAGE> 15
the terms of or in connection with this Agreement, the Note, or the
Security Instruments, and all renewals and extensions of, amendments
and supplements to, and restatements of, any or all of the foregoing
from time to time in effect.

"Material Adverse Effect" shall mean (a) any material adverse
effect on the business, operations, properties, condition (financial or
otherwise), or prospects of the Borrower and/or the Co-Borrowers taken
as a whole, or (b) any adverse effect upon the Collateral taken as a
whole.

"Mortgaged Properties" shall mean all Oil and Gas Properties
and pipelines of the Borrower, Co-Borrowers and the interest of
Borrower in Diverse subject to a perfected first-priority Lien in favor
of the Lender, subject only to Permitted Liens, as security for the
Obligations.

"Net Income" shall mean, for any period, the net income of the
Borrower and the Co- Borrowers for such period, determined in
accordance with GAAP.

"Note" shall mean the promissory note of the Borrower and
Co-Borrowers, in the form attached hereto as Exhibit I, together with
all renewals, extensions for any period, increases, and rearrangements
thereof.

"Obligations" shall mean, without duplication, (a) all
Indebtedness evidenced by the Note, (b) the obligation of the Borrower
and/or the Co-Borrowers for the payment of Commitment Fees, Facility
Fees, and Engineering Fees, and all other obligations and liabilities
of the Borrower and/or the Co-Borrowers to the Lender, now existing or
hereafter incurred, under, arising out of or in connection with any
Loan Document, and to the extent that any of the foregoing includes or
refers to the payment of amounts deemed or constituting interest, only
so much thereof as shall have accrued, been earned and which remains
unpaid at each relevant time of determination and (c) the Term Note.

"Oil and Gas Properties" shall mean fee, leasehold, or other
interests in or under mineral estates or oil, gas, and other liquid or
gaseous hydrocarbon leases with respect to Properties situated in the
United States or offshore from any State of the United States,
including, without limitation, overriding royalty and royalty
interests, leasehold estate interests, net profits interests,
production payment interests, and mineral fee

11
<PAGE> 16
interests, together with contracts executed in connection therewith and
all tenements, hereditaments, appurtenances and Properties
appertaining, belonging, affixed, or incidental thereto.

"Permitted Indebtedness" shall mean (a) the Obligation under
the Loan Documents, (b) Indebtedness arising from endorsing negotiable
instruments for deposit or collection in the ordinary course of
business, (c) current liabilities incurred in the ordinary course of
business, (d) purchase money Indebtedness which does not exceed an
aggregate principal amount of $500,000 during the term of this
Agreement, (e) Indebtedness existing by virtue of the requirements of
GAAP or any changes in the requirements of GAAP, (f) non-recourse
Indebtedness for SMC Development, L.P. and Southern Links Group, and
(g) Indebtedness incurred to refinance the Term Loan on terms
acceptable to Lender.

"Permitted Liens" shall mean (a) Liens for taxes, assessments,
or other governmental charges or levies not yet due or which (if
foreclosure, distraint, sale, or other similar proceedings shall not
have been initiated) are being contested in good faith by appropriate
proceedings, and such reserve as may be required by GAAP shall have
been made therefor, (b) Liens in connection with workers' compensation,
unemployment insurance or other social security (other than Liens
created by Section 4068 of ERISA), old-age pension, or public liability
obligations which are not yet due or which are being contested in good
faith by appropriate proceedings, if such reserve as may be required by
GAAP shall have been made therefor, (c) Liens in favor of vendors,
carriers, warehousemen, repairmen, mechanics, workmen, materialmen,
construction, or similar Liens arising by operation of law in the
ordinary course of business in respect of obligations which are not yet
due or which are being contested in good faith by appropriate
proceedings, if such reserve as may be required by GAAP shall have been
made therefor, (d) 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 and/or the
Co-Borrowers to secure amounts owing, which amounts are not yet due or
are being contested in good faith by appropriate proceedings, if such
reserve as may be required by GAAP shall have been made therefor, (e)
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

12
<PAGE> 17
Indebtedness and provided that such Liens do not secure obligations to
deliver hydrocarbons at some future date without receiving full payment
therefor within 90 days of delivery, (f) easements, rights of way,
restrictions, and other similar encumbrances, and minor defects in the
chain of title which are customarily accepted in the oil and gas
financing industry, none of which interfere with the ordinary conduct
of the business of the Borrower or materially detract from the value or
use of the Property to which they apply, (g) Liens in favor of the
Lender and other Liens expressly permitted under the Security
Instruments, and (h) non-recourse Indebtedness or other Indebtedness
with terms acceptable to the Lender which is used to refinance the Term
Loan.

"Person" shall mean an individual, corporation, partnership,
trust, unincorporated organization, government, any agency or political
subdivision of any government, or any other form of entity.

"Plan" shall mean, at any time, any employee benefit plan
which is covered by ERISA and in respect of which the Borrower or any
Commonly Controlled Entity is (or, if such plan were terminated at such
time, would under Section 4069 of ERISA be deemed to be) an "employer"
as defined in Section 3(5) of ERISA.

"Principal Office" shall mean the principal office of the
Lender in Houston, Texas, presently located at 24 Greenway Plaza, Suite
1401, Houston, Texas 77046.

"Property" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, tangible or intangible.

"Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System, as the same may be amended or
supplemented from time to time.

"Regulatory Change" shall mean the passage, adoption,
institution, or amendment of any federal, state, local, or foreign
Requirement of Law (including, without limitation, Regulation D), or
any interpretation, directive, or request of any Governmental Authority
or monetary authority charged with the enforcement, interpretation, or
administration thereof, occurring after the Closing Date and applying
to a class of banks including the Lender or its Applicable Lending
Office.

"Release of Hazardous Substances" shall mean any emission,
spill, release, disposal, or discharge, except

13
<PAGE> 18
in accordance with the Requirement of Law, a valid permit, license,
certificate, or approval of the relevant Governmental Authority, of any
Hazardous Substance into or upon (a) the air, (b) soils or any
improvements located thereon, (c) surface water or groundwater, or (d)
the sewer or septic system, or the waste treatment,storage, or disposal
system servicing any Property of the Borrower and/or the Co-Borrowers.

"Requirement of Law" shall mean, as to any Person, the
certificate or articles of incorporation and by-laws or other
organizational or governing documents of such Person, and any
applicable law, treaty, ordinance, order, judgment, rule, decree,
regulation, or determination of an arbitrator, court, or other
Governmental Authority, including, without limitation, rules,
regulations, orders, and requirements for permits, licenses,
registrations, approvals, or authorizations, in each case as such now
exist or may be hereafter amended and are applicable to or binding upon
such Person or any of its Property or to which such Person or any of
its Property is subject.

"Reserve Report" shall mean each report delivered to the
Lender pursuant to Section 5.5.

"Responsible Officer" shall mean, as to any Person, its
President, Chief Executive Officer, Chief Financial Officer or any Vice
President.

"Security Instruments" shall mean the security instruments
executed and delivered in satisfaction of the condition set forth in
Section 3.1(f), and all other documents and instruments at any time
executed as security for all or any portion of the Obligations, as such
instruments may be amended, restated, or supplemented from time to
time.

"Subsidiary" shall mean, as to any Person, a corporation of
which shares of stock having ordinary voting power (other than stock
having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by such Person.

"Superfund Site" shall mean those sites listed on the
Environmental Protection Agency National Priority List and eligible for
remedial action or any comparable

14
<PAGE> 19
state registries or list in any state of the United States.

"Tangible Net Worth" shall mean (a) total assets, as would be
reflected on a balance sheet of the Borrower prepared on a consolidated
basis and in accordance with GAAP, exclusive of Intellectual Property,
experimental or organization expenses, franchises, licenses, permits,
and other intangible assets, treasury stock, unamortized underwriters'
debt discount and expenses, and goodwill minus (b) total liabilities,
as would be reflected on a balance sheet of the Borrower prepared on a
consolidated basis and in accordance with GAAP.

"Term Loan" shall mean the loan of even date herewith from the
Lender to the Borrower and the Co-Borrowers in the amount of
$3,500,000.

"Transferee" shall mean any Person to which the Lender has
sold, assigned, transferred, or granted a participation in any of the
Obligations, as authorized pursuant to Section 8.1, and any Person
acquiring, by purchase, assignment, transfer, or participation, from
any such purchaser, assignee, transferee, or participant, any part of
such Obligations.

"UCC" shall mean the Uniform Commercial Code as from time to
time in effect in the State of Texas.

1.3 Undefined Financial Accounting Terms. Undefined
financial accounting terms used in this Agreement shall be defined according to
GAAP at the time in effect.

1.4 References. References in this Agreement to Exhibit,
Article, or Section numbers shall be to Exhibits, Articles, or Sections of this
Agreement, unless expressly stated to the contrary. References in this
Agreement to "hereby," "herein," "hereinafter," "hereinabove," "hereinbelow,"
"hereof," "hereunder" and words of similar import shall be to this Agreement in
its entirety and not only to the particular Exhibit, Article, or Section in
which such reference appears.

1.5 Articles and Sections. This Agreement, for
convenience only, has been divided into Articles and Sections; and it is
understood that the rights and other legal relations of the parties hereto
shall be determined from this instrument as an entirety and without regard to
the aforesaid division into Articles and Sections and without regard to
headings prefixed to such Articles or Sections.

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<PAGE> 20
1.6 Number and Gender. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural; and likewise, the plural shall be understood to include the singular.
Definitions of terms defined in the singular or plural shall be equally
applicable to the plural or singular, as the case may be, unless otherwise
indicated. Words denoting sex shall be construed to include the masculine,
feminine and neuter, when such construction is appropriate; and specific
enumeration shall not exclude the general but shall be construed as cumulative.

1.7 Incorporation of Exhibits. The Exhibits attached to
this Agreement are incorporated herein and shall be considered a part of this
Agreement for all purposes.

ARTICLE II

TERMS OF FACILITY

2.1 Revolving Line of Credit. (a) Upon the terms and
conditions (including, without limitation, the right of the Lender to decline
to make any Loan so long as any Default or Event of Default exists) and relying
on the representations and warranties contained in this Agreement, the Lender
agrees, during the Commitment Period, to make Loans, in immediately available
funds at the Applicable Lending Office or the Principal Office, to or for the
benefit of the Borrower and/or the Co-Borrowers, from time to time on any
Business Day designated by the Borrower and/or the Co-Borrowers following
receipt by the Lender of a Borrowing Request; provided, however, no Loan shall
exceed the then existing Available Commitment.

(b) Subject to the terms of this Agreement, during the
Commitment Period, the Borrower and/or the Co-Borrowers may borrow, repay, and
reborrow and convert Loans of one type or with one Interest Period into Loans
of another type or with a different Interest Period. Except for prepayments
made pursuant to Section 2.8, each borrowing, conversion, and prepayment of
principal of Loans shall be in an amount at least equal to $100,000. Each
borrowing, prepayment, or conversion of or into a Loan of a different type or,
in the case of a Fixed Rate Loan, having a different Interest Period, shall be
deemed a separate borrowing, conversion, and prepayment for purposes of the
foregoing, one for each type of Loan or Interest Period. Anything in this
Agreement to the contrary notwithstanding, the aggregate principal amount of
LIBO Rate Loans having the same Interest Period shall be at least equal to
$100,000; and if any LIBO Rate Loan would otherwise be in a lesser principal
amount for any period, such Loan shall be a Floating Rate Loan during such
period.

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<PAGE> 21
(c) The Loans shall be made and maintained at the Applicable
Lending Office or the Principal Office and shall be evidenced by the Note.

2.2 Use of Loan Proceeds. Proceeds of all Loans shall be
used for the acquisition of the assets of Stone & Webster Oil Company, Inc. and
the stock of San Salvador Development Company, Inc., Spruce Hills Production
Company, Inc. and Venture Resources, Inc. and general corporate purposes of the
Borrower and Co- Borrowers.

2.3 Interest. Subject to the terms of this Agreement
(including, without limitation, Section 2.15), interest on the Loans shall
accrue and be payable at a rate per annum equal to the Floating Rate for each
Floating Rate Loan and the Adjusted LIBO Rate for each LIBO Rate Loan.
Interest on all Floating Rate Loans shall be computed on the basis of a year of
365 or 366 days, as the case may be, and actual days elapsed (including the
first day but excluding the last day) during the period for which payable.
Interest on all LIBO Rate Loans shall be computed on the basis of a year of 360
days, and actual days elapsed (including the first day but excluding the last
day) during the period for which payable. Notwithstanding the foregoing,
interest on past-due principal and, to the extent permitted by applicable law,
past-due interest, shall accrue at the Default Rate, computed on the basis of a
year of 365 or 366 days, as the case may be, and actual days elapsed (including
the first day but excluding the last day) during the period for which payable,
and shall be payable upon demand by the Lender at any time as to all or any
portion of such interest. In the event that the Borrower and/or the
Co-Borrowers fail to select the duration of any Interest Period for any Fixed
Rate Loan within the time period and otherwise as provided herein, such Loan
(if outstanding as a Fixed Rate Loan) will be automatically converted into a
Floating Rate Loan on the last day of the then current Interest Period for such
Loan or (if outstanding as a Floating Rate Loan) will remain as, or (if not
then outstanding) will be made as, a Floating Rate Loan. Interest provided for
herein shall be calculated on unpaid sums actually advanced and outstanding
pursuant to the terms of this Agreement and only for the period from the date
or dates of such advances until repayment.

2.4 Repayment of Loans and Interest. Accrued and unpaid
interest on each outstanding Floating Rate Loan shall be due and payable
monthly commencing on the first day of January, 1996, and continuing on the
first day of each calendar month thereafter while any Floating Rate Loan
remains outstanding, the payment in each instance to be the amount of interest
which has accrued and remains unpaid in respect of the relevant Loan. Accrued
and unpaid interest on each outstanding Fixed Rate Loan shall be due and
payable on the last day of the Interest Period for such Fixed Rate Loan and, in
the case of any Interest Period in excess of three

17
<PAGE> 22
months, on the day of the third calendar month following the commencement of
such Interest Period corresponding to the day of the calendar month on which
such Interest Period commenced, the payment in each instance to be the amount
of interest which has accrued and remains unpaid in respect of the relevant
Loan. The Loan Balance, together with all accrued and unpaid interest thereon,
shall be due and payable at Final Maturity. At the time of making each payment
hereunder or under the Note, the Borrower and/or the Co-Borrowers shall specify
to the Lender the Loans or other amounts payable by the Borrower and/or the
Co-Borrowers hereunder to which such payment is to be applied. In the event
the Borrower and/or the Co-Borrowers fail to so specify, or if an Event of
Default has occurred and is continuing, the Lender may apply such payment as it
may elect in its sole discretion.

2.5 Outstanding Amounts. The Loan Balance reflected by
the notations by the Lender on its records or ledger sheets affixed to the Note
shall be deemed rebuttably presumptive evidence of the Loan Balance. The
liability for payment of principal and interest evidenced by the Note shall be
limited to principal amounts actually advanced and outstanding pursuant to this
Agreement and interest on such amounts calculated in accordance with this
Agreement.

2.6 Time, Place, and Method of Payments. All payments
required pursuant to this Agreement or the Note shall be made in lawful money
of the United States of America and in immediately available funds, shall be
deemed received by the Lender on the next Business Day following receipt if
such receipt is after 2:00 p.m., Central Standard or Daylight Savings Time, as
the case may be, on any Business Day, and shall be made at the Principal
Office. Except as provided to the contrary herein, if the due date of any
payment hereunder or under the Note would otherwise fall on a day which is not
a Business Day, such date shall be extended to the next succeeding Business
Day, and interest shall be payable for any principal so extended for the period
of such extension.

2.7 Borrowing Base Determinations. (a) The Borrowing Base
as of the Closing Date is acknowledged by the Borrower and the Co-Borrowers and
the Lender to be $12,500,000. Commencing on January 1, 1996, and continuing
thereafter on the first day of each calendar month until the earlier of the
date such amount is redetermined or the Commitment Termination Date, the amount
of the Borrowing Base shall be reduced by $215,000.

(b) The Borrowing Base shall be redetermined semi-annually
beginning June 1, 1996, on the basis of information supplied by the Borrower in
compliance with the provisions of this Agreement, including, without
limitation, Reserve Reports, and all other information available to the Lender.
In addition, the Lender shall, in the normal course of business following a
request of the

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<PAGE> 23
Borrower, redetermine the Borrowing Base; provided, however, the Lender shall
not be obligated to respond to more than four such requests during any calendar
year, and in no event shall the Lender be required to redetermine the Borrowing
Base more than once in any three-month period, including, without limitation,
each scheduled semi-annual redetermination provided for above. Notwithstanding
the foregoing, the Lender may at its discretion redetermine the Borrowing Base
and the amount by which the Borrowing Base shall be reduced each calendar month
as set forth in Section 2.7 (a) at any time and from time to time.

(c) Upon each determination of the Borrowing Base by the
Lender, the Lender shall notify the Borrower orally (confirming such notice
promptly in writing) of such determination, and the Borrowing Base and the
amount by which the Borrowing Base shall be reduced so communicated to the
Borrower shall become effective upon such oral notification and shall remain in
effect until the next subsequent determination of the Borrowing Base and the
amount by which the Borrowing Base shall be reduced.

(d) The Borrowing Base shall represent the determination by
the Lender, in accordance with the applicable definitions and provisions herein
contained and its customary lending practices for loans of this nature, of the
value, for loan purposes, of the Mortgaged Properties, plus certain other Oil
and Gas Properties to be determined in sole discretion of the Lender subject,
in the case of any increase in the Borrowing Base, to the credit approval
process of the Lender. Furthermore, the Borrower and/or the Co-Borrowers
acknowledge that the determination of the Borrowing Base contains an equity
cushion (market value in excess of loan value), which is acknowledged by the
Borrower and/or the Co-Borrowers to be essential for the adequate protection of
the Lender.

2.8 Mandatory Prepayments. If at any time the Loan
Balance exceeds the Borrowing Base then in effect, the Borrower and/or the
Co-Borrower shall, within 30 days of notice from the Lender of such occurrence,
(a) prepay, or make arrangements acceptable to the Lender for the prepayment
of, the amount of such excess for application on the Loan Balance, (b) provide
additional collateral, of character and value satisfactory to the Lender in its
sole discretion, to secure the amount of such excess by the execution and
delivery to the Lender of Security Instruments in form and substance
satisfactory to the Lender, or (c) effect any combination of the alternatives
described in clauses (a) and (b) of this Section and acceptable to the Lender
in its sole discretion.

2.9 Voluntary Prepayments and Conversions of Loans.
Subject to applicable provisions of this Agreement, the Borrower and/or the
Co-Borrowers shall have the right at any time or from time to time to prepay
Loans and to convert Loans of one type or with one Interest Period into Loans
of another type or with a

19
<PAGE> 24
different Interest Period; provided, however, that (a) the Borrower and/or the
Co-Borrowers shall give the Lender notice of each such prepayment or conversion
of all or any portion of a Fixed Rate Loan no less than two Business Days prior
to prepayment or conversion, (b) any Fixed Rate Loan may be prepaid or
converted only on the last day of an Interest Period for such Loan, (c) the
Borrower and/or the Co-Borrowers shall pay all accrued and unpaid interest on
the amounts prepaid or converted, and (d) no such prepayment or conversion
shall serve to postpone the repayment when due of any Obligation.

2.10 Commitment Fee. In addition to interest on the Note
as provided herein and the Engineering Fees and Facility Fees payable hereunder
and to compensate the Lender for maintaining funds available, the Borrower
and/or the Co-Borrowers shall pay to the Lender, in immediately available
funds, on the first day of March, 1996, and on the first day of each third
calendar month thereafter during the Commitment Period, a fee in the amount of
one-half percent (1/2%) per annum, calculated on the basis of a year of 365 or
366 days, as the case may be, and actual days elapsed (including the first day
but excluding the last day), on the average daily amount of the Available
Commitment during the preceding quarterly period. The Commitment Fee due on
March 1, 1996, shall be calculated for the period beginning the Closing Date
through February 29, 1996, and the Commitment Fee due on the Commitment
Termination Date shall be calculated from the date of the immediately preceding
Commitment Fee payment through the Commitment Termination Date.

2.11 Engineering Fee. In addition to interest on the Note
as provided herein and the Commitment Fees and Facility Fees payable hereunder
and to compensate the Lender for the costs of evaluating the Mortgaged
Properties and reviewing the Reserve Reports, the Borrower and/or the
Co-Borrowers shall pay to the Lender, in immediately available funds, on the
date of each redetermination of the Borrowing Base during the term hereof, an
engineering fee in the amount of $10,000. The Borrower and/or the Co-Borrowers
has previously paid a non-refundable Engineering Fee in the amount of $10,000
upon acceptance of the preliminary term sheet.

2.12 Facility Fee. In addition to interest on the Note as
provided herein and Commitment Fees and Engineering Fees payable hereunder and
to compensate the Lender for the costs of the extension of credit hereunder,
the Borrower and/or the Co-Borrowers shall pay to the Lender, in immediately
available funds, a facility fee in the amount of $62,500. One half of such fee
was paid upon the acceptance of the preliminary term sheet and the remaining
one-half shall be paid on the Closing Date.

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<PAGE> 25
2.13 Loans to Satisfy Obligations of Borrower. The Lender
may, but shall not be obligated to, make Loans for the benefit of the Borrower
and/or the Co-Borrowers and apply proceeds thereof to the satisfaction of any
condition, warranty, representation, or covenant of the Borrower and/or the
Co-Borrowers contained in this Agreement or any other Loan Document. Any such
Loan shall be evidenced by the Note and shall be made as a Floating Rate Loan.

2.14 Security Interest in Accounts; Right of Offset. As
security for the payment and performance of the Obligations, the Borrower
and/or the Co-Borrowers hereby transfer, assign, and pledge to the Lender and
grant to the Lender a security interest in all funds of the Borrower and the
Co-Borrowers now or hereafter or from time to time on deposit with the Lender,
with such interest of the Lender to be retransferred, reassigned, and/or
released by the Lender, as the case may be, at the expense of the Borrower and
the Co-Borrowers upon payment in full and complete performance by the Borrower
and the Co-Borrowers of all Obligations. All remedies as secured party or
assignee of such funds shall be exercisable by the Lender upon the occurrence
of any Event of Default, regardless of whether the exercise of any such remedy
would result in any penalty or loss of interest or profit with respect to any
withdrawal of funds deposited in a time deposit account prior to the maturity
thereof. Furthermore, the Borrower and the Co-Borrowers hereby grant to the
Lender the right, exercisable at such time as any Obligation shall mature,
whether by acceleration of maturity or otherwise, of offset or banker's lien
against all funds of the Borrower and the Co-Borrowers now or hereafter or from
time to time on deposit with the Lender, regardless of whether the exercise of
any such remedy would result in any penalty or loss of interest or profit with
respect to any withdrawal of funds deposited in a time deposit account prior to
the maturity thereof.

2.15 General Provisions Relating to Interest. (a) It is
the intention of the parties hereto to comply strictly with the usury laws of
the State of Texas and the United States of America. In this connection, there
shall never be collected, charged, or received on the sums advanced hereunder
interest in excess of that which would accrue at the Highest Lawful Rate. For
purposes of Article 5069-1.04, Vernon's Texas Civil Statutes, as amended, the
Borrower and the Co-Borrowers agrees that the Highest Lawful Rate shall be the
"indicated (weekly) rate ceiling" as defined in such Article, provided that the
Lender may also rely, to the extent permitted by applicable laws of the State
of Texas or the United States of America, on alternative maximum rates of
interest under other laws of the State of Texas or the United States of America
applicable to the Lender, if greater.

(b) Notwithstanding anything herein or in the Note to the
contrary, during any Limitation Period, the interest rate to be

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<PAGE> 26
charged on amounts evidenced by the Note shall be the Highest Lawful Rate, and
the obligation, if any, of the Borrower and the Co-Borrowers for the payment of
fees or other charges deemed to be interest under applicable law shall be
suspended. During any period or periods of time following a Limitation Period,
to the extent permitted by applicable laws of the State of Texas or the United
States of America, the interest rate to be charged hereunder shall remain at
the Highest Lawful Rate until such time as there has been paid to the Lender
(i) the amount of interest in excess of that accruing at the Highest Lawful
Rate that the Lender would have received during the Limitation Period had the
interest rate remained at the otherwise applicable rate, and (ii) all interest
and fees otherwise payable to the Lender but for the effect of such Limitation
Period.

(c) If, under any circumstances, the aggregate amounts paid on
the Note or under this Agreement or any other Loan Document include amounts
which by law are deemed interest and which would exceed the amount permitted if
the Highest Lawful Rate were in effect, the Borrower and the Co-Borrowers
stipulate that such payment and collection will have been and will be deemed to
have been, to the extent permitted by applicable laws of the State of Texas or
the United States of America, the result of mathematical error on the part of
the Borrower and the Co- Borrowers and the Lender; and the Lender shall
promptly refund the amount of such excess (to the extent only of such interest
payments in excess of that which would have accrued and been payable on the
basis of the Highest Lawful Rate) upon discovery of such error by the Lender or
notice thereof from the Borrower and the Co-Borrowers. In the event that the
maturity of any Obligation is accelerated, by reason of an election by the
Lender or otherwise, or in the event of any required or permitted prepayment,
then the consideration constituting interest under applicable laws may never
exceed the Highest Lawful Rate; and excess amounts paid which by law are deemed
interest, if any, shall be credited by the Lender on the principal amount of
the Obligations, or if the principal amount of the Obligations shall have been
paid in full, refunded to the Borrower and the Co-Borrowers.

(d) All sums paid, or agreed to be paid, to the Lender for the
use, forbearance and detention of the proceeds of any advance hereunder shall,
to the extent permitted by applicable law, be amortized, prorated, allocated,
and spread throughout the full term hereof until paid in full so that the
actual rate of interest is uniform but does not exceed the Highest Lawful Rate
throughout the full term hereof.

2.16 Yield Protection. (a) Without limiting the effect of
the other provisions of this Section (but without duplication), the Borrower
and/or the Co-Borrowers shall pay to the Lender from

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<PAGE> 27
time to time such amounts as the Lender may determine are necessary to
compensate it for any Additional Costs incurred by the Lender.

(b) Without limiting the effect of the other provisions of
this Section (but without duplication), the Borrower and/or the Co-Borrowers
shall pay to the Lender from time to time on request such amounts as the Lender
may determine are necessary to compensate the Lender for any costs attributable
to the maintenance by the Lender (or any Applicable Lending Office), pursuant
to any Regulatory Change, of capital in respect of the Commitment, such
compensation to include, without limitation, an amount equal to any reduction
of the rate of return on assets or equity of the Lender (or any Applicable
Lending Office) to a level below that which the Lender (or any Applicable
Lending Office) could have achieved but for such Regulatory Change.

(c) Without limiting the effect of the other provisions of
this Section (but without duplication), the Borrower and/or the Co-Borrowers
shall pay to the Lender the administrative and re-employment costs customarily
charged by Lender as a result of:

(i) any payment, prepayment, or conversion by the
Borrower and/or the Co-Borrowers of a Fixed Rate Loan on a
date other than the last day of an Interest Period for such
Loan; or

(ii) any failure by the Borrower and/or the
Co-Borrowers to borrow a Fixed Rate Loan from the Lender on
the date for such borrowing specified in the relevant
Borrowing Request;

such compensation to include, without limitation, with respect to any LIBO Rate
Loan, an amount equal to the excess, if any and only to the extent actually
incurred by Lender, of (A) the amount of interest which would have accrued on
the principal amount so paid, prepaid, converted, or not borrowed for the
period from the date of such payment, prepayment, conversion, or failure to
borrow to the last day of the then current Interest Period for such Loan (or,
in the case of a failure to borrow, the Interest Period for such Loan which
would have commenced on the date of such failure to borrow) at the applicable
rate of interest for such Loan provided for herein over (B) the interest
component (as reasonably determined by the Lender) of the amount (as reasonably
determined by the Lender) the Lender would have bid in the London interbank
market for Dollar deposits of amounts comparable to such principal amount and
maturities comparable to such period.

(d) Determinations by the Lender for purposes of this Section
of the effect of any Regulatory Change on capital maintained, its costs or rate
of return, maintaining Loans, its

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<PAGE> 28
obligation to make Loans or on amounts receivable by it in respect of Loans or
such obligations, and the additional amounts required to compensate the Lender
under this Section shall be conclusive, absent manifest error, provided that
such determinations are made on a reasonable basis. The Lender shall furnish
the Borrower with a certificate setting forth in reasonable detail the basis
and amount of increased costs incurred or reduced amounts receivable as a
result of any such event, and the statements set forth therein shall be
conclusive, absent manifest error. The Lender shall (i) notify the Borrower,
as promptly as practicable after the Lender obtains knowledge of any Additional
Costs or other sums payable pursuant to this Section and determines to request
compensation therefor, of any event occurring after the Closing Date which will
entitle the Lender to compensation pursuant to this Section; provided that the
Borrower shall not be obligated for the payment of any Additional Costs or
other sums payable pursuant to this Section to the extent such Additional Costs
or other sums accrued more than 30 days prior to the date upon which the
Borrower was given such notice; and (ii) designate a different Applicable
Lending Office for the Loans of the Lender affected by such event if such
designation will avoid the need for or reduce the amount of such compensation.
If the Lender requests compensation from the Borrower under this Section, the
Borrower may, by notice to the Lender, require that the Loans by the Lender of
the type with respect to which such compensation is requested be converted into
Floating Rate Loans in accordance with Section 2.9. Any compensation requested
by the Lender pursuant to this Section shall be due and payable to the Lender
within five days of delivery of any such notice by the Lender to the Borrower.

(e) The Lender agrees that it shall not request, and the
Borrower and/or the Co-Borrowers shall not be obligated to pay, any Additional
Costs or other sums payable pursuant to this Section unless similar additional
costs and other sums payable are also generally assessed by the Lender against
other customers of the Lender similarly situated where such customers are
subject to documents providing for such assessment.

2.17 Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, no more than 6 separate Loans shall be outstanding at
any one time, with, for purposes of this Section, all Floating Rate Loans
constituting one Loan and all LIBO Rate Loans for the same Interest Period
constituting one Loan. Anything herein to the contrary notwithstanding, if, on
or prior to the determination of any interest rate for any LIBO Rate Loan for
any Interest Period therefor:

(a) the Lender determines (which determination shall be
conclusive) that quotations of interest rates for the deposits referred
to in the definition of "LIBO Rate" in Section 1.2 are not being
provided in the relevant

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<PAGE> 29
amounts or for the relevant maturities for purposes of determining the
rate of interest for such Loan as provided in this Agreement; or

(b) the Lender determines (which determination shall be
conclusive) that the rates of interest referred to in the definition of
"LIBO Rate" in Section 1.2 upon the basis of which the rate of interest
for such Loan for such Interest Period is to be determined do not
accurately reflect the cost to the Lender of making or maintaining such
Loan for such Interest Period,

then the Lender shall give the Borrower and/or the Co-Borrowers prompt notice
thereof; and so long as such condition remains in effect, the Lender shall be
under no obligation to make LIBO Rate Loans or to convert Loans of any other
type into LIBO Rate Loans, and the Borrower and/or the Co-Borrowers shall, on
the last day of the then current Interest Period for each outstanding LIBO Rate
Loan, either prepay such LIBO Rate Loan or convert such Loan into another type
of Loan in accordance with Section 2.9. Before giving such notice pursuant to
this Section, the Lender will designate a different available Applicable
Lending Office for LIBO Rate Loans or take such other action as the Borrower
and/or the Co-Borrowers may request if such designation or action will avoid
the need to suspend the obligation of the Lender to make LIBO Rate Loans
hereunder and will not, in the opinion of the Lender, be disadvantageous to the
Lender.

2.18 Illegality. Notwithstanding any other provision of
this Agreement, in the event that it becomes unlawful for the Lender or its
Applicable Lending Office to (a) honor its obligation to make any type of Fixed
Rate Loans hereunder, or (b) maintain any type of Fixed Rate Loans hereunder,
then the Lender shall promptly notify the Borrower and the Co-Borrowers
thereof; and the obligation of the Lender hereunder to make such type of Fixed
Rate Loans and to convert other types of Loans into Fixed Rate Loans of such
type shall be suspended until such time as the Lender may again make and
maintain Fixed Rate Loans of such type, and the outstanding Fixed Rate Loans of
such type shall be converted into Floating Rate Loans in accordance with
Section 2.9. Before giving such notice pursuant to this Section, the Lender
will designate a different available Applicable Lending Office for Fixed Rate
Loans or take such other action as the Borrower and the Co-Borrowers may
request if such designation or action will avoid the need to suspend the
obligation of the Lender to make Fixed Rate Loans and will not, in the opinion
of the Lender, be disadvantageous to the Lender.

2.19 Regulatory Change. In the event that by reason of any
Regulatory Change, the Lender (a) incurs Additional Costs based on or measured
by the excess above a specified level of the amount

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<PAGE> 30
of a category of deposits or other liabilities of the Lender which includes
deposits by reference to which the interest rate on any Fixed Rate Loan is
determined as provided in this Agreement or a category of extensions of credit
or other assets of such Lender which includes any Fixed Rate Loan, or (b)
becomes subject to restrictions on the amount of such a category of liabilities
or assets which it may hold, then, at the election of the Lender with notice to
the Borrower and the Co-Borrowers, the obligation of the Lender to make such
Fixed Rate Loans and to convert Floating Rate Loans into such Fixed Rate Loans
shall be suspended until such time as such Regulatory Change ceases to be in
effect, and all such outstanding Fixed Rate Loans shall be converted into
Floating Rate Loans in accordance with Section 2.9.

2.20 Limitations on Interest Periods. Each Interest Period
selected by the Borrower and/or the Co-Borrowers (a) which commences on the
last Business Day of a calendar month (or, with respect to any LIBO Rate Loan,
any day for which there is no numerically corresponding day in the appropriate
subsequent calendar month) shall end on the last Business Day of the
appropriate subsequent calendar month, (b) which would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day), (c) which would otherwise commence
before and end after Final Maturity shall end on Final Maturity, and (d) shall
have a duration of not less than one month, as to any LIBO Rate Loan, and, if
any Interest Period would otherwise be a shorter period, the relevant Loan
shall be a Floating Rate Loan during such period.

2.21 Letters in Lieu of Transfer Orders. The Lender agrees
that none of the letters in lieu of transfer or division orders provided by the
Borrower and/or the Co-Borrowers pursuant to Section 3.1(f)(ix) or Section 5.8
will be sent to the addressees thereof prior to the occurrence of an Event of
Default, at which time the Lender may, at its option and in addition to the
exercise of any of its other rights and remedies, send any or all of such
letters.

2.22 Power of Attorney. The Borrower and the Co-Borrowers
hereby designate the Lender as their agent and attorney-in-fact, to act in
their name, place, and stead for the purpose of completing and, upon the
occurrence of an Event of Default, delivering any and all of the letters in
lieu of transfer orders delivered by the Borrower and/or the Co-Borrowers to
the Lender pursuant to Section 3.1(f)(v) or Section 5.8, including, without
limitation, completing any blanks contained in such letters and attaching
exhibits thereto describing the relevant Collateral. The Borrower and the
Co-Borrowers hereby ratify and confirm all that the Lender shall lawfully do or
cause to be done by virtue of this

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<PAGE> 31
power of attorney and the rights granted with respect to such power of
attorney. This power of attorney is coupled with the interests of the Lender
in the Collateral, shall commence and be in full force and effect as of the
Closing Date and shall remain in full force and effect and shall be irrevocable
so long as any Obligation remains outstanding or unpaid or any Commitment
exists. The powers conferred on the Lender by this appointment are solely to
protect the interests of the Lender under the Loan Documents and shall not
impose any duty upon the Lender to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers and shall not be responsible to the Borrower and the
Co-Borrowers or any other Person for any act or failure to act with respect to
such powers, except for gross negligence or willful misconduct.

ARTICLE III

CONDITIONS

The obligations of the Lender to enter into this Agreement and
to make Loans are subject to the satisfaction of the following conditions
precedent:

3.1 Receipt of Loan Documents and Other Items. The Lender
shall have no obligation under this Agreement unless and until all matters
incident to the consummation of the transactions contemplated herein,
including, without limitation, the review by the Lender or its counsel of the
title of the Borrower and/or the Co- Borrowers or Diverse to its Oil and Gas
Properties, shall be satisfactory to the Lender, and the Lender shall have
received, reviewed, and approved the following documents and other items,
appropriately executed when necessary and, where applicable, acknowledged by
one or more authorized officers of the Borrower and/or the Co-Borrowers all in
form and substance satisfactory to the Lender and dated, where applicable, of
even date herewith or a date prior thereto and acceptable to the Lender:

(a) multiple counterparts of this Agreement as requested by
the Lender;

(b) the Note;

(c) copies of the Articles of Incorporation or Certificate of
Incorporation and all amendments thereto and the bylaws and all
amendments thereto of the Borrower and the Co-Borrowers accompanied by
a certificate issued by the secretary or an assistant secretary of the
Borrower and the Co-Borrowers as the case may be, to the effect that
each such copy is correct and complete;

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(d) certificates of incumbency and signatures of all officers
of the Borrower and the Co- Borrowers who are authorized to execute
Loan Documents on behalf of the Borrower and the Co- Borrowers, each
such certificate being executed by the secretary or an assistant
secretary of the Borrower and the Co-Borrowers;

(e) copies of corporate resolutions approving the Loan
Documents and authorizing the transactions contemplated herein and
therein, duly adopted by the boards of directors of the Borrower and
the Co-Borrowers accompanied by certificates of the secretary or an
assistant secretary of the Borrower and the Co-Borrowers to the effect
that such copies are true and correct copies of resolutions duly
adopted at a meeting or by unanimous consent of the board of directors
of the Borrower and the Co-Borrowers and that such resolutions
constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified, or revoked in any
respect, and are in full force and effect as of the date of such
certificate;

(f) multiple counterparts, as requested by the Lender, of the
following Security Instruments creating, evidencing, perfecting, and
otherwise establishing Liens in favor of the Lender in and to the
Collateral:

(i) Mortgage, Deed of Trust, Indenture, Security
Agreement, Assignment of Production, and Financing Statement
from the Borrower covering all Oil and Gas Properties of the
Borrower and all improvements, personal property, and fixtures
related thereto;

(ii) Financing Statements from the Borrower, as
debtor, constituent to the instrument described in clause (i)
above;

(iii) Mortgage, Deed of Trust, Indenture, Security
Agreement, Assignment of Production, and Financing Statement
from Diverse pledging SMC Production Co.'s interest in certain
designated Oil and Gas Properties of the Borrower and all
improvements, personal property, and fixtures related thereto;

(iv) Financing Statements from Diverse, as debtor,
constituent to the instrument described in clause (i) above;

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(v) Mortgage, Deed of Trust, Indenture, Security
Agreement and Financing Statement from Venture Pipeline
Company covering certain pipelines situated in Louisiana and
all improvements, personal property, and fixtures related
thereto;

(vi) Financing Statements from Venture Pipeline
Company, as debtor, constituent to the instrument described in
clause (v) above;

(vii) Deed of Trust, Security Agreement, Financing
Statement and Assignment of Production from San Salvador
Development Company, Inc., covering all Oil and Gas Properties
of San Salvador Development Company, Inc. and all
improvements, personal property, and fixtures related thereto;

(viii) Financing Statements from San Salvador
Development Company, Inc., as debtor, constituent to the
instrument described in clause (vii) above;

(ix) Assignment of Partnership Interests (Security
Agreement) from the Borrower pledging its interest in Diverse
GP III;

(x) Financing Statement from the Borrower, as
debtor, constituent to the instrument described in clause
(vii) above;

(xi) Assignment of Partnership Interests (Security
Agreement) from Diverse pledging SMC Production Co.'s pro-rata
part of Diverse's interest in Diverse-Rimco, a general
partnership;

(xii) Financing Statement from the Borrower, as
debtor, constituent to the instrument described in clause (ix)
above;

(xiii) Assignment of Partnership Interests (Security
Agreement) from VenGas Pipeline Company pledging its interest
in Carmel Pipeline Co.;

(xiv) Financing Statement from VenGas Pipeline
Company, as debtor, constituent to the instrument described in
clause (xi) above;

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<PAGE> 34
(xv) undated letters, in form and substance
satisfactory to the Lender, from the Borrower and Diverse to
each purchaser of production and disburser of the proceeds of
production from or attributable to the Mortgaged Properties,
together with additional letters with the addressees left
blank, authorizing and directing the addressees to make future
payments attributable to production from the Mortgaged
Properties directly to the Lender;

(xvi) Security Agreement (Stock Pledge) by Borrower
of Stock of San Salvador Development Company, Inc., Venture
Resources, Inc., SMC Production Co. and Spruce Hills
Production Company, Inc.

(xvii) Security Agreement (Stock Pledge) by Venture
Resources, Inc. of stock of Venture Pipeline Co. and VenGas
Pipeline Company.

(g) audited Financial Statements of the Borrower as of
December 31, 1994, and unaudited Financial Statements of Co-Borrowers
except for SMC Production Co. as of September 30, 1995, and unaudited
Financial Statements of Diverse as of September 30, 1995.

(h) certificates dated as of a recent date from the Secretary
of State or other appropriate Governmental Authority evidencing the
existence or qualification and good standing of the Borrower and
Co-Borrowers in their respective jurisdictions of incorporation and in
any other jurisdictions where any of them does business;

(i) results of searches of the UCC Records of the Secretary of
State of the States of Arkansas, Louisiana, Michigan, Mississippi,
Oklahoma, Texas and Wyoming from a source acceptable to the Lender and
reflecting no Liens other than Permitted Liens against any of the
Collateral as to which perfection of a Lien is accomplished by the
filing of a financing statement other than in favor of the Lender;

(j) confirmation, acceptable to the Lender, of the title of
the Borrowers and Diverse to the Mortgaged Properties, free and clear
of Liens other than Permitted Liens;

(k) all operating, lease, sublease, royalty, sales, exchange,
processing, farmout, bidding, pooling,

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<PAGE> 35
unitization, communitization, and other agreements relating to the
Mortgaged Properties requested by the Lender;

(l) engineering reports covering the Mortgaged Properties;

(m) the opinion of Porter & Hedges, L.L.P., counsel to the
Borrower, in the form attached hereto as Exhibit IV, with such changes
thereto as may be approved by the Lender;

(n) certificates evidencing the insurance coverage required
pursuant to Section 5.19; and

(o) such other agreements, documents, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may
reasonably request.

3.2 Each Loan. In addition to the conditions precedent
stated elsewhere herein, the Lender shall not be obligated to make any Loan
unless:

(a) the Borrower and/or the Co-Borrowers shall have delivered
to the Lender a Borrowing Request at least the requisite time prior to
the requested date for the relevant Loan; and each statement or
certification made in such Borrowing Request shall be true and correct
in all material respects on the requested date for such Loan;

(b) no Event of Default or Default shall exist or will occur
as a result of the making of the requested Loan;

(c) if requested by the Lender, the Borrower and/or the
Co-Borrowers shall have delivered evidence satisfactory to the Lender
substantiating any of the matters contained in this Agreement which are
necessary to enable the Borrower and/or the Co-Borrowers to qualify for
such Loan;

(d) the Lender shall have received, reviewed, and approved
such additional documents and items as described in Section 3.1 as may
be requested by the Lender with respect to such Loan;

(e) no event shall have occurred which, in the reasonable
opinion of the Lender, could have a Material Adverse Effect;

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<PAGE> 36
(f) each of the representations and warranties contained in
this Agreement shall be true and correct and shall be deemed to be
repeated by the Borrower and/or the Co-Borrowers as if made on the
requested date for such Loan;

(g) the Security Instruments shall be in full force and effect
and provide to the Lender the security intended thereby;

(h) neither the consummation of the transactions contemplated
hereby nor the making of such Loan shall contravene, violate, or
conflict with any Requirement of Law;

(i) the Borrower, Co-Borrowers and Diverse shall hold full
legal title to the Collateral pledged by such entity and be the sole
beneficial owner thereof;

(j) the Lender shall have received the payment of all
Engineering Fees, Facility Fees, and other fees payable to the Lender
hereunder and reimbursement from the Borrower and/or the Co- Borrowers,
or special legal counsel for the Lender shall have received payment
from the Borrower and/or the Co-Borrowers, for (i) all reasonable fees
and expenses of counsel to the Lender for which the Borrower and/or the
Co-Borrowers is responsible pursuant to applicable provisions of this
Agreement and for which invoices have been presented as of or prior to
the date of the relevant Loan, and (ii) estimated fees charged by
filing officers and other public officials incurred or to be incurred
in connection with the filing and recordation of any Security
Instruments, for which invoices have been presented as of or prior to
the date of the requested Loan; and

(k) all matters incident to the consummation of the
transactions hereby contemplated shall be satisfactory to the Lender.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

To induce the Lender to enter into this Agreement and to make
the Loans, the Borrower and each Co- Borrower, respectively, represent and
warrant to the Lender with respect to itself and not the others (which
representations and warranties shall survive the delivery of the Note) that:

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<PAGE> 37
4.1 Due Authorization. The execution and delivery by the
Borrower and Co-Borrowers of this Agreement and the borrowings hereunder, the
execution and delivery by the Borrower and Co-Borrowers of the Note, the
repayment of the Note and interest and fees provided for in the Note and this
Agreement, the execution and delivery of the Security Instruments by the
Borrower and Co-Borrowers and the performance of all obligations of the
Borrower and Co-Borrowers under the Loan Documents are within the power of the
Borrower and Co-Borrowers, have been duly authorized by all necessary corporate
action by the Borrower and Co-Borrowers, and do not and will not to our
knowledge, (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) contravene or conflict
with any indenture, instrument, or other agreement to which the Borrower and
Co- Borrowers is a party or by which any Property of the Borrower and
Co-Borrowers may be presently bound or encumbered, or (d) result in or require
the creation or imposition of any Lien in, upon or of any Property of the
Borrower and Co-Borrowers under any such indenture, instrument, or other
agreement, other than the Loan Documents.

4.2 Corporate Existence. The Borrower and Co-Borrowers
are corporations duly organized, legally existing, and in good standing under
the laws of their states of incorporation and are duly qualified as foreign
corporations and are in good standing in all jurisdictions wherein the
ownership of Property or the operation of their business necessitates same,
other than those jurisdictions wherein the failure to so qualify will not have
a Material Adverse Effect.

4.3 Valid and Binding Obligations. All Loan Documents,
when duly executed and delivered by the Borrower and/or the Co-Borrowers, as
applicable, will be the legal, valid, and binding obligations of the Borrower
and/or the Co-Borrowers, enforceable against the Borrower and/or the
Co-Borrowers, as applicable, in accordance with their respective terms.

4.4 Security Instruments. The provisions of each Security
Instrument are effective to create in favor of the Lender, a legal, valid, and
enforceable Lien in all right, title, and interest of the Borrower and/or the
Co-Borrowers in the Collateral described therein, which Liens, assuming the
accomplishment of recording and filing in accordance with applicable laws prior
to the intervention of rights of other Persons, shall constitute fully
perfected first-priority Liens on all right, title, and interest of the
Borrower and/or the Co-Borrowers in the Collateral described therein.

4.5 Title to Assets. The Borrower and/or the Co-Borrowers
have good and defensible title to all of their respective Properties, free and
clear of all Liens except Permitted Liens.

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<PAGE> 38
4.6 Scope and Accuracy of Financial Statements. The
Financial Statements of the Borrower, Co- Borrowers (except SMC Production Co.)
as of September 30, 1995, present fairly the financial position and results of
operations and cash flows of the Borrower, Co-Borrowers (except SMC Production
Co.) in accordance with GAAP as at the relevant point in time or for the period
indicated, as applicable. No event or circumstance has occurred since
September 30, 1995, which could reasonably be expected to have a Material
Adverse Effect.

4.7 No Material Misstatements. To our knowledge, no
information, exhibit, statement, or report furnished to the Lender by or at the
direction of the Borrower and the Co-Borrowers in connection with this
Agreement contains any material misstatement of fact or omits to state a
material fact or any fact necessary to make the statements contained therein
not misleading as of the date made or deemed made.

4.8 Liabilities, Litigation, and Restrictions. Other than
as listed under the heading "Liabilities" on Exhibit VI attached hereto, the
Borrower and/or the Co-Borrowers have no liabilities, direct, or contingent,
which may materially and adversely affect its business or operations or its
ownership of the Collateral. Except as set forth under the heading
"Litigation" on Exhibit VI hereto, no litigation or other action of any nature
affecting the Borrower and/or the Co-Borrowers is pending before any
Governmental Authority or, to the best knowledge of the Borrower and/or the
Co-Borrowers, threatened against or affecting the Borrower and/or the Co-
Borrowers which might reasonably be expected to result in any impairment of its
ownership of any Collateral or have a Material Adverse Effect. No unusual or
unduly burdensome restriction, restraint or hazard exists by contract,
Requirement of Law, or otherwise relative to the business or operations of the
Borrower and/or the Co-Borrowers or the ownership and operation of the
Collateral other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower and/or the Co-Borrowers.

4.9 Compliance with Laws. The Borrower and/or the
Co-Borrowers and their Property, including, without limitation, the Mortgaged
Property, are in compliance with all applicable Requirements of Law, including,
without limitation, Environmental Laws, the Natural Gas Policy Act of 1978, as
amended, and ERISA, except to the extent non-compliance with any such
Requirements of Law could not reasonably be expected to have a Material Adverse
Effect.

4.10 ERISA. Except as set out on Exhibit VII, the Borrower
and the Co-Borrowers do not maintain nor have they maintained any Plan. The
Borrower and the Co-Borrowers do not

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currently contribute to or have any obligation to contribute to or otherwise
have any liability with respect to any Plan.

4.11 Environmental Laws. To the best knowledge and belief
of the Borrower and/or the Co- Borrowers, except as would not have a Material
Adverse Effect, or as described on Exhibit VI under the heading "Environmental
Matters:"

(a) no Property of the Borrower and/or the Co-Borrowers is
currently on or has ever been on, or is adjacent to any Property which
is on or has ever been on, any federal or state list of Superfund
Sites;

(b) no Hazardous Substances have been generated, transported,
and/or disposed of by the Borrower and/or the Co-Borrowers at a site
which was, at the time of such generation, transportation, and/or
disposal, or has since become, a Superfund Site;

(c) except in accordance with applicable Requirements of Law
or the terms of a valid permit, license, certificate, or approval of
the relevant Governmental Authority, no Release of Hazardous Substances
by the Borrower and/or the Co-Borrowers or from, affecting, or related
to any Property of the Borrower and/or the Co-Borrowers or adjacent to
any Property of the Borrower and/or the Co-Borrowers has occurred; and

(d) no Environmental Complaint has been received by the
Borrower and/or the Co-Borrowers.

4.12 Compliance with Federal Reserve Regulations. No
transaction contemplated by the Loan Documents is in violation of any
regulations promulgated by the Board of Governors of the Federal Reserve
System, including, without limitation, Regulations G, T, U, or X.

4.13 Investment Company Act Compliance. The Borrower
and/or the Co-Borrowers are not, nor are the Borrower and/or the Co-Borrowers
directly or indirectly controlled by or acting on behalf of any Person which
is, an "investment company" or an "affiliated person" of an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.

4.14 Public Utility Holding Company Act Compliance. The
Borrower and/or the Co-Borrowers are not a "holding company," or an "affiliate"
of a "holding company" or of a "subsidiary company" of a "holding company,"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.

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4.15 Proper Filing of Tax Returns; Payment of Taxes Due.
The Borrower and the Co-Borrowers have duly and properly filed a United States
income tax return and all other tax returns which are required to be filed and
has paid all taxes due except such as are being contested in good faith and as
to which adequate provisions and disclosures have been made. The respective
charges and reserves on the books of the Borrower and the Co-Borrowers with
respect to taxes and other governmental charges are adequate.

4.16 Refunds. Except as described on Exhibit VI under the
heading "Refunds," no orders of, proceedings pending before, or other
requirements of, the Federal Energy Regulatory Commission, the Texas Railroad
Commission, or any Governmental Authority exist which could result in the
Borrower and/or the Co-Borrowers being required to refund any material portion
of the proceeds received or to be received from the sale of hydrocarbons
constituting part of the Mortgaged Property.

4.17 Gas Contracts. Except as described on Exhibit VI
under the heading "Gas Contracts," the Borrower and/or the Co-Borrowers (a) are
not obligated in any material respect by virtue of any prepayment made under
any contract containing a "take-or-pay" or "prepayment" provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Mortgaged Property at some future date without receiving full payment
therefor within 90 days of delivery, and (b) have not produced gas, in any
material amount, subject to, and neither the Borrower and/or the Co-Borrowers
nor any of the Mortgaged Properties is subject to, balancing rights of third
parties or subject to balancing duties under governmental requirements, except
as to such matters for which the Borrower and/or the Co-Borrowers have
established monetary reserves adequate in amount to satisfy such obligations
and have segregated such reserves from other accounts.

4.18 Intellectual Property. The Borrower and/or the
Co-Borrowers own or are licensed to use all Intellectual Property necessary to
conduct all business material to their condition (financial or otherwise),
business, or operations as such business is currently conducted. No claim has
been asserted or is pending by any Person with the respect to the use of any
such Intellectual Property or challenging or questioning the validity or
effectiveness of any such Intellectual Property; and the Borrower and/or the
Co-Borrowers knows of no valid basis for any such claim. The use of such
Intellectual Property by the Borrower and/or the Co-Borrowers does not infringe
on the rights of any Person, except for such claims and infringements as do
not, in the aggregate, give rise to any material liability on the part of the
Borrower and/or the Co-Borrowers.

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4.19 Casualties or Taking of Property. Except as disclosed
on Exhibit VI under the heading "Casualties," since September 30, 1995, neither
the business nor any Property of the Borrower and/or the Co- Borrowers have
been materially adversely affected as a result of any fire, explosion,
earthquake, flood, drought, windstorm, accident, strike or other labor
disturbance, embargo, requisition or taking of Property, or cancellation of
contracts, permits, or concessions by any Governmental Authority, riot,
activities of armed forces, or acts of God.

4.20 Locations of Borrower. The principal place of
business and chief executive office of the Borrower and the Co-Borrowers is
located at the address of the Borrower set forth in Section 8.3 or at such
other location as the Borrower and the Co-Borrowers may have, by proper written
notice hereunder, advised the Lender, provided that such other location is
within a state in which appropriate financing statements from the Borrower in
favor of the Lender have been filed.

4.21 Subsidiaries. The Borrower has no Subsidiaries other
than the Co-Borrowers and those listed on Exhibit IV.

ARTICLE V

AFFIRMATIVE COVENANTS

So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower and/or the Co-Borrowers shall:

5.1 Maintenance and Access to Records. Keep adequate
records, in accordance with GAAP, of all its transactions so that at any time,
and from time to time, its true and complete financial condition may be readily
determined, and within 2 Business Days following the reasonable request of the
Lender, make such records available for inspection by the Lender and, at the
expense of the Borrower and/or the Co-Borrowers, allow the Lender to make and
take away copies thereof.

5.2 Quarterly Financial Statements; Compliance
Certificates. Deliver to the Lender, (a) on or before the 45th day after the
close of each of the first three quarterly periods of each fiscal year of the
Borrower and the Co-Borrowers, a copy of the unaudited consolidated and
consolidating Financial Statements of the Borrower and the Co-Borrowers as at
the close of such quarterly period and from the beginning of such fiscal year
to the end of such period, such Financial Statements to be certified by
Responsible Officers of the Borrower and the Co- Borrowers as having been
prepared in accordance with GAAP consistently applied and as a fair
presentation of the condition of the Borrower and the Co-

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<PAGE> 42
Borrowers, subject to changes resulting from normal year-end audit adjustments,
and (b) on or before the 45th day after the close of each fiscal quarter and on
or before the 120th day after the close of the fiscal year, a Compliance
Certificate.

5.3 Annual Financial Statements. Deliver to the Lender,
on or before the 120th day after the close of each fiscal year of the Borrower
and the Co-Borrowers, a copy of the annual audited consolidated and unaudited
consolidating Financial Statements of the Borrower and the Co-Borrowers.

5.4 Financial Statements of Diverse. (a) Deliver to the
Lender on or before the 45th day after the close of each of the first three
quarterly periods of each fiscal year of Diverse, a copy of the unaudited
consolidated Financial Statements of Diverse as at the close of such quarterly
period and from the beginning of such fiscal year to the end of such period,
such Financial Statements to be certified by a Responsible Officer of the
managing partner of Diverse as having been prepared in accordance with GAAP
consistently applied and as a fair presentation of the condition of Diverse,
subject to changes resulting from normal year-end audit adjustments, and (b) on
or before the 120th day after the close of each fiscal year of Diverse, a copy
of the annual unaudited consolidated Financial Statements of Diverse.

5.5 Oil and Gas Reserve Reports. (a) Deliver to the
Lender no later than April 1 of each year during the term of this Agreement,
engineering reports in form and substance satisfactory to the Lender, certified
by any nationally- or regionally-recognized independent consulting petroleum
engineers acceptable to the Lender as fairly and accurately setting forth (i)
the proven and producing, shut-in, behind-pipe, and undeveloped oil and gas
reserves (separately classified as such) attributable to the Mortgaged
Properties, plus certain other Oil and Gas Properties to be determined in sole
discretion of the Lender, as of January 1 of the year for which such reserve
reports are furnished, (ii) the aggregate present value of the future net
income with respect to such Mortgaged Properties, plus certain other Oil and
Gas Properties to be determined in sole discretion of the Lender, discounted at
a stated per annum discount rate of proven and producing reserves, (iii)
projections of the annual rate of production, gross income, and net income with
respect to such proven and producing reserves, and (iv) information with
respect to the "take-or-pay," "prepayment," and gas-balancing liabilities of
the Borrower and/or the Co- Borrowers.

(b) Deliver to the Lender no later than October 1 of each year
during the term of this Agreement, engineering reports in form and substance
satisfactory to the Lender prepared by or under the supervision of the chief
petroleum engineer of the Borrower and/or the Co-Borrowers evaluating the
Mortgaged Properties, plus certain

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other Oil and Gas Properties to be determined in sole discretion of the Lender,
as of July 1 of the year for which such reserve reports are furnished and
updating the information provided in the reports pursuant to Section 5.5(a).

(c) Each of the reports provided pursuant to this Section
shall be submitted to the Lender together with additional data concerning
pricing, quantities of production from the Mortgaged Properties, plus certain
other Oil and Gas Properties to be determined in sole discretion of the Lender,
volumes of production sold, purchasers of production, gross revenues, expenses,
and such other information and engineering and geological data with respect
thereto as the Lender may reasonably request.

5.6 Title Opinions; Title Defects. Promptly upon the
request of the Lender, furnish to the Lender title opinions, in form and
substance and by counsel satisfactory to the Lender, or other confirmation of
title acceptable to the Lender, covering Oil and Gas Properties constituting
not less than 70% of the present value, determined by the Lender in its sole
discretion, of the Mortgaged Properties, plus certain other Oil and Gas
Properties to be determined in sole discretion of the Lender, and promptly, but
in any event within 60 days after notice by the Lender of any defect, material
in the opinion of the Lender in value, in the title of the Borrower and/or the
Co-Borrowers to any of its Oil and Gas Properties, clear such title defects,
and, in the event any such title defects are not cured in a timely manner, pay
all related costs and fees incurred by the Lender to do so.

5.7 Notices of Certain Events. Deliver to the Lender,
immediately upon having knowledge of the occurrence of any of the following
events or circumstances, a written statement with respect thereto, signed by a
Responsible Officer of the Borrower and/or the Co-Borrowers and setting forth
the relevant event or circumstance and the steps being taken by the Borrower
and/or the Co-Borrowers with respect to such event or circumstance:

(a) any Default or Event of Default;

(b) any default or event of default under any contractual
obligation of the Borrower and/or the Co-Borrowers, including, but not
limited to the Term Loan, or any litigation, investigation, or
proceeding between the Borrower and/or the Co-Borrowers and any
Governmental Authority which, in either case, if not cured or if
adversely determined, as the case may be, could reasonably be expected
to have a Material Adverse Effect;

(c) any litigation or proceeding involving the Borrower and/or
the Co-Borrowers as a defendant or in which any Property of the
Borrower and/or the Co-

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Borrowers are subject to a claim and in which the amount involved is
$100,000 or more and which is not covered by insurance or in which
injunctive or similar relief is sought;

(d) the receipt by the Borrower and/or the Co-Borrowers of any
Environmental Complaint;

(e) any actual, proposed, or threatened testing or other
investigation by any Governmental Authority or other Person concerning
the environmental condition of, or relating to, any Property of the
Borrower and/or the Co-Borrowers or adjacent to any Property of the
Borrower and/or the Co- Borrowers following any allegation of a
violation of any Requirement of Law;

(f) any Release of Hazardous Substances by the Borrower and/or
the Co-Borrowers or from, affecting, or related to any Property of the
Borrower and/or the Co-Borrowers or adjacent to any Property of the
Borrower and/or the Co-Borrowers except in accordance with applicable
Requirements of Law or the terms of a valid permit, license,
certificate, or approval of the relevant Governmental Authority, or the
violation of any Environmental Law, or the revocation, suspension,
orforfeiture of or failure to renew, any permit, license, registration,
approval, or authorization which could reasonably be expected to have a
Material Adverse Effect;

(g) the change in identity or address of any Person remitting
to the Borrower and/or the Co-Borrowers proceeds from the sale of
hydrocarbon production from or attributable to any Mortgaged Property;

(h) any change in the senior management of the Borrower; and

(i) any other event or condition which could reasonably be
expected to have a Material Adverse Effect.

5.8 Letters in Lieu of Transfer Orders; Division Orders.
Promptly upon request by the Lender at any time and from time to time, execute
such letters in lieu of transfer orders, in addition to the letters signed by
the Borrower and/or the Co-Borrowers and delivered to the Lender in
satisfaction of the condition set forth in Section 3.1 (f)(v) and/or division
and/or transfer orders as are necessary or appropriate to transfer and deliver
to the Lender proceeds from or attributable to any Mortgaged Property.

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5.9 Additional Information. Furnish to the Lender,
promptly upon the request of the Lender, such additional financial or other
information concerning the assets, liabilities, operations, and transactions of
the Borrower and/or the Co-Borrowers as the Lender may from time to time
request; and notify the Lender not less than ten Business Days prior to the
occurrence of any condition or event that may change the proper location for
the filing of any financing statement or other public notice or recording for
the purpose of perfecting a Lien in any Collateral, including, without
limitation, any change in its name or the location of its principal place of
business or chief executive office; and upon the request of the Lender, execute
such additional Security Instruments as may be necessary or appropriate in
connection therewith.

5.10 Compliance with Laws. Comply with all applicable
Requirements of Law, including, without limitation, (a) the Natural Gas Policy
Act of 1978, as amended, (b) ERISA, (c) Environmental Laws, and (d) all
permits, licenses, registrations, approvals, and authorizations issued to it or
of which it has knowledge (i) related to any natural or environmental resource
or media located on, above, within, in the vicinity of, related to or affected
by any Property of the Borrower and/or the Co-Borrowers, (ii) required for the
performance of the operations of the Borrower and/or the Co-Borrowers, or (iii)
applicable to the use, generation, handling, storage, treatment, transport, or
disposal of any Hazardous Substances; and instruct all employees, crew members,
agents, contractors, subcontractors, and future lessees (pursuant to
appropriate lease provisions) of the Borrower and/or the Co-Borrowers, while
such Persons are acting within the scope of their relationship with the
Borrower and/or the Co-Borrowers, to comply with all such Requirements of Law
as may be necessary or appropriate to enable the Borrower and/or the
Co-Borrowers to so comply.

5.11 Payment of Assessments and Charges. Pay all taxes,
assessments, governmental charges, rent, and other Indebtedness which, if
unpaid, might become a Lien against the Property of the Borrower and/or the
Co-Borrowers, except any of the foregoing being contested in good faith and as
to which adequate reserve in accordance with GAAP has been established or
unless failure to pay would not have a Material Adverse Effect.

5.12 Maintenance of Corporate Existence and Good Standing.
Maintain their corporate existence or qualification and good standing in its
jurisdictions of incorporation and in all jurisdictions wherein the Property
now owned or hereafter acquired or business now or hereafter conducted
necessitates same, unless the failure to do so would not have a Material
Adverse Effect.

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5.13 Payment of Notes; Performance of Obligations. Pay the
Note according to the reading, tenor, and effect thereof, as modified hereby,
and do and perform every act and discharge all of its other Obligations.

5.14 Further Assurances. Upon Lender's written request,
promptly cure any defects in the execution and delivery of any of the Loan
Documents and all agreements contemplated thereby, and execute, acknowledge,
and deliver such other assurances and instruments as shall, in the opinion of
the Lender, be necessary to fulfill the terms of the Loan Documents.

5.15 Initial Fees and Expenses of Counsel to Lender. Upon
request by the Lender, promptly reimburse the Lender for all reasonable fees
and expenses of Jackson & Walker, L.L.P., special counsel to the Lender, in
connection with the preparation of this Agreement and all documentation
contemplated hereby, the satisfaction of the conditions precedent set forth
herein, the filing and recordation of Security Instruments, and the
consummation of the transactions contemplated in this Agreement.

5.16 Subsequent Fees and Expenses of Lender. Upon request
by the Lender, promptly reimburse the Lender (to the fullest extent permitted
by law) for all amounts reasonably expended, advanced, or incurred by or on
behalf of the Lender to satisfy any obligation of the Borrower and/or the
Co-Borrowers under any of the Loan Documents; to collect the Obligations; to
ratify, amend, restate, or prepare additional Loan Documents, as the case may
be; for the filing and recordation of Security Instruments; to enforce the
rights of the Lender under any of the Loan Documents; and to protect the
Properties or business of the Borrower and/or the Co-Borrowers, including,
without limitation, the Collateral, which amounts shall be deemed compensatory
in nature and liquidated as to amount upon notice to the Borrower and/or the
Co-Borrowers by the Lender and which amounts shall include, but not be limited
to (a) all court costs, (b) reasonable attorneys' fees, (c) reasonable fees and
expenses of auditors and accountants incurred to protect the interests of the
Lender, (d) fees and expenses incurred in connection with the participation by
the Lender as a member of the creditors' committee in a case commenced under
any Insolvency Proceeding, (e) fees and expenses incurred in connection with
lifting the automatic stay prescribed in Section 362 Title 11 of the United
States Code, and (f) fees and expenses incurred in connection with any action
pursuant to Section 1129 Title 11 of the United States Code all reasonably
incurred by the Lender in connection with the collection of any sums due under
the Loan Documents, together with interest at the per annum interest rate equal
to the Floating Rate, calculated on a basis of a calendar year of 365 or 366
days, as the case may be, counting the actual number of days elapsed, on each
such amount from the date of notification that the same was expended, advanced,
or incurred by

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the Lender until the date it is repaid to the Lender, with the obligations
under this Section surviving the non- assumption of this Agreement in a case
commenced under any Insolvency Proceeding and being binding upon the Borrower
and/or the Co-Borrowers and/or a trustee, receiver, custodian, or liquidator of
the Borrower and/or the Co-Borrowers appointed in any such case.

5.17 Operation of Oil and Gas Properties. Develop,
maintain, and operate its Oil and Gas Properties in a prudent and workmanlike
manner in accordance with industry standards.

5.18 Maintenance and Inspection of Properties. Maintain
all of its tangible Properties in good repair and condition, ordinary wear and
tear excepted; make all necessary replacements thereof and operate such
Properties in a good and workmanlike manner; and permit on 2 Business Days
prior notice any authorized representative of the Lender to visit and inspect,
any tangible Property of the Borrower and/or the Co-Borrowers.

5.19 Maintenance of Insurance. Maintain insurance with
respect to its Properties and businesses against such liabilities, casualties,
risks, and contingencies as is customary in the relevant industry and
sufficient to prevent a Material Adverse Effect, all such insurance to be in
amounts and from insurers acceptable to the Lender and, within 60 days of the
Closing Date for property damage insurance covering Collateral and business
interruption insurance, if any, maintained by Borrower and/or the Co-Borrowers,
naming the Lender as loss payee, and, upon any renewal of any such insurance
and at other times upon request by the Lender, furnish to the Lender evidence,
satisfactory to the Lender, of the maintenance of such insurance. The Lender
shall have the right to collect, and the Borrower and/or the Co-Borrowers
hereby assigns to the Lender, any and all monies that may become payable under
any policies of insurance relating to business interruption or by reason of
damage, loss, or destruction of any of the Collateral. In the event of any
damage, loss, or destruction for which insurance proceeds relating to business
interruption or Collateral exceed $100,000, the Lender may, at its option,
apply all such sums or any part thereof received by it toward the payment of
the Obligations, whether matured or unmatured, application to be made first to
interest and then to principal, and shall deliver to the Borrower and/or the
Co-Borrowers the balance, if any, after such application has been made. In the
event of any such damage, loss, or destruction for which insurance proceeds are
$100,000 or less, provided that no Default or Event of Default has occurred and
is continuing, the Lender shall deliver any such proceeds received by it to the
Borrower and/or the Co-Borrowers. In the event the Lender receives insurance
proceeds not attributable to Collateral or business interruption, the Lender
shall deliver any such proceeds to the Borrower and/or the Co-Borrowers.

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5.20 INDEMNIFICATION. INDEMNIFY AND HOLD THE LENDER AND
ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT,
AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY
SECURITY INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES,
DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL
PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND
ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN
CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND
EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE
PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE
BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, WHETHER PRIOR TO OR DURING THE
TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY PROPERTY
OF THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, WHETHER PRIOR TO OR DURING
THE TERM HEREOF, AND WHETHER BY THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE
OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF
THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE OR ANY OTHER PERSON AT ANY TIME
OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING,
TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER
SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE
BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, (D) ANY CONTAMINATION OF ANY
PROPERTY OR NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE,
HANDLING, STORAGE, TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY
THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE OR ANY EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE
WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE
BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, IRRESPECTIVE OF WHETHER ANY OF
SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH APPLICABLE
REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE OF ANY LOAN DOCUMENT, OR ANY OTHER
ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF THE
FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, OTHER THAN GROSS NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF THE LENDER OR ANY OF ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY
INSTRUMENT; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL
OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.

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ARTICLE VI

NEGATIVE COVENANTS

So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower and/or the Co-Borrowers will not:

6.1 Indebtedness. Create, incur, assume, or suffer to
exist any Indebtedness, whether by way of loan or otherwise; provided, however,
the foregoing restriction shall not apply to (a) the Obligations, (b) Permitted
Indebtedness, and (c) unsecured accounts payable incurred in the ordinary
course of business, which are not unpaid in excess of 75 days beyond invoice
date or are being contested in good faith and as to which such reserve as is
required by GAAP has been made.

6.2 Contingent Obligations. Create, incur, assume, or
suffer to exist any Contingent Obligation; provided, however, the foregoing
restriction shall not apply to (a) performance guarantees and performance
surety or other bonds provided in the ordinary course of business, or (b) trade
credit incurred or operating leases entered into in the ordinary course of
business.

6.3 Liens. Create, incur, assume, or suffer to exist any
Lien on any of its Oil and Gas Properties or any other Property, whether now
owned or hereafter acquired; provided, however, the foregoing restrictions
shall not apply to Permitted Liens.

6.4 Sales of Assets. Without the prior written consent of
the Lender, Borrower and/or Co- Borrowers shall not sell, transfer, or
otherwise dispose of any assets, if such assets are material to the operations
of Borrower and/or the Co-Borrowers when taken as a whole, other than (a) sales
of inventory in the ordinary course of business, (b) occasional sales, leases
or other dispositions of immaterial assets for consideration not less than fair
market value, (c) sales, leases or other dispositions of assets that are
obsolete or have negligible fair market value, and (d) sales of equipment for
fair and adequate consideration. The Lender will consent to sales of assets
representing up to 10% of the net present value of the Oil and Gas Properties
which comprise the Borrowing Base, as calculated by the Lender pursuant to the
terms of this Agreement, provided that the Borrowing Base shall be reduced, and
if necessary, proceeds from such sale shall be applied to amounts outstanding
in an amount equal to the loan value attributable to such assets sold.

6.5 Leasebacks. Enter into any agreement to sell or
transfer any Property and thereafter rent or lease as lessee such

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Property or other Property intended for the same use or purpose as the Property
sold or transferred.

6.6 Loans or Advances. Make or agree to make or allow to
remain outstanding any loans or advances to any Person other than Borrower
and/or Co-Borrowers in excess of $100,000; provided, however, the foregoing
restrictions shall not apply to (a) advances or extensions of credit in the
form of accounts receivable incurred in the ordinary course of business and
upon terms common in the industry for such accounts receivable, or (b) advances
to employees of the Borrower and/or the Co-Borrowers for the payment of
expenses in the ordinary course of business.

6.7 Investments. Acquire Investments in, or purchase or
otherwise acquire all or substantially all of the assets of, any Person.
This restriction shall not apply to the following investments:

(a) up to $300,000 in SMC Development, L.P. prior to
January 15, 1996,

(b) an aggregate of up to $1,000,000 in Southern Links
Group,

(c) marketable obligations issued or unconditionally
guaranteed by the United States Government or issued
by any of its agencies and backed by the full faith
and credit of the United States of America,

(d) short-term investment grade domestic or Eurodollar
certificates of deposit or time deposits that are
fully insured by the Federal Deposit Insurance
Corporation,

(e) commercial paper and similar obligations rated "P-1"
or better by Moody's Investors Services, Inc. or "A-1"
or better by Standard & Poors Corporation,

(f) intercompany loans to, advances to or investments in,
wholly owned Subsidiaries,

(g) readily marketable tax-free municipal bonds of a
domestic issuer or rated "aaa" or better by Moody's
Investors Services, Inc. or "AAA" by Standard & Poors
Corporation, and

(h) demand deposit accounts maintained in the ordinary
course of business.

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6.8 Dividends and Distributions. Declare, pay, or make,
any cash dividend or distribution on, or purchase, redeem, or otherwise acquire
for value, any share of any class of its capital stock.

6.9 Issuance of Stock; Changes in Corporate Structure.
Issue or agree to issue additional shares of capital stock other than for cash,
in one or any series of transactions except to officers, directors or employees
of Borrower or any Co-Borrower as part of their compensation; enter into any
transaction of consolidation, merger, or amalgamation; liquidate, wind up, or
dissolve (or suffer any liquidation or dissolution).

6.10 Transactions with Affiliates. Directly or indirectly,
enter into any transaction (including the sale, lease, or exchange of Property
or the rendering of service) with any of its Affiliates, other than upon fair
and reasonable terms no less favorable than could be obtained in an arm's
length transaction with a Person which was not an Affiliate.

6.11 Lines of Business. Expand, on its own or through any
Subsidiary, into any line of business other than those in which the Borrower
and/or the Co-Borrowers are engaged as of the date hereof.

6.12 Plan Obligations. Except as disclosed in Exhibit
VIII, assume or otherwise become subject to an obligation to contribute to or
maintain any Plan or acquire any Person which has at any time had an obligation
to contribute to or maintain any Plan.

6.13 New Subsidiaries. Form any new Subsidiaries without
the prior written consent of the Lender.

6.14 Tangible Net Worth. Permit Tangible Net Worth as of
the close of any fiscal quarter to be less than $5,000,000 plus 50% of positive
Net Income and 100% of other increases in equity for all fiscal quarters ending
subsequent to December 31, 1995.

6.15 Cash Flow Coverage. Permit as of the close of any
fiscal quarter, the ratio of Cash Flow to Debt Service to be less than 1.25 to
1.00.

ARTICLE VII

EVENTS OF DEFAULT

7.1 Enumeration of Events of Default. Any of the
following events shall constitute an Event of Default:

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<PAGE> 52
(a) default shall be made in the payment when due of any
installment of principal or interest under this Agreement or the Note
or in the payment when due of any fee or other sum payable under any
Loan Document;

(b) default shall be made by the Borrower and/or the
Co-Borrowers in the due observance or performance of any of their
respective obligations under the Loan Documents, and such default shall
continue for 30 days after the earlier of notice thereof to the
Borrower by the Lender or actual knowledge thereof by the Borrower
and/or the Co-Borrowers;

(c) any representation or warranty made by the Borrower and/or
the Co-Borrowers in any of the Loan Documents proves to have been
untrue in any material respect or any representation, statement
(including Financial Statements), certificate, or data furnished or
made to the Lender in connection herewith proves to have been untrue in
any material respect as of the date the facts therein set forth were
stated or certified;

(d) default shall be made by the Borrower and/or the
Co-Borrowers (as principal or guarantor or other surety) in the payment
or performance of any Indebtedness including, but not limited to the
Term Loan, and such default shall remain unremedied for in excess of
the period of grace, if any, with respect thereto;

(e) the Borrower and/or the Co-Borrowers shall be unable to
satisfy any condition or cure any circumstance specified in Article
III, the satisfaction or curing of which is precedent to the right of
the Borrower and/or the Co-Borrowers to obtain a Loan, and such
inability shall continue for a period in excess of 30 days;

(f) the Borrower and/or the Co-Borrowers shall (i) apply for
or consent to the appointment of a receiver, trustee, or liquidator of
it or all or a substantial part of its assets, (ii) file a voluntary
petition commencing an Insolvency Proceeding, (iii) make a general
assignment for the benefit of creditors, (iv) be unable, or admit in
writing its inability, to pay its debts generally as they become due,
or (v) file an answer admitting the material allegations of a petition
filed against it in any Insolvency Proceeding;

(g) an order, judgment, or decree shall be entered against
either the Borrower and/or the Co-Borrowers by any court of competent
jurisdiction or by any other duly authorized authority, on the petition
of a creditor or

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otherwise, granting relief in any Insolvency Proceeding or approving a
petition seeking reorganization or an arrangement of its debts or
appointing a receiver, trustee, conservator, custodian, or liquidator
of it or all or any substantial part of its assets, and such order,
judgment, or decree shall not be dismissed or stayed within 90 days;

(h) the levy against any significant portion of the Property
of the Borrower and/or the Co- Borrowers or any execution, garnishment,
attachment, sequestration, or other writ or similar proceeding which is
not permanently dismissed or discharged within 30 days after the levy;

(i) a final and non-appealable order, judgment, or decree
shall be entered against the Borrower and/or the Co-Borrowers for money
damages and/or Indebtedness due in an amount in excess of $250,000, and
such order, judgment, or decree shall not be dismissed or stayed within
30 days;

(j) any charges are filed or any other action or proceeding is
instituted by any Governmental Authority against the Borrower and/or
the Co-Borrowers under the Racketeering Influence and Corrupt
Organizations Statute (18 U.S.C. Section 1961 et seq.), the result of
which could be the forfeiture or transfer of any material Property of
the Borrower and/or the Co- Borrowers subject to a Lien in favor of the
Lender without (i) satisfaction or provision for satisfaction of such
Lien, or (ii) such forfeiture or transfer of such Property being
expressly made subject to such Lien;

(k) the Borrower and/or the Co-Borrowers shall have (i)
concealed, removed, or diverted, or permitted to be concealed, removed,
or diverted, any part of its Property, with intent to hinder, delay, or
defraud its creditors or any of them, (ii) made or suffered a transfer
of any of its Property which may be fraudulent under any bankruptcy,
fraudulent conveyance, or similar law, or (iii) shall have suffered or
permitted, while insolvent, any creditor to obtain a Lien upon any of
its Property through legal proceedings or distraint which is not
vacated within 30 days from the date thereof;

(l) any Security Instrument shall for any reason (other than
Lender's fault or negligence) not, or cease to, create valid and
perfected first-priority Liens against the Collateral purportedly
covered thereby;

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(m) the occurrence of a Material Adverse Effect and the same
shall remain unremedied for in excess of 30 days after notice given by
the Lender.

7.2 Remedies. (a) Upon the occurrence of an Event of
Default specified in Sections 7.1(f) or 7.1(g), immediately and without notice,
(i) all Obligations shall automatically become immediately due and payable,
without presentment, demand, protest, notice of protest, default, or dishonor,
notice of intent to accelerate maturity, notice of acceleration of maturity, or
other notice of any kind, except as may be provided to the contrary elsewhere
herein, all of which are hereby expressly waived by the Borrower and the
Co-Borrowers; (ii) the Commitment shall immediately cease and terminate unless
and until reinstated by the Lender in writing; and (iii) to the extent
permitted by and in compliance with applicable law, the Lender may set-off and
apply any and all deposits (general or special, time or demand, provisional or
final) held by the Lender and any and all other indebtedness at any time owing
by the Lender to or for the credit or account of the Borrower and the
Co-Borrowers against any and all of the Obligations.

(b) Upon the occurrence of any Event of Default other than
those specified in Sections 7.1(f) or 7.1(g), (i) the Lender may, by notice to
the Borrower and the Co-Borrowers, declare all Obligations immediately due and
payable, without presentment, demand, protest, notice of protest, default, or
dishonor, notice of intent to accelerate maturity, notice of acceleration of
maturity, or other notice of any kind, except as may be provided to the
contrary elsewhere herein, all of which are hereby expressly waived by the
Borrower and the Co-Borrowers; (ii) the Commitment shall immediately cease and
terminate unless and until reinstated by the Lender in writing; and (iii) to
the extent permitted by and in compliance with applicable law, the Lender may
set-off and apply any and all deposits (general or special, time or demand,
provisional or final) held by the Lender and any and all other indebtedness at
any time owing by the Lender to or for the credit or account of the Borrower
and the Co-Borrowers against any and all of the Obligations although such
Obligations may be unmatured.

(c) Upon the occurrence of any Event of Default, the Lender
may, in addition to the foregoing in this Section, exercise any or all of its
rights and remedies provided by law or pursuant to the Loan Documents.

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ARTICLE VIII

MISCELLANEOUS

8.1 Transfers; Participations. The Lender may, at any
time, sell, transfer, assign, or grant participations in the Obligations or any
portion thereof; and the Lender may forward to each Transferee and prospective
Transferee all documents and information relating to such Obligations, whether
furnished by the Borrower and the Co-Borrowers or otherwise obtained, as the
Lender determines necessary or desirable. The Borrower agrees that each
Transferee, regardless of the nature of any transfer to it, may exercise all
rights (including, without limitation, rights of set-off) with respect to the
portion of the Obligations held by it as fully as if such Transferee were the
direct holder thereof, subject to any agreements between such Transferee and
the transferor to such Transferee. Notwithstanding Lender's ability to grant
rights to Transferees, Borrower will continue to deal solely and directly with
Lender.

8.2 Survival of Representations, Warranties, and
Covenants. All representations and warranties of the Borrower and/or the
Co-Borrowers and all covenants and agreements herein made shall survive the
execution and delivery of the Note and the Security Instruments and shall
remain in force and effect so long as any Obligation is outstanding or any
Commitment exists.

8.3 Notices and Other Communications. Except as to oral
notices expressly authorized herein, which oral notices shall be confirmed in
writing, all notices, requests, and communications hereunder shall be in
writing (including by telecopy). Unless otherwise expressly provided herein,
any such notice, request, demand, or other communication shall be deemed to
have been duly given or made when delivered by hand, or, in the case of
delivery by mail, when deposited in the mail if concurrent telecopy notice is
also given, or, if no concurrent telecopy notice is given, three Business Days
after deposited in the mail, certified mail, return receipt requested, postage
prepaid, or, in the case of telecopy notice, when receipt thereof is
acknowledged orally or by written confirmation report, addressed as follows:

(a) if to the Lender, to:

Compass Bank-Houston
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Attention: Energy Lending Group
Telecopy: (713) 968-8222

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(b) if to the Borrower or Co-Borrowers, to:

Southern Mineral Corporation
500 Dallas, Suite 2800
Houston, Texas 77002
Attention: Steven H. Mikel

Any party may, by proper written notice hereunder to the
others, change the individuals or addresses to which such notices to it shall
thereafter be sent.

8.4 Parties in Interest. Subject to the restrictions on
changes in corporate structure set forth in Section 6.9 and other applicable
restrictions contained herein, all covenants and agreements herein contained by
or on behalf of the Borrower and the Co-Borrowers or the Lender shall be
binding upon and inure to the benefit of the Borrower and the Co-Borrowers or
the Lender, as the case may be, and their respective legal representatives,
successors, and assigns.

8.5 Rights of Third Parties. All provisions herein are
imposed solely and exclusively for the benefit of the Lender and the Borrower
and the Co-Borrowers. No other Person shall have any right, benefit, priority,
or interest hereunder or as a result hereof or have standing to require
satisfaction of provisions hereof in accordance with their terms, and any or
all of such provisions may be freely waived in whole or in part by the Lender
at any time if in its sole discretion it deems it advisable to do so.

8.6 Renewals; Extensions. All provisions of this
Agreement relating to the Note shall apply with equal force and effect to each
promissory note hereafter executed which in whole or in part represents a
renewal or extension of any part of the Indebtedness of the Borrower and the
Co-Borrowers under this Agreement, the Note, or any other Loan Document.

8.7 No Waiver; Rights Cumulative. No course of dealing on
the part of the Lender, its officers or employees, nor any failure or delay by
the Lender with respect to exercising any of its rights under any Loan Document
shall operate as a waiver thereof. The rights of the Lender under the Loan
Documents shall be cumulative and the exercise or partial exercise of any such
right shall not preclude the exercise of any other right. The making of any
Loan shall not constitute a waiver of any of the covenants, warranties, or
conditions of the Borrower and the Co-Borrowers contained herein. In the event
the Borrower and the Co-Borrowers are unable to satisfy any such covenant,
warranty, or condition, the making of any Loan shall not have the effect of
precluding the Lender from thereafter declaring such inability to be an Event
of Default as hereinabove provided.

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8.8 Survival Upon Unenforceability. In the event any one
or more of the provisions contained in any of the Loan Documents or in any
other instrument referred to herein or executed in connection with the
Obligations shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of any Loan Document or of any other
instrument referred to herein or executed in connection with such Obligations.

8.9 Amendments; Waivers. Neither this Agreement nor any
provision hereof may be amended, waived, discharged, or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement
of the amendment, waiver, discharge, or termination is sought.

8.10 Controlling Agreement. In the event of a conflict
between the provisions of this Agreement and those of any other Loan Document,
the provisions of this Agreement shall control.

8.11 Disposition of Collateral. Notwithstanding any term
or provision, express or implied, in any of the Security Instruments, the
realization, liquidation, foreclosure, or any other disposition on or of any or
all of the Collateral shall be in the order and manner and determined in the
sole discretion of the Lender; provided, however, that in no event shall the
Lender violate applicable law or exercise rights and remedies other than those
provided in such Security Instruments or otherwise existing at law or in
equity.

8.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT VERNON'S TEXAS
CIVIL STATUTES, ARTICLE 5069, CHAPTER 15 (WHICH REGULATES CERTAIN REVOLVING
CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.

8.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS
WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF,
RELATED TO, OR FROM THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED,
AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN COURTS HAVING SITUS IN
HOUSTON, HARRIS COUNTY, TEXAS. THE BORROWER AND THE CO-BORROWERS HEREBY SUBMIT
TO THE JURISDICTION OF ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HOUSTON,
HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR
CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE
LENDER IN ACCORDANCE WITH THIS SECTION.

8.14 WAIVER OF RIGHTS TO JURY TRIAL. THE BORROWER, THE
CO-BORROWERS AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY,

53
<PAGE> 58
INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT
RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR
THE ACTS OR OMISSIONS OF THE LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR
PROVISIONS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH
RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT FOR
THE LENDER ENTERING INTO THIS AGREEMENT.

8.15 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE
ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF
AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER
WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF, INCLUDING, WITHOUT LIMITATION,
THE CORRESPONDENCE DATED NOVEMBER 21, 1995, FROM THE LENDER TO THE BORROWER AND
THE CO-BORROWERS AND THE TERM SHEET ENCLOSED THEREWITH. FURTHERMORE, IN THIS
REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT,
COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH
PARTIES.

8.16 Counterparts. For the convenience of the parties,
this Agreement may be executed in multiple counterparts, each of which for all
purposes shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same Agreement.

IN WITNESS WHEREOF, this Agreement is deemed executed
effective as of the date first above written.

BORROWER:

SOUTHERN MINERAL CORPORATION

By: /s/ STEVEN H. MIKEL
------------------------------------------
Steven H. Mikel
President and CEO

CO-BORROWERS:

SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

54
<PAGE> 59
VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By: /s/ STEVEN H. MIKEL
------------------------------------------
Steven H. Mikel
President and CEO

LENDER:

COMPASS BANK-HOUSTON

By: /s/ MURRAY E. BRASSEUX
------------------------------------------
Murray E. Brasseux
Executive Vice-President

55
<PAGE> 60
EXHIBIT I

[FORM OF NOTE]

PROMISSORY NOTE

$25,000,000 Houston, Texas December 20, 1995

FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of COMPASS BANK-HOUSTON ("Payee"), at
its banking quarters in Houston, Harris County, Texas, the sum of TWENTY-FIVE
MILLION DOLLARS ($25,000,000), or so much thereof as may be advanced against
this Note pursuant to the Credit Agreement dated of even date herewith by and
between Maker and Payee (as amended, restated, or supplemented from time to
time, the "Credit Agreement"), together with interest at the rates and
calculated as provided in the Credit Agreement.

Reference is hereby made to the Credit Agreement for matters
governed thereby, including, without limitation, certain events which will
entitle the holder hereof to accelerate the maturity of all amounts due
hereunder. Capitalized terms used but not defined in this Note shall have the
meanings assigned to such terms in the Credit Agreement.

This Note is issued pursuant to, is the "Note" under, and is
payable as provided in the Credit Agreement. Subject to compliance with
applicable provisions of the Credit Agreement, Maker may at any time pay the
full amount or any part of this Note without the payment of any premium or fee,
but such payment shall not, until this Note is fully paid and satisfied, excuse
the payment as it becomes due of any payment on this Note provided for in the
Credit Agreement.

Without being limited thereto or thereby, this Note is secured
by the Security Instruments.

THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE
STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO
CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT VERNON'S TEXAS CIVIL STATUTES,
ARTICLE 5069, CHAPTER 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN
ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY TO THIS NOTE.

SOUTHERN MINERAL CORPORATION

By:
------------------------------------
Steven H. Mikel
President and CEO

I-i
<PAGE> 61
SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By:
-------------------------------------
Steven H. Mikel
President and CEO

I-ii
<PAGE> 62
EXHIBIT II

[FORM OF OPINION OF COUNSEL]

[Closing Date]

Compass Bank-Houston
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Attention: Energy Lending Group

Re: Credit Agreement dated as of December 20, 1995, by and between
Compass Bank-Houston and Southern Mineral Corporation, SMC
Production Company, San Salvador Development Company, Inc.,
Venture Resources, Inc., Venture Pipeline Company, VenGas
Pipeline Company and Spruce Hills Production Company (as
amended, restated, or supplemented from time to time, the
"Credit Agreement")

Ladies and Gentlemen:

We have acted as counsel to Southern Mineral Corporation (the
"Borrower") in connection with the transactions contemplated in the Credit
Agreement. This Opinion is delivered pursuant to Section 3.1(m) of the Credit
Agreement, and the Lender is hereby authorized to rely upon this Opinion in
connection with the transactions contemplated in the Credit Agreement. Each
capitalized term used but not defined herein shall have the meaning assigned to
such term in the Credit Agreement.

In our representation of the Borrower, we have examined an
executed counterpart of each of the following (the "Loan Documents"):

(a) the Credit Agreement;

(b) the Note;

(c) Mortgage, Deed of Trust, Indenture, Security
Agreement, Assignment of Production, and Financing Statement dated of
even date herewith from the Borrower in favor of the Lender (the
"Mortgage"); and

(d) Financing Statements from the Borrower, as debtor[S],
constituent to the Mortgage (the "Financing Statement").

II-i
<PAGE> 63
We have also examined the originals, or copies certified to
our satisfaction, of such other records of the Borrower certificates of public
officials and officers of the Borrower agreements, instruments, and documents
as we have deemed necessary as a basis for the opinions hereinafter expressed.

In making such examinations, we have, with your permission,
assumed:

(a) the genuineness of all signatures to the Loan
Documents other than those of the Borrower;

(b) the authenticity of all documents submitted to us as
originals and the conformity with the originals of all documents
submitted to us as copies;

(d) the due authorization, execution, and delivery of all
Loan Documents by each party thereto other than the Borrower; and

(e) the Borrower has title to all Property covered or
affected by the Mortgage.

Based upon the foregoing and subject to the qualifications set
forth herein, we are of the opinion that:

1. The Borrower [IS A] corporation[S] duly organized,
legally existing, and in good standing under the laws of [ITS] [THEIR
RESPECTIVE] state[S] of incorporation and [IS] [ARE] duly qualified as
[A] foreign corporation[S] and [IS] [ARE] in good standing in [THE
STATES OF __________________________] [ALL JURISDICTIONS WHEREIN THE
OWNERSHIP OF [ITS] [THEIR RESPECTIVE] PROPERTY OR THE OPERATION OF
[ITS] [THEIR RESPECTIVE] BUSINESS[ES] NECESSITATES SAME].

2. The execution and delivery by the Borrower of the
Credit Agreement and the borrowings thereunder, the execution and
delivery by the Borrower of the other Loan Documents to which the
Borrower is a party, and the payment and performance of all Obligations
of the Borrower thereunder are within the power of the Borrower, have
been duly authorized by all necessary corporate action, and do not (a)
require the consent of any Governmental Authority, (b) contravene or
conflict with any Requirement of Law, (c) to our knowledge after due
inquiry, contravene or conflict with any indenture,

II-ii
<PAGE> 64
instrument, or other agreement to which the Borrower is a party or by
which any Property of the Borrower may be presently bound or
encumbered, or (d) result in or require the creation or imposition of
any Lien upon any Property of the Borrower other than as contemplated
by the Loan Documents.

3. The Loan Documents to which the Borrower is a party
constitute legal, valid, and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective
terms.

4. The forms of the Mortgage and the Financing Statement
and the description of the Mortgaged Property (as such term is defined
in the Mortgage and so used herein) situated in the State of Texas (the
"State") satisfy all applicable Requirements of Law of the State and
are legally sufficient under the laws of the State to enable the Lender
to realize the practical benefits purported to be afforded by the
Mortgage.

5. The Mortgage creates a valid lien upon and security
interest in all Mortgaged Property situated in the State to secure the
Indebtedness (as such term is defined in the Mortgage and so used
herein).

6. The Mortgage and the Financing Statement are in
satisfactory form for filing and recording in the offices described
below.

7. The filing and/or recording, as the case may be, of
(a) the Mortgage in the office of the county clerk of each county in
the State in which any portion of the Mortgaged Property is located,
and as a financing statement and utility security instrument in the
office of the Secretary of State of the State, and (b) the Financing
Statement in the Uniform Commercial Code records in each county in the
State in which any portion of the Mortgaged Property is located are the
only recordings or filings in the State necessary to perfect the liens
and security interests in the Mortgaged Property created by the
Mortgage or to permit the Lender to enforce in the State its rights
under the Mortgage. No subsequent filing, re-filing, recording, or
re-recording will be required in the State in order to continue the
perfection of the liens and security interests created by the Mortgage
except that (a) a continuation statement must be filed with respect to
the Mortgage filed as a financing statement in the office of the
Secretary of State of the State and with respect to the Financing
Statement in the Uniform Commercial Code

II-iii
<PAGE> 65
records in each county in the State in which any portion of the
Mortgaged Property is located, each within six months prior to the
expiration of five years from the date of the relevant initial
financing statement filing, (b) a subsequent continuation statement
must be filed within six months prior to the expiration of each
subsequent five-year period from the date of each initial financing
statement filing, and (c) amendments or supplements to the Mortgage
filed as a financing statement and the Financing Statement and/or
additional financing statements may be required to be filed in the
event of a change in the name, identity, or structure of the Borrower
or in the event the financing statement filing otherwise becomes
inaccurate or incomplete.

8. To our knowledge after due inquiry, except as
disclosed in Exhibit VI to the Credit Agreement, no litigation or other
action of any nature affecting the Borrower is pending before any
Governmental Authority or threatened against the Borrower. To our
knowledge after due inquiry, no unusual or unduly burdensome
restriction, restraint, or hazard exists by contract, Requirement of
Law, or otherwise relative to the business or operations of the
Borrower or ownership and operation of any Properties of the Borrower
other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower.

9. No authorization, consent, approval, exemption,
franchise, permit or license of, or filing (other than filing of
Security Instruments in appropriate filing offices) with, any
Governmental Authority or any other Person is required to authorize or
is otherwise required in connection with the valid execution and
delivery by the Borrower of the Loan Documents or any instrument
contemplated thereby, or the payment performance by the Borrower of the
Obligations.

10. No transaction contemplated by the Loan Documents is
in violation of any regulations promulgated by the Board of Governors
of the Federal Reserve System, including, without limitation,
Regulations G, T, U, or X.

11. The Borrower is not, nor is the Borrower directly or
indirectly controlled by or acting on behalf of any Person which is, an
"investment company" or an "affiliated person" of an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.

II-iv
<PAGE> 66
12. The Borrower is not a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding
Company Act of 1935, as amended.

The opinions expressed herein are subject to the following
qualifications and limitations:

A. We are licensed to practice law only in the State and
other jurisdictions whose laws are not applicable to the opinions
expressed herein; accordingly, the foregoing opinions are limited
solely to the laws of the State, applicable United States federal law,
and the corporation laws of the State of [_______________].

B. The validity, binding effect, and enforceability of
the Loan Documents may be limited or affected by bankruptcy,
insolvency, moratorium, reorganization, or other similar laws affecting
rights of creditors generally, including, without limitation, statutes
or rules of law which limit the effect of waivers of rights by a debtor
or grantor; provided, however, that the limitations and other effects
of such statutes or rules of law upon the validity and binding effect
of the Loan Documents should not differ materially from the limitations
and other effects of such statutes or rules of law upon the validity
and binding effect of credit agreements, promissory notes and security
instruments generally.

C. The enforceability of the respective obligations of
the Borrower under the Loan Documents is subject to general principles
of equity (whether such enforceability is considered in a suit in
equity or at law).

This Opinion is furnished by us solely for the benefit of the
Lender in connection with the transactions contemplated by the Loan Documents
and is not to be quoted in whole or in part or otherwise referred to or
disclosed in any other transaction.

Very truly yours,

II-v
<PAGE> 67
EXHIBIT III

[FORM OF COMPLIANCE CERTIFICATE]

______________, 19__

Compass Bank-Houston
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Attention: Energy Lending Group

Ladies and Gentlemen:

Pursuant to applicable requirements of the Credit Agreement,
the undersigned, as a Responsible Officer of the Borrower, hereby certifies to
you the following information as true and correct as of the date hereof or for
the period indicated, as the case may be:

[1. To the best of the knowledge of the undersigned, no Default or
Event of Default exists as of the date hereof or has occurred since the
date of our previous certification to you, if any.]

[1. To the best of the knowledge of the undersigned, the following
Defaults or Events of Default exist as of the date hereof or have
occurred since the date of our previous certification to you, if any,
and the actions set forth below are being taken to remedy such
circumstances:]

2. The compliance of the Borrower with the financial covenants of
the Credit Agreement, as of the close of business on
____________________, is evidenced by the following:

(a) Section 6.14: Tangible Net Worth. Permit Tangible Net Worth
as of the close of any fiscal quarter to be less than $5,000,000 plus
50% of positive Net Income and 100% of other increases in equity for
all fiscal quarters ending subsequent to December 31, 1995.

III-i
<PAGE> 68
Actual

(b) Section 6:15: Cash Flow Coverage. Permit as of the close of
any fiscal quarter, the ratio of Cash Flow to Debt Service to be less
than 1.25 to 1.00.

Actual

3. No Material Adverse Effect has occurred since the date of the
Financial Statements dated as of _____________________.

Each capitalized term used but not defined herein shall have
the meaning assigned to such term in the Credit Agreement.

Very truly yours,

SOUTHERN MINERAL CORPORATION

By:
-------------------------------------
Steven H. Mikel
President and CEO

SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By:
-------------------------------------
Steven H. Mikel
President and CEO

III-ii
<PAGE> 69
EXHIBIT IV

DISCLOSURES

Section 4.8 Liabilities
-----------

None.

Litigation
----------

James E. Knight v. Cherokee Drilling
and Development Corporation and
Southern Mineral, 83rd Judicial
District Court of Upton County,
Texas, Cause No. 94-09-U1952-IDO

Section 4.10 ERISA
-----

Borrower terminated the following
401(k) Plan effective September 30,
1995:

SOUTHERN MINERAL CORPORATION
RETIREMENT PLAN 401(k)

Borrower created the following SEP
Plan in September 1995:

SOUTHERN MINERAL CORPORATION
SEP

Section 4.11 Environmental
-------------

None.

Section 4.17 Refunds
-------

None.

Section 4.18 Gas Contracts
-------------

None.

Section 4.20 Casualties
----------

None.

Section 4.22 Subsidiaries
------------

None.

<PAGE> 1
EXHIBIT 10.2

PROMISSORY NOTE

$25,000,000 Houston, Texas December 20, 1995

Without being limited thereto or thereby, this Note is secured
by the Security Instruments.

SOUTHERN MINERAL CORPORATION

By: /s/ STEVEN H. MIKEL
-------------------------------------
Steven H. Mikel
President and CEO

(Signatures Continued on Next Page)
<PAGE> 2
SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY SPRUCE HILLS
PRODUCTION COMPANY, INC.

By: /s/ STEVEN H. MIKEL
-------------------------------------
Steven H. Mikel
President and CEO

<PAGE> 1
Exhibit 10.3

================================================================================

CREDIT AGREEMENT

BETWEEN

SOUTHERN MINERAL CORPORATION

SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

AND

SPRUCE HILLS PRODUCTION COMPANY, INC.

AND

COMPASS BANK-HOUSTON

DECEMBER 20, 1995

--------------------------------------------------
TERM LOAN OF $3,500,000
--------------------------------------------------

================================================================================
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I DEFINITIONS AND INTERPRETATION
1.1 Terms Defined Above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Additional Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Undefined Financial Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.4 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.5 Articles and Sections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.6 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.7 Incorporation of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

ARTICLE II TERMS OF FACILITY
2.1 The Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Use of Loan Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.3 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4 Repayment of Loans and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.5 Outstanding Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.6 Time, Place, and Method of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.7 Borrowing Base Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.8 Voluntary Prepayments and Conversions of Loans . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.9 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.10 Loans to Satisfy Obligations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.11 Security Interest in Accounts; Right of Offset . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.12 General Provisions Relating to Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.13 Letters in Lieu of Transfer Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.14 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE III CONDITIONS
3.1 Receipt of Loan Documents and Other Items . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE IV REPRESENTATIONS AND WARRANTIES
4.1 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.2 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.3 Valid and Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.4 Security Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.5 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.6 Scope and Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.7 No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.8 Liabilities, Litigation, and Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.9 Authorizations; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.12 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.13 Compliance with Federal Reserve Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.14 Investment Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.15 Public Utility Holding Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>

-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
4.16 Proper Filing of Tax Returns; Payment of Taxes Due . . . . . . . . . . . . . . . . . . . . . . . 24
4.17 Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.18 Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.19 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.20 Casualties or Taking of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.21 Locations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.22 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

ARTICLE V AFFIRMATIVE COVENANTS
5.1 Maintenance and Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.2 Quarterly Financial Statements; Compliance Certificates . . . . . . . . . . . . . . . . . . . . 26
5.3 Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 Financial Statements of Diverse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.5 Title Opinions; Title Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.6 Notices of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.7 Letters in Lieu of Transfer Orders; Division Orders . . . . . . . . . . . . . . . . . . . . . . 28
5.8 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.9 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.10 Payment of Assessments and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.11 Maintenance of Corporate Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . 29
5.12 Payment of Notes; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.13 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.14 Initial Fees and Expenses of Counsel to Lender . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.15 Subsequent Fees and Expenses of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.16 Operation of Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.17 Maintenance and Inspection of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.18 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.19 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

ARTICLE VI NEGATIVE COVENANTS
6.1 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.2 Contingent Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.4 Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.5 Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.6 Loans or Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.8 Dividends and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.9 Issuance of Stock; Changes in Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . 33
6.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.11 Lines of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.12 Plan Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.13 New Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.14 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.15 Cash Flow Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>

-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE VII EVENTS OF DEFAULT
7.1 Enumeration of Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

ARTICLE VIII MISCELLANEOUS
8.1 Transfers; Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.2 Survival of Representations, Warranties, and Covenants . . . . . . . . . . . . . . . . . . . . . 38
8.3 Notices and Other Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.5 Rights of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.6 Renewals; Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.7 No Waiver; Rights Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.8 Survival Upon Unenforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.9 Amendments; Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.10 Controlling Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.11 Disposition of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.12 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.13 JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.14 WAIVER OF RIGHTS TO JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.15 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.16 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

</TABLE>

LIST OF EXHIBITS

Exhibit I - Form of Note
Exhibit II - Form of Opinion of Counsel
Exhibit III - Form of Compliance Certificate
Exhibit IV - Disclosures

-iii-
<PAGE> 5
CREDIT AGREEMENT

THIS CREDIT AGREEMENT is made and entered into this 20th day
of December, 1995, by and between SOUTHERN MINERAL CORPORATION, a Nevada
corporation, (the "Borrower"), SMC PRODUCTION CO., a Texas corporation, SAN
SALVADOR DEVELOPMENT COMPANY, INC., a Texas corporation, VENTURE RESOURCES,
INC., a Texas corporation, VENTURE PIPELINE COMPANY, a Texas corporation,
VENGAS PIPELINE COMPANY, a Texas corporation, and SPRUCE HILLS PRODUCTION
COMPANY, INC., a Delaware corporation ("Co-Borrowers"), and COMPASS
BANK-HOUSTON, a state chartered banking institution (the "Lender").

W I T N E S S E T H:

In consideration of the mutual covenants and agreements herein
contained, the Borrower and the Co- Borrowers and the Lender hereby agree as
follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

1.1 Terms Defined Above. As used in this Credit
Agreement, the terms "Borrower", "Co-Borrowers" and "Lender" shall have the
meaning assigned to them hereinabove.

1.2 Additional Defined Terms. As used in this Credit
Agreement, each of the following terms shall have the meaning assigned thereto
in this Section, unless the context otherwise requires:

"Affiliate" shall mean any Person directly or indirectly
controlling, or under common control with, the Borrower and includes
any Subsidiary of the Borrower and any "affiliate" of the Borrower
within the meaning of Reg. Section 240.12b-2 of the Securities
Exchange Act of 1934, as amended, with "control," as used in this
definition, meaning possession, directly or indirectly, of the power
to direct or cause the direction of management, policies or action
through ownership of voting securities, contract, voting trust, or
membership in management or in the group appointing or electing
management or otherwise through formal or informal arrangements or
business relationships.

"Agreement" shall mean this Credit Agreement, as it may be
amended, supplemented, or restated from time to time.
<PAGE> 6
"Borrowing Base" shall mean, at any time, the amount
determined by the Lender in accordance with Section 2.7 and then in
effect.

"Business Day" shall mean a day other than a Saturday, Sunday,
legal holiday for commercial banks under the laws of the State of
Texas, or any other day when banking is suspended in the State of
Texas.

"Closing Date" shall mean the effective date of this
Agreement.

"Collateral" shall mean the Mortgaged Properties and any other
Property now or at any time used or intended as security for the
payment or performance of all or any portion of the Obligations which
is subject to a Security Instrument.

"Commitment" shall mean the obligation of the Lender, subject
to applicable provisions of this Agreement, to make Loans to or for
the benefit of the Borrower and the Co-Borrowers pursuant to Section
2.1.

"Commitment Amount" shall mean the amount equal to the
Borrowing Base.

"Commitment Period" shall mean the period from and including
the Closing Date to but not including the Commitment Termination Date.

"Commitment Termination Date" shall mean July 1, 1996.

"Commonly Controlled Entity" shall mean any Person which is
under common control with the Borrower within the meaning of Section
4001 of ERISA.

"Compliance Certificate" shall mean each certificate,
substantially in the form attached hereto as Exhibit III, executed by
a Responsible Officer of the Borrower and the Co-Borrowers and
furnished to the Lender from time to time in accordance with Section
5.2.

"Contingent Obligation" shall mean, as to any Person, any
obligation of such Person guaranteeing or in

2
<PAGE> 7
effect guaranteeing any Indebtedness, leases, dividends, or other
obligations of any other Person (for purposes of this definition, a
"primary obligation") in any manner, whether directly or indirectly,
including, without limitation, any obligation of such Person,
regardless of whether such obligation is contingent, (a) to purchase
any primary obligation or any Property constituting direct or indirect
security therefor, (b) to advance or supply funds (i) for the purchase
or payment of any primary obligation, or (ii) to maintain working or
equity capital of any other Person in respect of any primary
obligation, or otherwise to maintain the net worth or solvency of any
other Person, (c) to purchase Property, securities or services
primarily for the purpose of assuring the owner of any primary
obligation of the ability of the Person primarily liable for such
primary obligation to make payment thereof, or (d) otherwise to assure
or hold harmless the owner of any such primary obligation against loss
in respect thereof, with the amount of any Contingent Obligation being
deemed to be equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made or,
if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good
faith.

"Default" shall mean any event or occurrence which with the
lapse of time or the giving of notice or both would become an Event of
Default.

"Default Rate" shall mean a per annum interest rate equal to
the Index Rate plus five percent (5%), but in no event exceeding the
Highest Lawful Rate.

"Diverse" shall mean Diverse GP III.

"Dollars" and "$" shall mean dollars in lawful currency of the
United States of America.

3
<PAGE> 8
groundwater, or the sewer, septic, waste treatment, storage, or
disposal systems servicing any Property of the Borrower and/or the
Co-Borrowers, (c) solid or liquid waste disposal, (d) the use,
generation, storage, transportation, or disposal of any Hazardous
Substance, or (e) other environmental, health, or safety matters
affecting any Property of the Borrower and/or the Co-Borrowers or the
business conducted thereon.

"Environmental Laws" shall mean (a) the following federal laws
as they may be cited, referenced, and amended from time to time: the
Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the
Comprehensive Environmental Response, Compensation and Liability Act,
the Endangered Species Act, the Resource Conservation and Recovery
Act, the Occupational Safety and Health Act, the Hazardous Materials
Transportation Act, the Superfund Amendments and Reauthorization Act,
and the Toxic Substances Control Act; (b) any and all equivalent
environmental statutes of any state in which Property of the Borrower
and/or the Co-Borrowers is situated, as they may be cited, referenced
and amended from time to time; (c) any rules or regulations
promulgated under or adopted pursuant to the above federal and state
laws; and (d) any other equivalent federal, state, or local statute or
any requirement, rule, regulation, code, ordinance, or order adopted
pursuant thereto, including, without limitation, those relating to the
generation, transportation, treatment, storage, recycling, disposal,
handling, or release of Hazardous Substances.

"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and the regulations thereunder
and interpretations thereof.

"Event of Default" shall mean any of the events specified in
Section 7.1.

"Facility Fee" shall mean the fee payable to the Lender by the
Borrower and/or the Co-Borrowers pursuant to Section 2.9.

"Final Maturity" shall mean July 1, 1996.

4
<PAGE> 9
Borrowers and statements of the financial condition of Diverse GP III
as provided by Diverse GP III and, when required by applicable
provisions of this Agreement to be audited, accompanied by the
unqualified certification of a nationally-recognized firm of
independent certified public accountants or other independent
certified public accountants acceptable to the Lender and footnotes to
any of the foregoing, all of which shall be prepared in accordance
with GAAP consistently applied and in comparative form with respect to
the corresponding period of the preceding fiscal period.

"Floating Rate" shall mean an interest rate per annum equal to
the Index Rate from time to time in effect plus two percent (2%), but
in no event exceeding the Highest Lawful Rate.

"GAAP" shall mean generally accepted accounting principles
established by the Financial Accounting Standards Board or the
American Institute of Certified Public Accountants and in effect in
the United States from time to time.

"Hazardous Substances" shall mean flammables, explosives,
radioactive materials, hazardous wastes, asbestos, or any material
containing asbestos, polychlorinated biphenyls (PCBs), toxic
substances or related materials, petroleum, petroleum products,
associated oil or natural gas exploration, production, and development
wastes, or any substances defined as "hazardous substances,"
"hazardous materials," "hazardous wastes," or "toxic substances" under
the Comprehensive Environmental Response, Compensation and Liability
Act, as amended, the Superfund Amendments and Reauthorization Act, as
amended, the Hazardous Materials Transportation Act, as amended, the
Resource Conservation and Recovery Act, as amended, the Toxic
Substances Control Act, as amended, or any other law or regulation now
or hereafter enacted or promulgated by any Governmental Authority.

"Highest Lawful Rate" shall mean the maximum non-usurious
interest rate, if any (or, if the context so requires, an amount
calculated at such rate), that at any time or from time to time may be
contracted for, taken,

5
<PAGE> 10
reserved, charged, or received under applicable laws of the State of
Texas or the United States of America, whichever authorizes the
greater rate, as such laws are presently in effect or, to the extent
allowed by applicable law, as such laws may hereafter be in effect and
which allow a higher maximum non-usurious interest rate than such laws
now allow.

"Index Rate" shall mean the prime rate established in The Wall
Street Journal's "Money Rates" or similar table. If multiple prime
rates are quoted in the table, then the highest prime rate will be the
Index Rate. In the event that the prime rate is no longer published
by The Wall Street Journal in the "Money Rates" or similar table, then
Lender may select an alternative published index based upon comparable
information as a substitute Index Rate. Upon the selection of a
substitute Index Rate, the applicable interest rate shall thereafter
vary in relation to the substitute index. Such substitute index shall
be the same index that is generally used as a substitute by Lender on
all Index Rate loans.

"Insolvency Proceeding" shall mean application (whether
voluntary or instituted by another Person) for or the consent to the
appointment of a receiver, trustee, conservator, custodian, or
liquidator of any Person or of all or a substantial part of the
Property of such Person, or the filing of a petition (whether
voluntary or instituted by another Person) commencing a case under
Title 11 of the United States Code, seeking liquidation,
reorganization, or rearrangement or taking advantage of any
bankruptcy, insolvency, debtor's relief, or other similar law of the
United States, the State of Texas, or any other jurisdiction.

6
<PAGE> 11
"Intellectual Property" shall mean patents, patent
applications, trademarks, tradenames, copyrights, technology,
know-how, and processes.

"Limitation Period" shall mean any period while any amount
remains owing on the Note and interest on such amount, calculated at
the applicable interest rate, plus any fees or other sums payable
under any Loan Document and deemed to be interest under applicable
law, would exceed the amount of interest which would accrue at the
Highest Lawful Rate.

"Loan" shall mean any loan made by the Lender to or for the
benefit of the Borrower and/or the Co-Borrowers pursuant to this
Agreement.

"Loan Balance" shall mean, at any time, the outstanding
principal balance of the Note at such time.

7
<PAGE> 12
"Loan Documents" shall mean this Agreement, the Note, the
Security Instruments, and all other documents and instruments now or
hereafter delivered pursuant to the terms of or in connection with
this Agreement, the Note, or the Security Instruments, and all
renewals and extensions of, amendments and supplements to, and
restatements of, any or all of the foregoing from time to time in
effect.

"Material Adverse Effect" shall mean (a) any material adverse
effect on the business, operations, properties, condition (financial
or otherwise), or prospects of the Borrower and/or the Co- Borrowers
taken as a whole, or (b) any adverse effect upon the Collateral, taken
as a whole.

"Mortgaged Properties" shall mean all Oil and Gas Properties
and pipelines of the Borrower, Co- Borrowers and the interest of
Borrower in Diverse subject to a perfected first-priority Lien in
favor of the Lender, subject only to Permitted Liens, as security for
the Obligations.

"Net Income" shall mean, for any period, the net income of the
Borrower and the Co-Borrowers for such period, determined in
accordance with GAAP.

"Obligations" shall mean, without duplication, (a) all
Indebtedness evidenced by the Note, (b) the obligation of the Borrower
and/or the Co-Borrowers for the payment of Commitment Fees, Facility
Fees, and Engineering Fees, and all other obligations and liabilities
of the Borrower and/or the Co- Borrowers to the Lender, now existing
or hereafter incurred, under, arising out of or in connection with any
Loan Document, and to the extent that any of the foregoing includes or
refers to the payment of amounts deemed or constituting interest, only
so much thereof as shall have accrued, been earned and which remains
unpaid at each relevant time of determination and (c) the Reducing
Revolving Line of Credit.

8
<PAGE> 13
offshore from any State of the United States, including, without
limitation, overriding royalty and royalty interests, leasehold estate
interests, net profits interests, production payment interests, and
mineral fee interests, together with contracts executed in connection
therewith and all tenements, hereditaments, appurtenances and
Properties appertaining, belonging, affixed, or incidental thereto.

"Permitted Indebtedness" shall mean (a) the Obligation under
the Loan Documents, (b) Indebtedness arising from endorsing negotiable
instruments for deposit or collection in the ordinary course of
business, (c) current liabilities incurred in the ordinary course of
business, (d) purchase money Indebtedness which does not exceed an
aggregate principal amount of $500,000 during the term of this
Agreement, (e) Indebtedness existing by virtue of the requirements of
GAAP or any changes in the requirements of GAAP, and (f) non-recourse
Indebtedness for SMC Development, L.P. and Southern Links Group.

"Permitted Liens" shall mean (a) Liens for taxes, assessments,
or other governmental charges or levies not yet due or which (if
foreclosure, distraint, sale, or other similar proceedings shall not
have been initiated) are being contested in good faith by appropriate
proceedings, and such reserve as may be required by GAAP shall have
been made therefor, (b) Liens in connection with workers'
compensation, unemployment insurance or other social security (other
than Liens created by Section 4068 of ERISA), old-age pension, or
public liability obligations which are not yet due or which are being
contested in good faith by appropriate proceedings, if such reserve as
may be required by GAAP shall have been made therefor, (c) Liens in
favor of vendors, carriers, warehousemen, repairmen, mechanics,
workmen, materialmen, construction, or similar Liens arising by
operation of law in the ordinary course of business in respect of
obligations which are not yet due or which are being contested in good
faith by appropriate proceedings, if such reserve as may be required
by GAAP shall have been made therefor, (d) 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 and/or the Co- Borrowers to secure amounts
owing, which amounts are not yet due or are being contested in good
faith by appropriate proceedings, if such reserve as may be required
by GAAP shall have been made therefor, (e) Liens under production
sales agreements, division orders, operating agreements, and other
agreements customary in the oil and gas

9
<PAGE> 14
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 90 days of delivery,
(f) easements, rights of way, restrictions, and other similar
encumbrances, and minor defects in the chain of title which are
customarily accepted in the oil and gas financing industry, none of
which interfere with the ordinary conduct of the business of the
Borrower or materially detract from the value or use of the Property
to which they apply, (g) Liens in favor of the Lender and other Liens
expressly permitted under the Security Instruments, and (h)
non-recourse Indebtedness or other Indebtedness with terms acceptable
to the Lender which is used to refinance the Term Loan.

"Person" shall mean an individual, corporation, partnership,
trust, unincorporated organization, government, any agency or
political subdivision of any government, or any other form of entity.

"Plan" shall mean, at any time, any employee benefit plan
which is covered by ERISA and in respect of which the Borrower or any
Commonly Controlled Entity is (or, if such plan were terminated at
such time, would under Section 4069 of ERISA be deemed to be) an
"employer" as defined in Section 3(5) of ERISA.

"Principal Office" shall mean the principal office of the
Lender in Houston, Texas, presently located at 24 Greenway Plaza,
Suite 1401, Houston, Texas 77046.

"Property" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, tangible or intangible.

"Reducing Revolving Line of Credit" shall mean the loan of
even date herewith from the Lender to the Borrower and the
Co-Borrowers up to the amount of $25,000,000, but not exceeding the
Borrowing Base which is $12,500,000 as of the Closing Date.

"Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System, as the same may be amended or
supplemented from time to time.

10
<PAGE> 15
directive, or request of any Governmental Authority or monetary
authority charged with the enforcement, interpretation, or
administration thereof, occurring after the Closing Date and applying
to a class of banks including the Lender or its Applicable Lending
Office.

"Release of Hazardous Substances" shall mean any emission,
spill, release, disposal, or discharge, except in accordance with the
Requirement of Law, a valid permit, license, certificate, or approval
of the relevant Governmental Authority, of any Hazardous Substance
into or upon (a) the air, (b) soils or any improvements located
thereon, (c) surface water or groundwater, or (d) the sewer or septic
system, or the waste treatment, storage, or disposal system servicing
any Property of the Borrower and/or the Co-Borrowers.

"Requirement of Law" shall mean, as to any Person, the
certificate or articles of incorporation and by-laws or other
organizational or governing documents of such Person, and any
applicable law, treaty, ordinance, order, judgment, rule, decree,
regulation, or determination of an arbitrator, court, or other
Governmental Authority, including, without limitation, rules,
regulations, orders, and requirements for permits, licenses,
registrations, approvals, or authorizations, in each case as such now
exist or may be hereafter amended and are applicable to or binding
upon such Person or any of its Property or to which such Person or any
of its Property is subject.

"Responsible Officer" shall mean, as to any Person, its
President, Chief Executive Officer, Chief Financial Officer or any
Vice President.

"Security Instruments" shall mean the security instruments
executed and delivered in satisfaction of the condition set forth in
Section 3.1(f), and all other documents and instruments at any time
executed as security for all or any portion of the Obligations, as
such instruments may be amended, restated, or supplemented from time
to time.

11
<PAGE> 16
through one or more intermediaries, or both, by such Person.

"Superfund Site" shall mean those sites listed on the
Environmental Protection Agency National Priority List and eligible
for remedial action or any comparable state registries or list in any
state of the United States.

"Tangible Net Worth" shall mean (a) total assets, as would be
reflected on a balance sheet of the Borrower prepared on a
consolidated basis and in accordance with GAAP, exclusive of
Intellectual Property, experimental or organization expenses,
franchises, licenses, permits, and other intangible assets, treasury
stock, unamortized underwriters' debt discount and expenses, and
goodwill minus (b) total liabilities, as would be reflected on a
balance sheet of the Borrower prepared on a consolidated basis and in
accordance with GAAP.

"UCC" shall mean the Uniform Commercial Code as from time to
time in effect in the State of Texas.

1.3 Undefined Financial Accounting Terms. Undefined
financial accounting terms used in this Agreement shall be defined according to
GAAP at the time in effect.

12
<PAGE> 17
1.6 Number and Gender. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural; and likewise, the plural shall be understood to include the singular.
Definitions of terms defined in the singular or plural shall be equally
applicable to the plural or singular, as the case may be, unless otherwise
indicated. Words denoting sex shall be construed to include the masculine,
feminine and neuter, when such construction is appropriate; and specific
enumeration shall not exclude the general but shall be construed as cumulative.

1.7 Incorporation of Exhibits. The Exhibits attached to
this Agreement are incorporated herein and shall be considered a part of this
Agreement for all purposes.

ARTICLE II

TERMS OF FACILITY

2.1 The Commitment. Subject to the terms and conditions
of this Agreement and relying on the representations and warranties contained
in this Agreement, the Lender agrees to lend the Borrower the sum of
$3,500,000. The loan made by the Lender to the Borrower under this Agreement
shall be made and maintained at the principal office of the Lender and shall be
evidenced by the Note.

2.3 Interest. Subject to the terms of this Agreement
(including, without limitation, Section 2.12), interest on the Loan shall
accrue and be payable at a rate per annum equal to the Floating Rate. Interest
on the Loan shall be computed on the basis of a year of 365 or 366 days, as the
case may be, and actual days elapsed (including the first day but excluding the
last day) during the period for which payable. Notwithstanding the foregoing,
interest on past-due principal and, to the extent permitted by applicable law,
past-due interest, shall accrue at the Default Rate, computed on the basis of a
year of 365 or 366 days, as the case may be, and actual days elapsed (including
the first day but excluding the last day) during the period for which payable,
and shall be payable upon demand by the Lender at any time as to all or any
portion of such interest.

2.4 Repayment of Loans and Interest. Accrued and unpaid
interest on the Loan shall be due and payable monthly commencing on the first
day of January, 1996, and continuing on the first day of

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each calendar month thereafter, the payment in each instance to be the amount
of interest which has accrued and remains unpaid in respect of the Loan. The
Loan Balance, together with all accrued and unpaid interest thereon, shall be
due and payable at Final Maturity.

2.7 Borrowing Base Determinations. The Borrowing Base as
of the Closing Date is acknowledged by the Borrower and the Co-Borrowers and
the Lender to be $3,500,000.

2.8 Voluntary Prepayments and Conversions of Loans.
Subject to applicable provisions of this Agreement, the Borrower and/or the
Co-Borrowers shall have the right at any time or from time to time to prepay
the Loan without prepayment penalty provided, however, (a) the Borrower and/or
the Co-Borrowers shall pay all accrued and unpaid interest on the amounts
prepaid, and (b) no such prepayment shall serve to postpone the repayment when
due of any Obligations.

2.9 Facility Fee. In addition to interest on the Note as
provided herein and to compensate the Lender for the costs of the extension of
credit hereunder, the Borrower and/or the Co-Borrowers shall pay to the Lender,
in immediately available funds, a facility fee in the amount of $35,000. One
half of such fee was paid upon the acceptance of the preliminary term sheet and
the remaining one-half shall be paid on the Closing Date.

2.10 Loans to Satisfy Obligations of Borrower. The Lender
may, but shall not be obligated to, make Loans for the

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<PAGE> 19
benefit of the Borrower and/or the Co-Borrowers and apply proceeds thereof to
the satisfaction of any condition, warranty, representation, or covenant of the
Borrower and/or the Co-Borrowers contained in this Agreement or any other Loan
Document. Any such Loan shall be evidenced by the Note.

2.11 Security Interest in Accounts; Right of Offset. As
security for the payment and performance of the Obligations, the Borrower
and/or the Co-Borrowers hereby transfer, assign, and pledge to the Lender and
grant to the Lender a security interest in all funds of the Borrower and the
Co-Borrowers now or hereafter or from time to time on deposit with the Lender,
with such interest of the Lender to be retransferred, reassigned, and/or
released by the Lender, as the case may be, at the expense of the Borrower and
the Co-Borrowers upon payment in full and complete performance by the Borrower
and the Co-Borrowers of all Obligations. All remedies as secured party or
assignee of such funds shall be exercisable by the Lender upon the occurrence
of any Event of Default, regardless of whether the exercise of any such remedy
would result in any penalty or loss of interest or profit with respect to any
withdrawal of funds deposited in a time deposit account prior to the maturity
thereof. Furthermore, the Borrower and the Co-Borrowers hereby grant to the
Lender the right, exercisable at such time as any Obligation shall mature,
whether by acceleration of maturity or otherwise, of offset or banker's lien
against all funds of the Borrower and the Co-Borrowers now or hereafter or from
time to time on deposit with the Lender, regardless of whether the exercise of
any such remedy would result in any penalty or loss of interest or profit with
respect to any withdrawal of funds deposited in a time deposit account prior to
the maturity thereof.

2.12 General Provisions Relating to Interest. (a) It is
the intention of the parties hereto to comply strictly with the usury laws of
the State of Texas and the United States of America. In this connection, there
shall never be collected, charged, or received on the sums advanced hereunder
interest in excess of that which would accrue at the Highest Lawful Rate. For
purposes of Article 5069-1.04, Vernon's Texas Civil Statutes, as amended, the
Borrower and the Co-Borrowers agrees that the Highest Lawful Rate shall be the
"indicated (weekly) rate ceiling" as defined in such Article, provided that the
Lender may also rely, to the extent permitted by applicable laws of the State
of Texas or the United States of America, on alternative maximum rates of
interest under other laws of the State of Texas or the United States of America
applicable to the Lender, if greater.

(b) Notwithstanding anything herein or in the Note to the
contrary, during any Limitation Period, the interest rate to be charged on
amounts evidenced by the Note shall be the Highest Lawful Rate, and the
obligation, if any, of the Borrower and the Co-Borrowers for the payment of
fees or other charges deemed to be

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<PAGE> 20
interest under applicable law shall be suspended. During any period or periods
of time following a Limitation Period, to the extent permitted by applicable
laws of the State of Texas or the United States of America, the interest rate
to be charged hereunder shall remain at the Highest Lawful Rate until such time
as there has been paid to the Lender (i) the amount of interest in excess of
that accruing at the Highest Lawful Rate that the Lender would have received
during the Limitation Period had the interest rate remained at the otherwise
applicable rate, and (ii) all interest and fees otherwise payable to the Lender
but for the effect of such Limitation Period.

(c) If, under any circumstances, the aggregate amounts paid on
the Note or under this Agreement or any other Loan Document include amounts
which by law are deemed interest and which would exceed the amount permitted if
the Highest Lawful Rate were in effect, the Borrower and the Co-Borrowers
stipulate that such payment and collection will have been and will be deemed to
have been, to the extent permitted by applicable laws of the State of Texas or
the United States of America, the result of mathematical error on the part of
the Borrower and the Co-Borrowers and the Lender; and the Lender shall promptly
refund the amount of such excess (to the extent only of such interest payments
in excess of that which would have accrued and been payable on the basis of the
Highest Lawful Rate) upon discovery of such error by the Lender or notice
thereof from the Borrower and the Co-Borrowers. In the event that the maturity
of any Obligation is accelerated, by reason of an election by the Lender or
otherwise, or in the event of any required or permitted prepayment, then the
consideration constituting interest under applicable laws may never exceed the
Highest Lawful Rate; and excess amounts paid which by law are deemed interest,
if any, shall be credited by the Lender on the principal amount of the
Obligations, or if the principal amount of the Obligations shall have been paid
in full, refunded to the Borrower and the Co-Borrowers.

2.13 Letters in Lieu of Transfer Orders. The Lender
agrees that none of the letters in lieu of transfer or division orders provided
by the Borrower and/or the Co-Borrowers pursuant to Section 3.1(f)(v) or
Section 5.7 will be sent to the addressees thereof prior to the occurrence of
an Event of Default, at which time the Lender may, at its option and in
addition to the exercise

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<PAGE> 21
of any of its other rights and remedies, send any or all of such letters.

2.14 Power of Attorney. The Borrower and the Co-Borrowers
hereby designate the Lender as their agent and attorney-in-fact, to act in
their name, place, and stead for the purpose of completing and, upon the
occurrence of an Event of Default, delivering any and all of the letters in
lieu of transfer orders delivered by the Borrower and/or the Co-Borrowers to
the Lender pursuant to Section 3.1(f)(ix) or Section 5.7, including, without
limitation, completing any blanks contained in such letters and attaching
exhibits thereto describing the relevant Collateral. The Borrower and the
Co-Borrowers hereby ratify and confirm all that the Lender shall lawfully do or
cause to be done by virtue of this power of attorney and the rights granted
with respect to such power of attorney. This power of attorney is coupled with
the interests of the Lender in the Collateral, shall commence and be in full
force and effect as of the Closing Date and shall remain in full force and
effect and shall be irrevocable so long as any Obligation remains outstanding
or unpaid or any Commitment exists. The powers conferred on the Lender by this
appointment are solely to protect the interests of the Lender under the Loan
Documents and shall not impose any duty upon the Lender to exercise any such
powers. The Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and shall not be
responsible to the Borrower and the Co-Borrowers or any other Person for any
act or failure to act with respect to such powers, except for gross negligence
or willful misconduct.

ARTICLE III

CONDITIONS

The obligations of the Lender to enter into this Agreement and
to make Loans are subject to the satisfaction of the following conditions
precedent:

3.1 Receipt of Loan Documents and Other Items. The
Lender shall have no obligation under this Agreement unless and until all
matters incident to the consummation of the transactions contemplated herein,
including, without limitation, the review by the Lender or its counsel of the
title of the Borrower and/or the Co-Borrowers or Diverse to its Oil and Gas
Properties, shall be satisfactory to the Lender, and the Lender shall have
received, reviewed, and approved the following documents and other items,
appropriately executed when necessary and, where applicable, acknowledged by
one or more authorized officers of the Borrower and/or the Co-Borrowers all in
form and substance satisfactory to the Lender and dated, where applicable, of
even date herewith or a date prior thereto and acceptable to the Lender:

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<PAGE> 22
(a) multiple counterparts of this Agreement as requested by
the Lender;

(b) the Note;

(d) certificates of incumbency and signatures of all officers
of the Borrower and the Co- Borrowers who are authorized to execute
Loan Documents on behalf of the Borrower and the Co-Borrowers, each
such certificate being executed by the secretary or an assistant
secretary of the Borrower and the Co-Borrowers;

(e) copies of corporate resolutions approving the Loan
Documents and authorizing the transactions contemplated herein and
therein, duly adopted by the boards of directors of the Borrower and
the Co-Borrowers accompanied by certificates of the secretary or an
assistant secretary of the Borrower and the Co-Borrowers to the effect
that such copies are true and correct copies of resolutions duly
adopted at a meeting or by unanimous consent of the board of directors
of the Borrower and the Co- Borrowers and that such resolutions
constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified, or revoked in any
respect, and are in full force and effect as of the date of such
certificate;

(ii) Financing Statements from the Borrower, as
debtor, constituent to the instrument described in clause (i)
above;

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<PAGE> 23
(iii) Mortgage, Deed of Trust, Indenture, Security
Agreement, Assignment of Production, and Financing Statement
from Diverse pledging SMC Production Co.'s interest in certain
designated Oil and Gas Properties of the Borrower and all
improvements, personal property, and fixtures related thereto;

(iv) Financing Statements from Diverse, as debtor,
constituent to the instrument described in clause (i) above;

(vi) Financing Statements from Venture Pipeline
Company, as debtor, constituent to the instrument described in
clause (v) above;

(viii) Financing Statements from San Salvador
Development Company, Inc., as debtor, constituent to the
instrument described in clause (vii) above;

(ix) Assignment of Partnership Interests (Security
Agreement) from the Borrower pledging its interest in Diverse
GP III;

(x) Financing Statement from the Borrower, as
debtor, constituent to the instrument described in clause
(vii) above;

(xi) Assignment of Partnership Interests (Security
Agreement) from Diverse pledging SMC Production Co.'s pro-rata
part of Diverse's interest in Diverse-Rimco, a general
partnership;

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<PAGE> 24
(xii) Financing Statement from the Borrower, as
debtor, constituent to the instrument described in clause (ix)
above;

(xiii) Assignment of Partnership Interests (Security
Agreement) from VenGas Pipeline Company pledging its interest
in Carmel Pipeline Co.;

(xiv) Financing Statement from VenGas Pipeline
Company, as debtor, constituent to the instrument described in
clause (xi) above;

(xv) undated letters, in form and substance
satisfactory to the Lender, from the Borrower and Diverse to
each purchaser of production and disburser of the proceeds of
production from or attributable to the Mortgaged Properties,
together with additional letters with the addressees left
blank, authorizing and directing the addressees to make future
payments attributable to production from the Mortgaged
Properties directly to the Lender;

(xvi) Security Agreement (Stock Pledge) by Borrower
of Stock of San Salvador Development Company, Inc., Venture
Resources, Inc., SMC Production Co. and Spruce Hills
Production Company, Inc.

(xvii) Security Agreement (Stock Pledge) by Venture
Resources, Inc. of stock of Venture Pipeline Co. and VenGas
Pipeline Company.

(i) results of searches of the UCC Records of the Secretary of
State of the States of Arkansas, Louisiana, Michigan, Mississippi,
Oklahoma, Texas and Wyoming from

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<PAGE> 25
a source acceptable to the Lender and reflecting no Liens other than
Permitted Liens against any of the Collateral as to which perfection
of a Lien is accomplished by the filing of a financing statement other
than in favor of the Lender;

(j) confirmation, acceptable to the Lender, of the title of
the Borrowers and Diverse to the Mortgaged Properties, free and clear
of Liens other than Permitted Liens;

(k) all operating, lease, sublease, royalty, sales, exchange,
processing, farmout, bidding, pooling, unitization, communitization,
and other agreements relating to the Mortgaged Properties requested by
the Lender;

(l) engineering reports covering the Mortgaged Properties;

(m) the opinion of Porter & Hedges, L.L.P., counsel to the
Borrower in the form attached hereto as Exhibit IV, with such changes
thereto as may be approved by the Lender;

(n) certificates evidencing the insurance coverage required
pursuant to Section 5.18; and

(o) such other agreements, documents, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may
reasonably request.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

To induce the Lender to enter into this Agreement and to make
the Loan, the Borrower and each Co- Borrower, respectively, represent and
warrant to the Lender with respect to itself and not the others (which
representations and warranties shall survive the delivery of the Note) that:

4.1 Due Authorization. The execution and delivery by the
Borrower and Co-Borrowers of this Agreement and the borrowings hereunder, the
execution and delivery by the Borrower and Co-Borrowers of the Note, the
repayment of the Note and interest and fees provided for in the Note and this
Agreement, the execution and delivery of the Security Instruments by the
Borrower and Co-Borrowers and the performance of all obligations of the
Borrower and Co- Borrowers under the Loan Documents are within the power of

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<PAGE> 26
the Borrower and Co-Borrowers, have been duly authorized by all necessary
corporate action by the Borrower and Co- Borrowers, and do not and will not to
our knowledge, (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) contravene or conflict
with any indenture, instrument, or other agreement to which the Borrower and
Co-Borrowers is a party or by which any Property of the Borrower and
Co-Borrowers may be presently bound or encumbered, or (d) result in or require
the creation or imposition of any Lien in, upon or of any Property of the
Borrower and Co-Borrowers under any such indenture, instrument, or other
agreement, other than the Loan Documents.

4.4 Security Instruments. The provisions of each
Security Instrument are effective to create in favor of the Lender, a legal,
valid, and enforceable Lien in all right, title, and interest of the Borrower
and/or the Co-Borrowers in the Collateral described therein, which Liens,
assuming the accomplishment of recording and filing in accordance with
applicable laws prior to the intervention of rights of other Persons, shall
constitute fully perfected first-priority Liens on all right, title, and
interest of the Borrower and/or the Co-Borrowers in the Collateral described
therein.

4.5 Title to Assets. The Borrower and/or the
Co-Borrowers have good and defensible title to all of their respective
Properties, free and clear of all Liens except Permitted Liens.

4.6 Scope and Accuracy of Financial Statements. The
Financial Statements of the Borrower, Co- Borrowers (except SMC Production Co.)
as of September 30, 1995, present fairly the financial position and results of
operations and cash flows of the Borrower, Co-Borrowers (except SMC Production
Co.) in accordance with GAAP as at the relevant point in time or for the period
indicated, as applicable. No event or circumstance has occurred

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<PAGE> 27
since September 30, 1995, which could reasonably be expected to have a Material
Adverse Effect.

4.8 Liabilities, Litigation, and Restrictions. Other
than as listed under the heading "Liabilities" on Exhibit V attached hereto,
the Borrower and/or the Co-Borrowers have no liabilities, direct, or
contingent, which may materially and adversely affect its business or
operations or its ownership of the Collateral. Except as set forth under the
heading "Litigation" on Exhibit V hereto, no litigation or other action of any
nature affecting the Borrower and/or the Co-Borrowers is pending before any
Governmental Authority or, to the best knowledge of the Borrower and/or the
Co-Borrowers, threatened against or affecting the Borrower and/or the
Co-Borrowers which might reasonably be expected to result in any impairment of
its ownership of any Collateral or have a Material Adverse Effect. No unusual
or unduly burdensome restriction, restraint or hazard exists by contract,
Requirement of Law, or otherwise relative to the business or operations of the
Borrower and/or the Co-Borrowers or the ownership and operation of the
Collateral other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower and/or the Co-Borrowers.

4.10 ERISA. Except as set out on Exhibit VII, the
Borrower and the Co-Borrowers do not maintain nor have they maintained any
Plan. The Borrower and the Co-Borrowers do not currently contribute to or have
any obligation to contribute to or otherwise have any liability with respect to
any Plan.

4.11 Environmental Laws. To the best knowledge and belief
of the Borrower and/or the Co-Borrowers, except as would not have a Material
Adverse Effect, or as described on Exhibit V under the heading "Environmental
Matters:"

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<PAGE> 28
(a) no Property of the Borrower and/or the Co-Borrowers is
currently on or has ever been on, or is adjacent to any Property which
is on or has ever been on, any federal or state list of Superfund
Sites;

(c) except in accordance with applicable Requirements of Law
or the terms of a valid permit, license, certificate, or approval of
the relevant Governmental Authority, no Release of Hazardous
Substances by the Borrower and/or the Co-Borrowers or from, affecting,
or related to any Property of the Borrower and/or the Co-Borrowers or
adjacent to any Property of the Borrower and/or the Co- Borrowers has
occurred; and

(d) no Environmental Complaint has been received by the
Borrower and/or the Co-Borrowers.

4.15 Proper Filing of Tax Returns; Payment of Taxes Due.
The Borrower and the Co-Borrowers have duly and properly filed a United States
income tax return and all other tax returns which are required to be filed and
has paid all taxes due except such as are being contested in good faith and as
to which adequate provisions and disclosures have been made. The respective
charges and reserves on the books of the Borrower and the Co-Borrowers with
respect to taxes and other governmental charges are adequate.

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<PAGE> 29
4.16 Refunds. Except as described on Exhibit V under the
heading "Refunds," no orders of, proceedings pending before, or other
requirements of, the Federal Energy Regulatory Commission, the Texas Railroad
Commission, or any Governmental Authority exist which could result in the
Borrower and/or the Co-Borrowers being required to refund any material portion
of the proceeds received or to be received from the sale of hydrocarbons
constituting part of the Mortgaged Property.

4.17 Gas Contracts. Except as described on Exhibit V
under the heading "Gas Contracts," the Borrower and/or the Co-Borrowers (a) are
not obligated in any material respect by virtue of any prepayment made under
any contract containing a "take-or-pay" or "prepayment" provision or under any
similar agreement to deliver hydrocarbons produced from or allocated to any of
the Mortgaged Property at some future date without receiving full payment
therefor within 90 days of delivery, and (b) have not produced gas, in any
material amount, subject to, and neither the Borrower and/or the Co-Borrowers
nor any of the Mortgaged Properties is subject to, balancing rights of third
parties or subject to balancing duties under governmental requirements, except
as to such matters for which the Borrower and/or the Co- Borrowers have
established monetary reserves adequate in amount to satisfy such obligations
and have segregated such reserves from other accounts.

4.19 Casualties or Taking of Property. Except as
disclosed on Exhibit V under the heading "Casualties," since September 30,
1995, neither the business nor any Property of the Borrower and/or the
Co-Borrowers have been materially adversely affected as a result of any fire,
explosion, earthquake, flood, drought, windstorm, accident, strike or other
labor disturbance, embargo, requisition or taking of Property, or cancellation
of contracts, permits, or concessions by any Governmental Authority, riot,
activities of armed forces, or acts of God.

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<PAGE> 30
4.20 Locations of Borrower. The principal place of
business and chief executive office of the Borrower and the Co-Borrowers is
located at the address of the Borrower set forth in Section 8.3 or at such
other location as the Borrower and the Co-Borrowers may have, by proper written
notice hereunder, advised the Lender, provided that such other location is
within a state in which appropriate financing statements from the Borrower in
favor of the Lender have been filed.

4.21 Subsidiaries. The Borrower has no Subsidiaries other
than the Co-Borrowers and those listed on Exhibit IV.

ARTICLE V

AFFIRMATIVE COVENANTS

So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower and/or the Co-Borrowers shall:

5.2 Quarterly Financial Statements; Compliance
Certificates. Deliver to the Lender, (a) on or before the 45th day after the
close of each of the first three quarterly periods of each fiscal year of the
Borrower and the Co-Borrowers, a copy of the unaudited consolidated and
consolidating Financial Statements of the Borrower and the Co-Borrowers as at
the close of such quarterly period and from the beginning of such fiscal year
to the end of such period, such Financial Statements to be certified by
Responsible Officers of the Borrower and the Co-Borrowers as having been
prepared in accordance with GAAP consistently applied and as a fair
presentation of the condition of the Borrower and the Co-Borrowers, subject to
changes resulting from normal year-end audit adjustments, and (b) on or before
the 45th day after the close of each fiscal quarter and on or before the 120th
day after the close of the fiscal year, a Compliance Certificate.

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<PAGE> 31
5.4 Financial Statements of Diverse. (a) Deliver to the
Lender on or before the 45th day after the close of each of the first three
quarterly periods of each fiscal year of Diverse, a copy of the unaudited
consolidated Financial Statements of Diverse as at the close of such quarterly
period and from the beginning of such fiscal year to the end of such period,
such Financial Statements to be certified by a Responsible Officer of the
managing partner of Diverse as having been prepared in accordance with GAAP
consistently applied and as a fair presentation of the condition of Diverse,
subject to changes resulting from normal year-end audit adjustments, and (b) on
or before the 120th day after the close of each fiscal year of Diverse, a copy
of the annual unaudited consolidated Financial Statements of Diverse.

5.5 Title Opinions; Title Defects. Promptly upon the
request of the Lender, furnish to the Lender title opinions, in form and
substance and by counsel satisfactory to the Lender, or other confirmation of
title acceptable to the Lender, covering Oil and Gas Properties constituting
not less than 70% of the present value, determined by the Lender in its sole
discretion, of the Mortgaged Properties, plus certain other Oil and Gas
Properties to be determined in sole discretion of the Lender, and promptly, but
in any event within 60 days after notice by the Lender of any defect, material
in the opinion of the Lender in value, in the title of the Borrower and/or the
Co- Borrowers to any of its Oil and Gas Properties, clear such title defects,
and, in the event any such title defects are not cured in a timely manner, pay
all related costs and fees incurred by the Lender to do so.

5.6 Notices of Certain Events. Deliver to the Lender,
immediately upon having knowledge of the occurrence of any of the following
events or circumstances, a written statement with respect thereto, signed by a
Responsible Officer of the Borrower and/or the Co-Borrowers and setting forth
the relevant event or circumstance and the steps being taken by the Borrower
and/or the Co-Borrowers with respect to such event or circumstance:

(a) any Default or Event of Default;

(b) any default or event of default under any contractual
obligation of the Borrower and/or the Co-Borrowers, including, but not
limited to the Reducing Revolving Line of Credit, or any litigation,
investigation, or proceeding between the Borrower and/or the
Co-Borrowers and any Governmental Authority which, in either case, if
not cured or if adversely determined, as the case may be, could
reasonably be expected to have a Material Adverse Effect;

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<PAGE> 32
which any Property of the Borrower and/or the Co-Borrowers are
subject to a claim and in which the amount involved is $100,000 or
more and which is not covered by insurance or in which injunctive or
similar relief is sought;

(d) the receipt by the Borrower and/or the Co-Borrowers of any
Environmental Complaint;

(f) any Release of Hazardous Substances by the Borrower and/or
the Co-Borrowers or from, affecting, or related to any Property of the
Borrower and/or the Co-Borrowers or adjacent to any Property of the
Borrower and/or the Co-Borrowers except in accordance with applicable
Requirements of Law or the terms of a valid permit, license,
certificate, or approval of the relevant Governmental Authority, or
the violation of any Environmental Law, or the revocation, suspension,
or forfeiture of or failure to renew, any permit, license,
registration, approval, or authorization which could reasonably be
expected to have a Material Adverse Effect;

(g) the change in identity or address of any Person remitting
to the Borrower and/or the Co- Borrowers proceeds from the sale of
hydrocarbon production from or attributable to any Mortgaged Property;

(h) any change in the senior management of the Borrower; and

(i) any other event or condition which could reasonably be
expected to have a Material Adverse Effect.

5.7 Letters in Lieu of Transfer Orders; Division Orders.
Promptly upon request by the Lender at any time and from time to time, execute
such letters in lieu of transfer orders, in addition to the letters signed by
the Borrower and/or the Co-Borrowers and delivered to the Lender in
satisfaction of the condition set forth in Section 3.1 (f)(v) and/or division
and/or transfer orders as are necessary or appropriate to transfer and deliver
to the Lender proceeds from or attributable to any Mortgaged Property.

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5.8 Additional Information. Furnish to the Lender,
promptly upon the request of the Lender, such additional financial or other
information concerning the assets, liabilities, operations, and transactions of
the Borrower and/or the Co-Borrowers as the Lender may from time to time
request; and notify the Lender not less than ten Business Days prior to the
occurrence of any condition or event that may change the proper location for
the filing of any financing statement or other public notice or recording for
the purpose of perfecting a Lien in any Collateral, including, without
limitation, any change in its name or the location of its principal place of
business or chief executive office; and upon the request of the Lender, execute
such additional Security Instruments as may be necessary or appropriate in
connection therewith.

5.9 Compliance with Laws. Comply with all applicable
Requirements of Law, including, without limitation, (a) the Natural Gas Policy
Act of 1978, as amended, (b) ERISA, (c) Environmental Laws, and (d) all
permits, licenses, registrations, approvals, and authorizations issued to it or
of which it has knowledge (i) related to any natural or environmental resource
or media located on, above, within, in the vicinity of, related to or affected
by any Property of the Borrower and/or the Co-Borrowers, (ii) required for the
performance of the operations of the Borrower and/or the Co-Borrowers, or (iii)
applicable to the use, generation, handling, storage, treatment, transport, or
disposal of any Hazardous Substances; and instruct all employees, crew members,
agents, contractors, subcontractors, and future lessees (pursuant to
appropriate lease provisions) of the Borrower and/or the Co-Borrowers, while
such Persons are acting within the scope of their relationship with the
Borrower and/or the Co-Borrowers, to comply with all such Requirements of Law
as may be necessary or appropriate to enable the Borrower and/or the
Co-Borrowers to so comply.

5.10 Payment of Assessments and Charges. Pay all taxes,
assessments, governmental charges, rent, and other Indebtedness which, if
unpaid, might become a Lien against the Property of the Borrower and/or the Co-
Borrowers, except any of the foregoing being contested in good faith and as to
which adequate reserve in accordance with GAAP has been established or unless
failure to pay would not have a Material Adverse Effect.

5.11 Maintenance of Corporate Existence and Good Standing.
Maintain their corporate existence or qualification and good standing in its
jurisdictions of incorporation and in all jurisdictions wherein the Property
now owned or hereafter acquired or business now or hereafter conducted
necessitates same, unless the failure to do so would not have a Material
Adverse Effect.

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<PAGE> 34
5.12 Payment of Notes; Performance of Obligations. Pay
the Note according to the reading, tenor, and effect thereof, as modified
hereby, and do and perform every act and discharge all of its other
Obligations.

5.13 Further Assurances. Upon Lender's written request,
promptly cure any defects in the execution and delivery of any of the Loan
Documents and all agreements contemplated thereby, and execute, acknowledge,
and deliver such other assurances and instruments as shall, in the opinion of
the Lender, be necessary to fulfill the terms of the Loan Documents.

5.14 Initial Fees and Expenses of Counsel to Lender. Upon
request by the Lender, promptly reimburse the Lender for all reasonable fees
and expenses of Jackson & Walker, L.L.P., special counsel to the Lender, in
connection with the preparation of this Agreement and all documentation
contemplated hereby, the satisfaction of the conditions precedent set forth
herein, the filing and recordation of Security Instruments, and the
consummation of the transactions contemplated in this Agreement.

5.15 Subsequent Fees and Expenses of Lender. Upon request
by the Lender, promptly reimburse the Lender (to the fullest extent permitted
by law) for all amounts reasonably expended, advanced, or incurred by or on
behalf of the Lender to satisfy any obligation of the Borrower and/or the
Co-Borrowers under any of the Loan Documents; to collect the Obligations; to
ratify, amend, restate, or prepare additional Loan Documents, as the case may
be; for the filing and recordation of Security Instruments; to enforce the
rights of the Lender under any of the Loan Documents; and to protect the
Properties or business of the Borrower and/or the Co-Borrowers, including,
without limitation, the Collateral, which amounts shall be deemed compensatory
in nature and liquidated as to amount upon notice to the Borrower and/or the
Co-Borrowers by the Lender and which amounts shall include, but not be limited
to (a) all court costs, (b) reasonable attorneys' fees, (c) reasonable fees and
expenses of auditors and accountants incurred to protect the interests of the
Lender, (d) fees and expenses incurred in connection with the participation by
the Lender as a member of the creditors' committee in a case commenced under
any Insolvency Proceeding, (e) fees and expenses incurred in connection with
lifting the automatic stay prescribed in Section 362 Title 11 of the United
States Code, and (f) fees and expenses incurred in connection with any action
pursuant to Section 1129 Title 11 of the United States Code all reasonably
incurred by the Lender in connection with the collection of any sums due under
the Loan Documents, together with interest at the per annum interest rate equal
to the Floating Rate, calculated on a basis of a calendar year of 365 or 366
days, as the case may be, counting the actual number of days elapsed, on each
such amount from the date of notification that the same was expended, advanced,
or incurred by

30
<PAGE> 35
the Lender until the date it is repaid to the Lender, with the obligations
under this Section surviving the non- assumption of this Agreement in a case
commenced under any Insolvency Proceeding and being binding upon the Borrower
and/or the Co-Borrowers and/or a trustee, receiver, custodian, or liquidator of
the Borrower and/or the Co-Borrowers appointed in any such case.

5.16 Operation of Oil and Gas Properties. Develop,
maintain, and operate its Oil and Gas Properties in a prudent and workmanlike
manner in accordance with industry standards.

5.17 Maintenance and Inspection of Properties. Maintain
all of its tangible Properties in good repair and condition, ordinary wear and
tear excepted; make all necessary replacements thereof and operate such
Properties in a good and workmanlike manner; and permit on 2 Business Days
prior notice any authorized representative of the Lender to visit and inspect,
any tangible Property of the Borrower and/or the Co-Borrowers.

5.18 Maintenance of Insurance. Maintain insurance with
respect to its Properties and businesses against such liabilities, casualties,
risks, and contingencies as is customary in the relevant industry and
sufficient to prevent a Material Adverse Effect, all such insurance to be in
amounts and from insurers acceptable to the Lender and, within 60 days of the
Closing Date for property damage insurance covering Collateral and business
interruption insurance, if any, maintained by Borrower and/or the Co-Borrowers,
naming the Lender as loss payee, and, upon any renewal of any such insurance
and at other times upon request by the Lender, furnish to the Lender evidence,
satisfactory to the Lender, of the maintenance of such insurance. The Lender
shall have the right to collect, and the Borrower and/or the Co-Borrowers
hereby assigns to the Lender, any and all monies that may become payable under
any policies of insurance relating to business interruption or by reason of
damage, loss, or destruction of any of the Collateral. In the event of any
damage, loss, or destruction for which insurance proceeds relating to business
interruption or Collateral exceed $100,000, the Lender may, at its option,
apply all such sums or any part thereof received by it toward the payment of
the Obligations, whether matured or unmatured, application to be made first to
interest and then to principal, and shall deliver to the Borrower and/or the
Co-Borrowers the balance, if any, after such application has been made. In the
event of any such damage, loss, or destruction for which insurance proceeds are
$100,000 or less, provided that no Default or Event of Default has occurred and
is continuing, the Lender shall deliver any such proceeds received by it to the
Borrower and/or the Co-Borrowers. In the event the Lender receives insurance
proceeds not attributable to Collateral or business interruption, the Lender
shall deliver any such proceeds to the Borrower and/or the Co-Borrowers.

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<PAGE> 36
5.19 INDEMNIFICATION. INDEMNIFY AND HOLD THE LENDER AND
ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT,
AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY
SECURITY INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES,
DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL
PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND
ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN
CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND
EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE
PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE
BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, WHETHER PRIOR TO OR DURING THE
TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY PROPERTY
OF THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, WHETHER PRIOR TO OR DURING
THE TERM HEREOF, AND WHETHER BY THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE
OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF
THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE OR ANY OTHER PERSON AT ANY TIME
OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE HANDLING,
TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION, OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR UNDER
SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE
BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, (D) ANY CONTAMINATION OF ANY
PROPERTY OR NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE,
HANDLING, STORAGE, TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY
THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE OR ANY EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER AND/OR THE CO-BORROWERS OR DIVERSE
WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE
BORROWER AND/OR THE CO-BORROWERS OR DIVERSE, IRRESPECTIVE OF WHETHER ANY OF
SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH APPLICABLE
REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE OF ANY LOAN DOCUMENT, OR ANY OTHER
ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF THE
FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, OTHER THAN GROSS NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF THE LENDER OR ANY OF ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY
INSTRUMENT; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL
OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.

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<PAGE> 37
ARTICLE VI

NEGATIVE COVENANTS

So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower and/or the Co-Borrowers will not:

6.4 Sales of Assets. Without the prior written consent
of the Lender, Borrower and/or Co-Borrowers shall not sell, transfer, or
otherwise dispose of any assets, if such assets are material to the operations
of Borrower and/or the Co-Borrowers when taken as a whole, other than (a) sales
of inventory in the ordinary course of business, (b) occasional sales, leases
or other dispositions of immaterial assets for consideration not less than fair
market value, (c) sales, leases or other dispositions of assets that are
obsolete or have negligible fair market value, and (d) sales of equipment for
fair and adequate consideration. The Lender will consent to sales of assets
representing up to 10% of the net present value of the Oil and Gas Properties
which comprise the Borrowing Base, as calculated by the Lender pursuant to the
terms of this Agreement, provided that the Borrowing Base shall be reduced, and
if necessary, proceeds from such sale shall be applied to amounts outstanding
in an amount equal to the loan value attributable to such assets sold.

6.5 Leasebacks. Enter into any agreement to sell or
transfer any Property and thereafter rent or lease as lessee such

33
<PAGE> 38
Property or other Property intended for the same use or purpose as the Property
sold or transferred.

6.7 Investments. Acquire Investments in, or purchase or
otherwise acquire all or substantially all of the assets of, any Person.
This restriction shall not apply to the following investments:

(a) up to $300,000 in SMC Development, L.P. prior to
January 15, 1996,

(b) an aggregate of up to $1,000,000 in Southern Links
Group,

(d) short-term investment grade domestic or Eurodollar
certificates of deposit or time deposits that are
fully insured by the Federal Deposit Insurance
Corporation,

(e) commercial paper and similar obligations rated "P-1"
or better by Moody's Investors Services, Inc. or
"A-1" or better by Standard & Poors Corporation,

(f) intercompany loans to, advances to or investments in,
wholly owned Subsidiaries,

(g) readily marketable tax-free municipal bonds of a
domestic issuer or rated "aaa" or better by Moody's
Investors Services, Inc. or "AAA" by Standard & Poors
Corporation, and

(h) demand deposit accounts maintained in the ordinary
course of business.

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<PAGE> 39
6.8 Dividends and Distributions. Declare, pay, or make,
any cash dividend or distribution on, or purchase, redeem, or otherwise acquire
for value, any share of any class of its capital stock.

6.9 Issuance of Stock; Changes in Corporate Structure.
Issue or agree to issue additional shares of capital stock other than for cash,
in one or any series of transactions; except to officers, directors or
employees of Borrower or any Co-Borrower as part of their compensation; enter
into any transaction of consolidation, merger, or amalgamation; liquidate, wind
up, or dissolve (or suffer any liquidation or dissolution).

6.10 Transactions with Affiliates. Directly or
indirectly, enter into any transaction (including the sale, lease, or exchange
of Property or the rendering of service) with any of its Affiliates, other than
upon fair and reasonable terms no less favorable than could be obtained in an
arm's length transaction with a Person which was not an Affiliate.

6.11 Lines of Business. Expand, on its own or through any
Subsidiary, into any line of business other than those in which the Borrower
and/or the Co-Borrowers are engaged as of the date hereof.

6.13 New Subsidiaries. Form any new Subsidiaries without
the prior written consent of the Lender.

6.15 Cash Flow Coverage. Permit as of the close of any
fiscal quarter, the ratio of Cash Flow to Debt Service to be less than 1.25 to
1.00.

ARTICLE VII

EVENTS OF DEFAULT

7.1 Enumeration of Events of Default. Any of the
following events shall constitute an Event of Default:

35
<PAGE> 40
(a) default shall be made in the payment when due of any
installment of principal or interest under this Agreement or the Note
or in the payment when due of any fee or other sum payable under any
Loan Document;

(b) default shall be made by the Borrower and/or the
Co-Borrowers in the due observance or performance of any of their
respective obligations under the Loan Documents, and such default
shall continue for 30 days after the earlier of notice thereof to the
Borrower by the Lender or actual knowledge thereof by the Borrower
and/or the Co-Borrowers;

(c) any representation or warranty made by the Borrower and/or
the Co-Borrowers in any of the Loan Documents proves to have been
untrue in any material respect or any representation, statement
(including Financial Statements), certificate, or data furnished or
made to the Lender in connection herewith proves to have been untrue
in any material respect as of the date the facts therein set forth
were stated or certified;

(d) default shall be made by the Borrower and/or the
Co-Borrowers (as principal or guarantor or other surety) in the
payment or performance of any Indebtedness including, but not limited
to the Reducing Revolving Line of Credit, and such default shall
remain unremedied for in excess of the period of grace, if any, with
respect thereto;

(e) the Borrower and/or the Co-Borrowers shall be unable to
satisfy any condition or cure any circumstance specified in Article
III, the satisfaction or curing of which is precedent to the right of
the Borrower and/or the Co-Borrowers to obtain the Loan, and such
inability shall continue for a period in excess of 30 days;

(g) an order, judgment, or decree shall be entered against
either the Borrower and/or the Co- Borrowers by any court of competent
jurisdiction or by any other duly

36
<PAGE> 41
authorized authority, on the petition of a creditor or otherwise,
granting relief in any Insolvency Proceeding or approving a petition
seeking reorganization or an arrangement of its debts or appointing a
receiver, trustee, conservator, custodian, or liquidator of it or all
or any substantial part of its assets, and such order, judgment, or
decree shall not be dismissed or stayed within 90 days;

(h) the levy against any significant portion of the Property
of the Borrower and/or the Co- Borrowers or any execution,
garnishment, attachment, sequestration, or other writ or similar
proceeding which is not permanently dismissed or discharged within 30
days after the levy;

(i) a final and non-appealable order, judgment, or decree
shall be entered against the Borrower and/or the Co-Borrowers for
money damages and/or Indebtedness due in an amount in excess of
$250,000, and such order, judgment, or decree shall not be dismissed
or stayed within 30 days;

(j) any charges are filed or any other action or proceeding is
instituted by any Governmental Authority against the Borrower and/or
the Co-Borrowers under the Racketeering Influence and Corrupt
Organizations Statute (18 U.S.C. Section 1961 et seq.), the result of
which could be the forfeiture or transfer of any material Property of
the Borrower and/or the Co-Borrowers subject to a Lien in favor of the
Lender without (i) satisfaction or provision for satisfaction of such
Lien, or (ii) such forfeiture or transfer of such Property being
expressly made subject to such Lien;

(k) the Borrower and/or the Co-Borrowers shall have (i)
concealed, removed, or diverted, or permitted to be concealed,
removed, or diverted, any part of its Property, with intent to hinder,
delay, or defraud its creditors or any of them, (ii) made or suffered
a transfer of any of its Property which may be fraudulent under any
bankruptcy, fraudulent conveyance, or similar law, or (iii) shall have
suffered or permitted, while insolvent, any creditor to obtain a Lien
upon any of its Property through legal proceedings or distraint which
is not vacated within 30 days from the date thereof;

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<PAGE> 42
(m) the occurrence of a Material Adverse Effect and the same
shall remain unremedied for in excess of 30 days after notice given by
the Lender.

(b) Upon the occurrence of any Event of Default other than
those specified in Sections 7.1(f) or 7.1(g), (i) the Lender may, by notice to
the Borrower and the Co-Borrowers, declare all Obligations immediately due and
payable, without presentment, demand, protest, notice of protest, default, or
dishonor, notice of intent to accelerate maturity, notice of acceleration of
maturity, or other notice of any kind, except as may be provided to the
contrary elsewhere herein, all of which are hereby expressly waived by the
Borrower and the Co-Borrowers; (ii) the Commitment shall immediately cease and
terminate unless and until reinstated by the Lender in writing; and (iii) to
the extent permitted by and in compliance with applicable law, then Lender may
set-off and apply any and all deposits (general or special, time or demand,
provisional or final) held by the Lender and any and all other indebtedness at
any time owing by the Lender to or for the credit or account of the Borrower
and the Co-Borrowers against any and all of the Obligations although such
Obligations may be unmatured.

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<PAGE> 43
ARTICLE VIII

MISCELLANEOUS

8.1 Transfers; Participations. The Lender may, at any
time, sell, transfer, assign, or grant participations in the Obligations or any
portion thereof; and the Lender may forward to each Transferee and prospective
Transferee all documents and information relating to such Obligations, whether
furnished by the Borrower and the Co- Borrowers or otherwise obtained, as the
Lender determines necessary or desirable. The Borrower agrees that each
Transferee, regardless of the nature of any transfer to it, may exercise all
rights (including, without limitation, rights of set-off) with respect to the
portion of the Obligations held by it as fully as if such Transferee were the
direct holder thereof, subject to any agreements between such Transferee and
the transferor to such Transferee. Notwithstanding Lender's ability to grant
rights to Transferees, Borrower will continue to deal solely and directly with
Lender.

8.3 Notices and Other Communications. Except as to oral
notices expressly authorized herein, which oral notices shall be confirmed in
writing, all notices, requests, and communications hereunder shall be in
writing (including by telecopy). Unless otherwise expressly provided herein,
any such notice, request, demand, or other communication shall be deemed to
have been duly given or made when delivered by hand, or, in the case of
delivery by mail, when deposited in the mail, if concurrent telecopy notice is
also given, or, if no concurrent telecopy notice is given, three Business Days
after deposited in the mail, certified mail, return receipt requested, postage
prepaid, or, in the case of telecopy notice, when receipt thereof is
acknowledged orally or by written confirmation report, addressed as follows:

(a) if to the Lender, to:

Compass Bank-Houston
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Attention: Energy Lending Group
Telecopy: (713) 968-8222

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<PAGE> 44
(b) if to the Borrower or Co-Borrowers, to:

Southern Mineral Corporation
500 Dallas, Suite 2800
Houston, Texas 77002
Attention: Steven H. Mikel

Any party may, by proper written notice hereunder to the
others, change the individuals or addresses to which such notices to it shall
thereafter be sent.

8.7 No Waiver; Rights Cumulative. No course of dealing
on the part of the Lender, its officers or employees, nor any failure or delay
by the Lender with respect to exercising any of its rights under any Loan
Document shall operate as a waiver thereof. The rights of the Lender under the
Loan Documents shall be cumulative and the exercise or partial exercise of any
such right shall not preclude the exercise of any other right. The making of
any Loan shall not constitute a waiver of any of the covenants, warranties, or
conditions of the Borrower and the Co- Borrowers contained herein. In the
event the Borrower and the Co-Borrowers are unable to satisfy any such
covenant, warranty, or condition, the making of any Loan shall not have the
effect of precluding the Lender from thereafter declaring such inability to be
an Event of Default as hereinabove provided.

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<PAGE> 45
8.8 Survival Upon Unenforceability. In the event any one
or more of the provisions contained in any of the Loan Documents or in any
other instrument referred to herein or executed in connection with the
Obligations shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of any Loan Document or of any other
instrument referred to herein or executed in connection with such Obligations.

8.10 Controlling Agreement. In the event of a conflict
between the provisions of this Agreement and those of any other Loan Document,
the provisions of this Agreement shall control.

8.14 WAIVER OF RIGHTS TO JURY TRIAL. THE BORROWER, THE
CO-BORROWERS AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY,

41
<PAGE> 46
INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT
RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR
THE ACTS OR OMISSIONS OF THE LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR
PROVISIONS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH
RESPECT THERETO. THE PROVISIONS OF THIS SECTION ARE A MATERIAL INDUCEMENT FOR
THE LENDER ENTERING INTO THIS AGREEMENT.

IN WITNESS WHEREOF, this Agreement is deemed executed
effective as of the date first above written.

BORROWER:

SOUTHERN MINERAL CORPORATION

By: /s/ STEVEN H. MIKEL
------------------------------------
Steven H. Mikel
President and CEO

CO-BORROWERS:

SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

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<PAGE> 47
VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By: /s/ STEVEN H. MIKEL
------------------------------------
Steven H. Mikel
President and CEO

LENDER:

COMPASS BANK - HOUSTON

By: /s/ MURRAY E. BRASSEUX
------------------------------------
Murray E. Brasseux
Executive Vice-President

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<PAGE> 48
EXHIBIT I

[FORM OF NOTE]

PROMISSORY NOTE

$3,500,000 Houston, Texas December 20, 1995

FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of COMPASS BANK-HOUSTON ("Payee"), at
its banking quarters in Houston, Harris County, Texas, the sum of THREE MILLION
FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), or so much thereof as may be
advanced against this Note pursuant to the Credit Agreement dated of even date
herewith by and between Maker and Payee (as amended, restated, or supplemented
from time to time, the "Credit Agreement"), together with interest at the rates
and calculated as provided in the Credit Agreement.

Without being limited thereto or thereby, this Note is secured
by the Security Instruments.

SOUTHERN MINERAL CORPORATION

By:
------------------------------------
Steven H. Mikel
President and CEO

I-i
<PAGE> 49
SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By:
------------------------------------
Steven H. Mikel
President and CEO

I-ii
<PAGE> 50
EXHIBIT II

[FORM OF OPINION OF COUNSEL]

[Closing Date]

Compass Bank-Houston
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Attention: Energy Lending Group

Ladies and Gentlemen:

In our representation of the Borrower, we have examined an
executed counterpart of each of the following (the "Loan Documents"):

(a) the Credit Agreement;

(b) the Note;

(d) Financing Statements from the Borrower, as
debtor[S], constituent to the Mortgage (the "Financing Statement").

II-i
<PAGE> 51
We have also examined the originals, or copies certified to
our satisfaction, of such other records of the Borrower certificates of public
officials and officers of the Borrower agreements, instruments, and documents
as we have deemed necessary as a basis for the opinions hereinafter expressed.

In making such examinations, we have, with your permission,
assumed:

(a) the genuineness of all signatures to the Loan
Documents other than those of the Borrower;

(b) the authenticity of all documents submitted to us as
originals and the conformity with the originals of all documents
submitted to us as copies;

(d) the due authorization, execution, and delivery of all
Loan Documents by each party thereto other than the Borrower; and

(e) the Borrower has title to all Property covered or
affected by the Mortgage.

Based upon the foregoing and subject to the qualifications set
forth herein, we are of the opinion that:

1. The Borrower [IS A] corporation[S] duly organized,
legally existing, and in good standing under the laws of [ITS] [THEIR
RESPECTIVE] state[S] of incorporation and [IS] [ARE] duly qualified as
[A] foreign corporation[S] and [IS] [ARE] in good standing in [THE
STATES OF _________________________] [ALL JURISDICTIONS WHEREIN THE
OWNERSHIP OF [ITS] [THEIR RESPECTIVE] PROPERTY OR THE OPERATION OF
[ITS] [THEIR RESPECTIVE] BUSINESS[ES] NECESSITATES SAME].

2. The execution and delivery by the Borrower of the
Credit Agreement and the borrowings thereunder, the execution and
delivery by the Borrower of the other Loan Documents to which the
Borrower is a party, and the payment and performance of all
Obligations of the Borrower thereunder are within the power of the
Borrower, have been duly authorized by all necessary corporate action,
and do not (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) to our
knowledge after due inquiry, contravene or conflict with any
indenture,

II-ii
<PAGE> 52
instrument, or other agreement to which the Borrower is a party or by
which any Property of the Borrower may be presently bound or
encumbered, or (d) result in or require the creation or imposition of
any Lien upon any Property of the Borrower other than as contemplated
by the Loan Documents.

3. The Loan Documents to which the Borrower is a party
constitute legal, valid, and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective
terms.

4. The forms of the Mortgage and the Financing Statement
and the description of the Mortgaged Property (as such term is defined
in the Mortgage and so used herein) situated in the State of Texas
(the "State") satisfy all applicable Requirements of Law of the State
and are legally sufficient under the laws of the State to enable the
Lender to realize the practical benefits purported to be afforded by
the Mortgage.

6. The Mortgage and the Financing Statement are in
satisfactory form for filing and recording in the offices described
below.

7. The filing and/or recording, as the case may be, of
(a) the Mortgage in the office of the county clerk of each county in
the State in which any portion of the Mortgaged Property is located,
and as a financing statement and utility security instrument in the
office of the Secretary of State of the State, and (b) the Financing
Statement in the Uniform Commercial Code records in each county in the
State in which any portion of the Mortgaged Property is located are
the only recordings or filings in the State necessary to perfect the
liens and security interests in the Mortgaged Property created by the
Mortgage or to permit the Lender to enforce in the State its rights
under the Mortgage. No subsequent filing, re-filing, recording, or
re-recording will be required in the State in order to continue the
perfection of the liens and security interests created by the Mortgage
except that (a) a continuation statement must be filed with respect to
the Mortgage filed as a financing statement in the office of the
Secretary of State of the State and with respect to the Financing
Statement in the Uniform Commercial Code

II-iii
<PAGE> 53
records in each county in the State in which any portion of the
Mortgaged Property is located, each within six months prior to the
expiration of five years from the date of the relevant initial
financing statement filing, (b) a subsequent continuation statement
must be filed within six months prior to the expiration of each
subsequent five-year period from the date of each initial financing
statement filing, and (c) amendments or supplements to the Mortgage
filed as a financing statement and the Financing Statement and/or
additional financing statements may be required to be filed in the
event of a change in the name, identity, or structure of the Borrower
or in the event the financing statement filing otherwise becomes
inaccurate or incomplete.

8. To our knowledge after due inquiry, except as
disclosed in Exhibit VI to the Credit Agreement, no litigation or
other action of any nature affecting the Borrower is pending before
any Governmental Authority or threatened against the Borrower. To our
knowledge after due inquiry, no unusual or unduly burdensome
restriction, restraint, or hazard exists by contract, Requirement of
Law, or otherwise relative to the business or operations of the
Borrower or ownership and operation of any Properties of the Borrower
other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower.

11. The Borrower is not, nor is the Borrower directly or
indirectly controlled by or acting on behalf of any Person which is,
an "investment company" or an "affiliated person" of an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.

II-iv
<PAGE> 54
12. The Borrower is not a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding
Company Act of 1935, as amended.

The opinions expressed herein are subject to the following
qualifications and limitations:

B. The validity, binding effect, and enforceability of
the Loan Documents may be limited or affected by bankruptcy,
insolvency, moratorium, reorganization, or other similar laws
affecting rights of creditors generally, including, without
limitation, statutes or rules of law which limit the effect of waivers
of rights by a debtor or grantor; provided, however, that the
limitations and other effects of such statutes or rules of law upon
the validity and binding effect of the Loan Documents should not
differ materially from the limitations and other effects of such
statutes or rules of law upon the validity and binding effect of
credit agreements, promissory notes and security instruments
generally.

Very truly yours,

II-v
<PAGE> 55
EXHIBIT III

[FORM OF COMPLIANCE CERTIFICATE]

______________, 19__

Compass Bank-Houston
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
Attention: Energy Lending Group

Ladies and Gentlemen:

[1. To the best of the knowledge of the undersigned, no Default or
Event of Default exists as of the date hereof or has occurred since
the date of our previous certification to you, if any.]

2. The compliance of the Borrower with the financial covenants of
the Credit Agreement, as of the close of business on
___________________, is evidenced by the following:

III-i
<PAGE> 56
Actual

(b) Section 6:15: Cash Flow Coverage. Permit as of the close of
any fiscal quarter, the ratio of Cash Flow to Debt Service to be less
than 1.25 to 1.00.

Actual

3. No Material Adverse Effect has occurred since the date of the
Financial Statements dated as of _____________________.

Each capitalized term used but not defined herein shall have
the meaning assigned to such term in the Credit Agreement.

Very truly yours,

SOUTHERN MINERAL CORPORATION

By:
------------------------------------
Steven H. Mikel
President and CEO

SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By:
--------------------------------------
Steven H. Mikel
President and CEO

III-ii
<PAGE> 57

EXHIBIT IV

DISCLOSURES

Section 4.8 Liabilities
-----------

None.

Litigation
----------

James E. Knight v. Cherokee Drilling
and Development Corporation and
Southern Mineral, 83rd Judicial
District Court of Upton County,
Texas, Cause No. 94-09-U1952-IDO

Section 4.10 ERISA
-----

Borrower terminated the following
401(k) Plan effective September 30,
1995:

SOUTHERN MINERAL CORPORATION
RETIREMENT PLAN 401(k)

Borrower created the following SEP
Plan in September 1995:

SOUTHERN MINERAL CORPORATION
SEP

Section 4.11 Environmental
-------------

None.

Section 4.17 Refunds
-------

None.

Section 4.18 Gas Contracts
-------------

None.

Section 4.20 Casualties
----------

None.

Section 4.22 Subsidiaries
------------

None.

<PAGE> 1
EXHIBIT 10.4

PROMISSORY NOTE

$3,500,000 Houston, Texas December 20, 1995

FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of COMPASS BANK-HOUSTON ("Payee"), at
its banking quarters in Houston, Harris County, Texas, the sum of THREE MILLION
FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), or so much thereof as may be
advanced against this Note pursuant to the Credit Agreement dated of even date
herewith by and between Maker and Payee (as amended, restated, or supplemented
from time to time, the "Credit Agreement"), together with interest at the rates
and calculated as provided in the Credit Agreement.

Without being limited thereto or thereby, this Note is secured
by the Security Instruments.

SOUTHERN MINERAL CORPORATION

By: /s/ STEVEN H. MIKEL
------------------------------------
Steven H. Mikel
President and CEO

(Signatures Continued on Next Page)
<PAGE> 2
SMC PRODUCTION CO.

SAN SALVADOR DEVELOPMENT COMPANY, INC.

VENTURE RESOURCES, INC.

VENTURE PIPELINE COMPANY

VENGAS PIPELINE COMPANY

SPRUCE HILLS PRODUCTION COMPANY, INC.

By: /s/ STEVEN H. MIKEL
----------------------------------
Steven H. Mikel
President and CEO

<PAGE> 1
Exhibit 99

SOUTHERN MINERAL CORPORATION
- --------------------------------------------------------------------------------
NEWS RELEASE

Contact:

[SOUTHERN MINERAL Steven H. Mikel
CORPORATION LOGO] President and
Chief Executive Officer
(713) 658-9444

December 20, 1995
For Immediate Release

SOUTHERN MINERAL CORPORATION
ANNOUNCES CLOSING OF ACQUISITION

Houston, December 20, 1995 -- Southern Mineral Corporation (the "Company")
announced today that it has consummated the purchase of certain oil and gas
assets and subsidiaries of Stone & Webster, Inc. ("S&W"). The cash purchase
price is $16.5 million, adjusted from the effective date of September 1, 1995.
The Company estimates proven reserves of approximately one million barrels of
oil and 14.5 billion cubic feet of natural gas are included in the sale in
addition to pipeline and gathering system assets. Current daily production
from the acquired properties averages approximately 6.6 MMCF per day and 500
barrels of oil per day. The acquired oil and gas interests include four fields
located in the onshore Gulf Coast of Texas as well as an S&W subsidiary that
owns non-operated interests in some 1200 wells located in Canada. The Company
is financing this acquisition with internally generated funds and credit
facilities provided by Compass Bank - Houston.

Southern Mineral Corporation is an oil and gas acquisition, exploration and
production company that is listed on the NASDAQ SmallCap Market under the
trading symbol SMIN.