-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 ME32P+cBRHebYDzJRt8T6PfEi/+dLTzsZxKaNDw1delu0yyrdvupsnMBSMVg2hUG
 UkIDCf78MtMss8BGuTPcGw==

<SEC-DOCUMENT>0000950134-03-005367.txt : 20030403
<SEC-HEADER>0000950134-03-005367.hdr.sgml : 20030403
<ACCEPTANCE-DATETIME>20030403171140
ACCESSION NUMBER:		0000950134-03-005367
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20021231
FILED AS OF DATE:		20030403

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PRIMEENERGY CORP
		CENTRAL INDEX KEY:			0000056868
		STANDARD INDUSTRIAL CLASSIFICATION:	CRUDE PETROLEUM & NATURAL GAS [1311]
		IRS NUMBER:				840637348
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-07406
		FILM NUMBER:		03639112

	BUSINESS ADDRESS:	
		STREET 1:		ONE LANDMARK SQ
		CITY:			STAMFORD
		STATE:			CT
		ZIP:			06901
		BUSINESS PHONE:		2033585700

	MAIL ADDRESS:	
		STREET 1:		ONE LANDMARK SQ
		CITY:			STAMFORD
		STATE:			CT
		ZIP:			06901

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	KRM PETROLEUM CORP
		DATE OF NAME CHANGE:	19900614
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d03089e10vk.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                       OR

[ ]        TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               FOR THE TRANSITION PERIOD FROM ________ TO ________

                          COMMISSION FILE NUMBER 0-7406


                             PRIMEENERGY CORPORATION
             (Exact name of registrant as specified in its charter)


              DELAWARE                                          84-0637348
   (state or other jurisdiction of                           (I.R.S. Employer
   incorporation or organization)                           Identification No.)

           ONE LANDMARK SQUARE                                    06901
          STAMFORD, CONNECTICUT                                 (Zip Code)
 (Address of principal executive offices)


       Registrant's telephone number, including area code: (203) 358-5700

           Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.10 PER SHARE
                                (Title of Class)


Indicate whether Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.                                                             Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the Registrant is an accelerated filer as defined
in Exchange Act Rule 12-b-2.                                      Yes [ ] No [X]

The aggregate market value of the voting stock of the Registrant held by
non-affiliates, computed on the average bid and asked prices of such stock in
the over-the-counter market, as of March 25, 2003, was $8,642,432.

The number of shares outstanding of each class of the Registrant's Common Stock
as of March 25, 2002 was: Common Stock, $0.10 par value, 3,695,311.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's proxy statement to be furnished to stockholders in
connection with its Annual Meeting of Stockholders to be held in June, 2003, are
incorporated by reference in Part III hereof.




<PAGE>
                             PRIMEENERGY CORPORATION

                             FORM 10-K ANNUAL REPORT
                            FOR THE FISCAL YEAR ENDED
                                DECEMBER 31, 2002

                                     PART I

ITEM 1. BUSINESS.

GENERAL

       This Report contains forward-looking statements that are based on
management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "projects" and
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, and are subject to the safe harbors created thereby. These
statements are not guarantees of future performance and involve risks and
uncertainties and are based on a number of assumptions that could ultimately
prove inaccurate and, therefore, there can be no assurance that they will prove
to be accurate. Actual results and outcomes may vary materially from what is
expressed or forecast in such statements due to various risks and uncertainties.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected.

       PrimeEnergy Corporation (the "Company") was organized in March, 1973,
under the laws of the State of Delaware.

       The Company is engaged generally in the oil and gas business through the
acquisition, exploration, development, and production of crude oil and natural
gas. The Company's properties are located primarily in Texas, Oklahoma, West
Virginia and Louisiana. The Company's wholly-owned subsidiary, PrimeEnergy
Management Corporation ("PEMC"), acts as the managing general partner in 38 oil
and gas limited partnerships (the "Partnerships") of which three are publicly
held, and acts as the managing trustee of two asset and income business trusts
("the Trusts"). The Company, through its wholly-owned subsidiaries Prime
Operating Company, Southwest Oilfield Construction Company, Eastern Oil Well
Service Company and EOWS Midland Company, acts as operator and provides well
servicing support operations for many of the oil and gas wells in which the
Partnerships, the Trusts and the Company have an interest, as well as for third
parties, primarily in Texas, Oklahoma and West Virginia. The Company is also
active in the acquisition of producing oil and gas properties through joint
ventures with industry partners and private investors.

THE PARTNERSHIPS AND TRUSTS

       A substantial portion of the assets and revenues of PEMC are derived from
the interest of PEMC in the oil and gas properties acquired by the Partnerships
and Trusts. As the managing general partner in each of the Partnerships and
managing trustee of the Trusts, PEMC receives approximately from 5% to 15% of
the net revenues of each Partnership and Trust as a carried interest in the
Partnership's and Trust's properties.

       Since 1975, PEMC has sponsored a total of 59 limited partnerships, 22 of
which were offered publicly and 37 of which were offered in private placements
and two Delaware business trusts, both of which were offered publicly. The
aggregate number of limited partners in the Partnerships and beneficial owners
of the Trusts now administered by PEMC is approximately 5,000. The Partnership
and Trust interests were sold by broker-dealers which are members of the
National Association of Securities Dealers, Inc. through a managing dealer. The
total funds contributed to the Partnerships and Trusts was about $157,550,000.

       A significant portion of the Company's business is conducted through the
Partnerships and Trusts, either through its ownership of interests in various
properties derived through the Partnerships and Trusts, or as operator of, and a
provider of oilfield services for, oil and gas wells in which the Partnerships
and Trusts have interests.




                                       2
<PAGE>
       PEMC, as managing general partner of the Partnerships and managing
trustee of the Trusts, is responsible for all Partnership and Trust activities,
including the review and analysis of oil and gas properties for acquisition, the
drilling of development wells and the production and sale of oil and gas from
productive wells. PEMC also provides administration, accounting and tax
preparation for the Partnerships and Trusts. PEMC is liable for all debts and
liabilities of the Partnerships and Trusts, to the extent that the assets of a
given limited partnership or trust are not sufficient to satisfy its
obligations.


JOINT VENTURES

       PEMC organizes and the Company participates in various joint ventures
formed for the purpose of acquiring and developing oil and gas assets. The
Company receives varying interests in the net revenues of each joint venture as
a carried interest in the joint venture properties. The Company's participation
in the joint ventures varies from none to approximately 78%. The Company's
carried interest is generally 10% of funds contributed by outside investors.
Since 1987, our joint venture partners have invested $27.6 million with the
Company.


WELL OPERATIONS

       The Company's operations are conducted through a central office in
Houston, Texas, and district offices in Houston and Midland, Texas, Oklahoma
City, Oklahoma, and Charleston, West Virginia. The Company currently operates
1,550 oil and gas wells, 434 through the Houston office, 162 through the Midland
office, 458 through the Oklahoma City office and 496 through the Charleston,
West Virginia office. Substantially all of the wells operated by the Company are
wells in which the Company, the Partnerships, the Trusts or our joint venture
partners have an interest.

       The Company operates wells pursuant to operating agreements which govern
the relationship between the Company as operator and the other owners of working
interests in the properties, including the Partnerships, Trusts and joint
venture participants. For each operated well, the Company receives monthly fees
that are competitive in the areas of operations and also is reimbursed for
expenses incurred in connection with well operations.


EXPLORATION, DEVELOPMENT AND ACQUISITION ACTIVITIES; OTHER MATTERS

       The Company continues to explore opportunities for the acquisition and
development of producing oil and gas properties, and will continue to engage in
exploratory operations and development drilling of properties in which it has an
interest. The Company attempts to assume the position of operator in all
acquisitions of producing properties.


RECENT ACTIVITIES

       During 2002, the Company continued the development of existing properties
in Oklahoma and Texas, and participated in exploratory drilling in Texas.
Drilling activity in 2002 on the East Wakita and DSR prospects in Oklahoma
resulted in nine producers. Two additional wells were drilled in 2003 and are
waiting on pipeline connections. Drilling activity in Gaines County, Texas
resulted in production from two wells and additional potential for development
in 2003.

       The Company's exploration program continues to identify prospects to be
evaluated. During 2002, four prospects were drilled resulting in two producers
and two dry holes. Drilling in 2003 has resulted in one successful well and one
dry hole. The Company expects to continue testing prospects in various counties
in Texas during the balance of 2003.

       The Company is committed to offer to repurchase the interests of the
limited partners and trust unitholders in certain of the Partnerships, as
described more fully in Note 7 of the Financial Statements. During 2002, the
Company purchased such interests in an amount totaling $1,203,500.

       The Company will continue to evaluate prospects for leasehold
acquisitions and for exploration and development operations in areas in which it
owns interests and is actively pursuing the acquisition of producing properties.

       In order to diversify and broaden its asset base, the Company will
consider acquiring the assets or stock in other entities and companies in the
oil and gas business. The main objective of the Company in making any such
acquisitions will be to acquire income producing assets so as to increase the
Company's net worth and increase the Company's oil and gas reserve base.

       The Company presently owns producing and non-producing properties located
primarily in Texas, Oklahoma, West Virginia and Louisiana, and owns a
substantial amount of well servicing equipment. The Company does not



                                       3
<PAGE>
own any refinery or marketing facilities, and does not currently own or lease
any bulk storage facilities or pipelines other than adjacent to and used in
connection with producing wells and the interests in certain gas gathering
systems. All of the Company's oil and gas properties and interests are located
in the continental United States.

         In the past, the supply of gas has exceeded demand on a cyclical basis,
and the Company is subject to a combination of shut-in and/or reduced takes of
gas production during summer months. Prolonged shut-ins could result in reduced
field operating income from properties in which the Company acts as operator.

         Exploration for oil and gas requires substantial expenditures
particularly in exploratory drilling in undeveloped areas, or "wildcat
drilling." As is customary in the oil and gas industry, substantially all of the
Company's exploration and development activities are conducted through joint
drilling and operating agreements with others engaged in the oil and gas
business.

         Summaries of the Company's oil and gas drilling activities, oil and gas
production, and undeveloped leasehold, mineral and royalty interests are set
forth under Item 2., "Properties," below. Summaries of the Company's oil and gas
reserves, future net revenue and present value of future net revenue are also
set forth under Item 2., "Properties - Reserves" below.


REGULATION

         The Company's oil and gas operations are subject to a wide variety of
federal, state and local regulations. Administrative agencies in such
jurisdictions may promulgate and enforce rules and regulations relating to,
among other things, drilling and spacing of oil and gas wells, production rates,
prevention of waste, conservation of natural gas and oil, pollution control, and
various other matters, all of which may affect the Company's future operations
and production of oil and gas. The Company's natural gas production and prices
received for natural gas are regulated by the Federal Energy Regulatory
Commission ("FERC"), the Natural Gas Act of 1938 ("NGA") and the Natural Gas
Policy Act of 1978 ("NGPA") and various state regulations. The Company is also
subject to state drilling and proration regulations affecting its drilling
operations and production rates.

         Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the Company's
operations. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.

         In the event the Company conducts operations on federal, state or
Indian oil and gas leases, such operations must comply with numerous regulatory
restrictions, including various nondiscrimination statutes, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other appropriate permits issued by the Bureau of Land Management ("BLM") or
Minerals Management Service ("MMS") or other appropriate federal or state
agencies.

         The Mineral Leasing Act of 1930 ("Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges' to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this restriction
is violated, the Company's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM
(which administers the Mineral Act) provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect.
The Company owns interests in federal onshore oil and gas leases. It is possible
that Common Stock could be acquired by citizens of foreign countries, which at
some time in the future might be determined to be non-reciprocal under the
Mineral Act.


TAXATION

        The Company's oil and gas operations are affected by federal income tax
laws applicable to the petroleum industry. The Company is permitted to deduct
currently, rather than capitalize, intangible drilling and development costs
incurred or borne by it. As an independent producer, the Company is also
entitled to a deduction for percentage depletion with respect to the first 1,000
barrels per day of domestic crude oil (and/or equivalent units of domestic
natural gas) produced by it, if such percentage depletion exceeds cost
depletion. Generally, this deduction is computed based upon the lesser of 100%
of the net income, or 15% of the gross income from a property, without reference
to the basis in the property. The amount of the percentage depletion deduction
so computed which may be deducted in any given year is limited to 65% of taxable
income. Any percentage depletion deduction disallowed due to the 65% of taxable
income test may be carried forward indefinitely.



                                       4
<PAGE>
        The Company is entitled to credits for producing fuel from a
non-conventional source under Section 29 of the Internal Revenue Code, primarily
from certain of the Company's operations in West Virginia.

        See Notes 1 and 9 to the consolidated financial statements included in
this Report for a discussion of accounting for income taxes and availability of
federal tax net operating loss carryforwards and alternative minimum tax credit
carryforwards.


COMPETITION AND MARKETS

        The business of acquiring producing properties and non-producing leases
suitable for exploration and development is highly competitive. Competitors of
the Company in its efforts to acquire both producing and non-producing
properties include oil and gas companies, independent concerns, income programs
and individual producers and operators, many of which have financial resources,
staffs and facilities substantially greater than those available to the Company.
Furthermore, domestic producers of oil and gas must not only compete with each
other in marketing their output, but must also compete with producers of
imported oil and gas and alternative energy sources such as coal, nuclear power
and hydroelectric power. Competition among petroleum companies for favorable oil
and gas properties and leases can be expected to increase.

        The availability of a ready market for any oil and gas produced by the
Company at acceptable prices per unit of production will depend upon numerous
factors beyond the control of the Company, including the extent of domestic
production and importation of oil and gas, the proximity of the Company's
producing properties to gas pipelines and the availability and capacity of such
pipelines, the marketing of other competitive fuels, fluctuation in demand,
governmental regulation of production, refining, transportation and sales,
general national and worldwide economic conditions, and use and allocation of
oil and gas and their substitute fuels. There is no assurance that the Company
will be able to market all of the oil or gas produced by it or that favorable
prices can be obtained for the oil and gas production.

        Listed below are the percent of the Company's total oil and gas sales
made to each of the customers whose purchases represented more than 10% of the
Company's oil and gas sales.

        Texon Distributing L.P.             18.6%
        Unimark LLC                         20.1%
        Plains All American, Inc.           10.1%

        Although there are no long-term purchasing agreements with these
purchasers, the Company believes that they will continue to purchase its oil and
gas products and, if not, could be replaced by other purchasers.


ENVIRONMENTAL MATTERS

        Over the past 30 years, the petroleum industry has been affected by a
wide variety of environmental issues. Throughout the 1970's and 1980's federal
and state environmental regulations have been enacted that affect all aspects of
the Company's operations. These regulations have primarily focused on correcting
existing environmental concerns and implementing preventive controls to reduce
future pollution.

        The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, rules and
regulations regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company. The Company cannot predict what effect additional regulation or
legislation, enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from the
Company's operations or ownership of its property could have on its activities.

        Activities of the Company with respect to oil and gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing oil and gas and
other products, are subject to stringent environmental regulation by state and
federal authorities including the Environmental Protection Agency ("EPA"). Such
regulation can increase the cost of planning, designing, installing and
operating such facilities. In most instances, the regulatory requirements relate
to water and air pollution control measures. Although the Company believes that
compliance with environmental regulations will not have a material adverse
effect on it, risks of substantial costs and liabilities are inherent in oil and
gas facility operations, and there can be no assurance that significant costs
and liabilities will not be incurred. Moreover, it is possible that other
developments, such as stricter environmental laws and regulations, and claims
for damages to property or persons resulting from operation of oil and gas
facilities, would result in substantial costs and liabilities to the Company.



                                       5
<PAGE>
         The Company currently owns or leases, and has in the past owned or
leased, numerous properties that have been used for production of oil and gas
for many years. Although the Company has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned or
leased by the Company. In addition, many of these properties have been operated
by third parties over whom the Company had no control as to such entities'
treatment of hydrocarbons or other wastes and the manner in which such
substances may have been disposed of or released. State and federal laws
applicable to oil and gas wastes and properties have gradually become stricter.
Under these new laws, the Company could be required to remove or remediate
previously disposed wastes (including wastes disposed of or released by prior
owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.

         The Company may generate wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
non-hazardous wastes. Furthermore, certain wastes generated by the Company's oil
and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes," and therefore be
subject to more rigorous and costly operating and disposal requirements.

         In addition, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas exploration and production wastes
as "hazardous wastes," which would make the reclassified wastes subject to much
more stringent handling, disposal and clean-up requirements. If such legislation
were to be enacted, it could have a significant impact on the operating costs of
the Company, as well as the oil and gas industry in general. Initiatives to
further regulate the disposal of oil and gas wastes are also pending in certain
states, and these various initiatives could have a similar impact on the
Company.

         The Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes joint and
several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
owner and operator of a site and persons that disposed of or arranged for the
disposal of the hazardous substances found at a site. CERCLA also authorizes the
EPA and, in some cases, third parties to take actions in response to threats to
the public health or the environment and to seek to recover from the responsible
classes of persons the costs of such action. In the course of its operations,
the Company may have generated and may generate wastes that fall within CERCLA'S
definition of "hazardous substances." The Company may also be an owner of sites
on which "hazardous substances" have been released by previous owners or
operators. The Company may be responsible under CERCLA for all or part of the
costs to clean up sites at which such wastes have been released. Neither the
Company nor, to its knowledge, its predecessors has been named a potentially
responsible person under CERCLA, nor does the Company know of any prior owners
or operators of its properties that are named as potentially responsible parties
related to their ownership or operation of such property.

         The Company has a proactive environmental policy that management feels
benefits the Company through increased operating profits, improved landowner
relations and an overall enhanced Company image. To this end, the Company has
also adopted a stringent environmental evaluation prior to purchasing a
property. This pre-acquisition assessment, usually referred to as an
Environmental Site Assessment, typically consists of a historical review of the
property combined with a site inspection and limited testing, when necessary.
The objective of this pre-acquisition assessment is to document conditions at
the time of acquisition and to assign liability to the seller for past
operations.


EMPLOYEES

         At March 25, 2003, the Company had 196 full-time and 5 part-time
employees, 17 of whom were employed by the Company at its principal offices in
Stamford, Connecticut, 22 in Houston, Texas, at the offices of Prime Operating
Company, Eastern Oil Well Service Company and EOWS Midland Company and 162
employees who were primarily involved in the district operations of the Company
in Houston and Midland, Texas, Oklahoma City, Oklahoma and Charleston, West
Virginia.


ITEM 2. PROPERTIES.

         The Company's executive offices and those of PEMC, are located at One
Landmark Square, Stamford, Connecticut, in leased premises of about 8,860 square
feet. The executive offices of Prime Operating Company, Eastern Oil Well Service
Company and EOWS Midland Company are located in leased premises in Houston,
Texas, and the offices of Southwest Oilfield Construction Company are in
Oklahoma City, Oklahoma.



                                       6
<PAGE>
         The Company maintains district offices in Houston and Midland, Texas,
Oklahoma City, Oklahoma and Charleston, West Virginia, and has field offices in
Carrizo Springs and Midland, Texas, Kingfisher and Garvin, Oklahoma and Orma,
West Virginia.

         The Company owns several parcels of land in Oklahoma, on which oil and
gas wells it owns and operates are located. These properties were purchased
primarily to simplify operations of these properties.

         Substantially all of the Company's oil and gas properties are subject
to a mortgage given to collateralize indebtedness of the Company, or are subject
to being mortgaged upon request by the Company's lender for additional
collateral.

         The information set forth below concerning the Company's properties,
activities, and oil and gas reserves include the Company's interests in the
Partnerships, Trusts and joint ventures.

         The following table sets forth the exploratory and development drilling
experience with respect to wells in which the Company participated during the
five years ended December 31, 2002.

<Table>
<Caption>
                     2002             2001               2000              1999              1998
               ---------------   ---------------   ---------------   ---------------   ---------------
                Gross     Net    Gross     Net     Gross     Net     Gross     Net     Gross      Net
               ------   ------   ------   ------   ------   ------   ------   ------   ------   ------
<S>            <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Exploratory:
    Oil             1        1        1    1.000       --       --        1     .300        1     .468
    Gas             1      .25        1     .602        3    1.279        1     .683        2     .387
    Dry             4     2.50       --       --        2     .276        2     .510        2     .686
Development:
    Oil             2     1.25        1     .500       --       --       --       --        1     .145
    Gas            10     7.59        7    4.926        7    4.134        2     .015        5     .316
    Dry             6     5.30        2    1.585       --       --        2     .745       --       --
Total:
    Oil             3     2.25        2    1.500       --       --        1     .300        2     .613
    Gas            11     7.84        8    5.528       10    5.413        3     .698        7     .703
    Dry            10     7.80        2    1.585        2     .276        4    1.255        2     .686
               ------   ------   ------   ------   ------   ------   ------   ------   ------   ------
                   24    17.89       12    8.613       12    5.689        8    2.253       11    2.002
               ======   ======   ======   ======   ======   ======   ======   ======   ======   ======
</Table>

OIL AND GAS PRODUCTION

       As of December 31, 2002, the Company had ownership interests in the
following numbers of gross and net producing oil and gas wells and gross and net
producing acres (1).

<Table>
<Caption>
                                             Gross              Net
                                            -------            ------
<S>                                         <C>                <C>
             Producing wells(1)
                         Oil Wells              891            244.85
                         Gas Wells            1,156            297.64
             Producing Acres                269,298            68,657
</Table>

(1)  A gross well or gross acre is a well or an acre in which a working interest
     is owned. A net well or net is the sum of the fractional revenue interests
     owned in gross wells or gross acres. Wells are classified by their primary
     product. Some wells produce both oil and gas.

      The following table shows the Company's net production of crude oil and
natural gas for each of the five years ended December 31, 2002. "Net" production
is net after royalty interests of others are deducted and is determined by
multiplying the gross production volume of properties in which the Company has
an interest by percentage of the leasehold, mineral or royalty interest owned by
the Company.


<Table>
<Caption>
                                    2002              2001            2000           1999           1998
                                  ---------         ---------       ---------      ---------      ---------
<S>                               <C>               <C>             <C>            <C>            <C>
Oil (barrels) ................      321,000           306,000         298,000        264,000        277,000
Gas (Mcf) ....................    3,540,000         3,764,000       3,930,000      3,289,000      3,621,000
</Table>

       The following table sets forth the Company's average sales price per
barrel of crude oil and average sales prices per one thousand cubic feet ("Mcf")
of gas, together with the Company's average production costs per unit of
production for the five years ended December 31, 2002.



                                       7
<PAGE>
<Table>
<Caption>
                                            2002              2001            2000            1999            1998
                                        ------------     ------------     ------------     -----------     ----------
<S>                                     <C>              <C>              <C>              <C>             <C>
Average sales price per barrel ......   $      23.37            24.92            28.34           15.71          12.39
Average sales price Per Mcf .........   $       3.06             4.08             3.76            2.32           2.19
Average production costs per net
  equivalent barrel(1) ..............   $      11.80            11.88             9.57            7.76           7.60
</Table>

- ----------

(1)  Net equivalent barrels are computed at a rate of 6 Mcf per barrel.

UNDEVELOPED ACREAGE

         The following table sets forth the approximate gross and net
undeveloped acreage in which the Company has leasehold, mineral and royalty
interests as of December 31, 2002. "Undeveloped acreage" is that acreage on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves.

<Table>
<Caption>
                         Leasehold                      Mineral                      Royalty
                         Interests                     Interests                    Interests
                 -------------------------     -------------------------     -------------------------
                    Gross          Net           Gross           Net           Gross           Net
   State            Acres         Acres          Acres          Acres          Acres          Acres
- ------------     ----------     ----------     ----------     ----------     ----------     ----------
<S>              <C>            <C>            <C>            <C>            <C>            <C>
Colorado                 --             --            799             23             --             --
Montana                  --             --         13,984             59            786              5
Nebraska                 --             --          2,553            331             --             --
North Dakota             --             --            640              1             --             --
Oklahoma              6,462          3,228            320              1             --             --
Texas                 8,411          5,472            680             16             --             --
Wyoming               1,000            125           5043             35            140             35
                 ----------     ----------     ----------     ----------     ----------     ----------
TOTAL                15,873          8,825         24,019            466            926             40
                 ==========     ==========     ==========     ==========     ==========     ==========
</Table>


RESERVES

         The Company's interests in proved developed and undeveloped oil and gas
properties have been evaluated by Ryder Scott & Company L.P. for the years ended
December 31, 1998, 1999, 2000, 2001 and 2002. All of the Company's reserves are
located within the continental United States. The following table summarizes the
Company's oil and gas reserves at each of the respective dates (figures
rounded):

<Table>
<Caption>
                   Reserve Category
                   Proved Developed             Proved Undeveloped                  Total
               -------------------------     -------------------------     -------------------------
 As of             Oil            Gas            Oil            Gas           Oil            Gas
 12-31           (bbls)          (Mcf)          (bbls)         (Mcf)         (bbls)         (Mcf)
- ----------     ----------     ----------     ----------     ----------     ----------     ----------
<S>            <C>            <C>            <C>            <C>            <C>            <C>
 1998           1,122,000     17,341,000         78,000             --      1,200,000     17,341,000
 1999           2,110,000     22,046,000             --        156,000      2,110,000     22,202,000
 2000           2,362,000     27,029,000             --             --      2,362,000     27,029,000
 2001           1,996,000     24,266,000             --        453,000      1,996,000     24,719,000
 2002           2,319,000     29,917,000             --             --      2,319,000     29,917,000
</Table>

         The estimated future net revenue (using current prices and costs as of
those dates, exclusive of income taxes) and the present value of future net
revenue (at a 10% discount for estimated timing of cash flow) for the Company's
proved developed and proved undeveloped oil and gas reserves at the end of each
of the five years ended December 31, 2002, are summarized as follows (figures
rounded):


                                       8
<PAGE>
<Table>
<Caption>
                 Proved Developed                 Proved Undeveloped                      Total
          ------------------------------    -------------------------------   ------------------------------
                           Present Value                      Present Value   Present Value
 As of     Future Net        Of Future       Future Net         Of Future      Future Net        Of Future
 12-31       Revenue        Net Revenue        Revenue         Net Revenue       Revenue        Net Revenue
 -----    ------------      ------------    -------------     -------------   -------------    -------------
<S>       <C>               <C>             <C>               <C>             <C>              <C>
 1998     $ 20,839,000       13,444,000          359,000          212,000       21,198,000       13,656,000
 1999     $ 41,103,000       26,057,000          258,000          151,000       41,361,000       26,208,000
 2000     $199,376,000      113,137,000               --               --      199,376,000      113,137,000
 2001     $ 41,086,000       24,653,000          957,000          629,000       42,043,000       25,282,000
 2002     $ 97,600,000       56,855,000               --               --       97,600,000       56,855,000
</Table>

         "Proved developed" oil and gas reserves are reserves that can be
expected to be recovered from existing wells with existing equipment and
operating methods. "Proved undeveloped" oil and gas reserves are reserves that
are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion.

         In accordance with FASB Statement No. 69, December 31 market prices are
determined using the daily oil price or daily gas sales price ("spot price")
adjusted for oilfield or gas gathering hub and wellhead price differentials
(e.g. grade, transportation, gravity, sulfur, and BS&W) as appropriate. Also in
accordance with SEC and FASB specifications, changes in market prices subsequent
to December 31 are not considered.

         The spot prices for gas at December 31, 2002 and 2001 were $4.75 and
$2.63 per MMBTU, respectively. The range of spot prices during the year 2002 was
a low of $1.98 and a high of $5.05 and the average was $3.38. The range during
the first quarter of 2003 has been from $4.88 to $9.50 with an average of $6.62.
The recent futures market prices have been around $5.00.

         The NYMEX price for oil at December 31, 2002 and 2001 was $31.23 and
$19.84 per barrel, respectively. The range of NYMEX prices during the year 2002
was a low of $17.97 and a high of $32.49 and the average was $26.15. The range
during the first quarter of 2003 has been from $30.56 to $37.83 with an average
of $33.89. The recent futures market prices have fluctuated around $30.

         While it may reasonably be anticipated that the prices received by the
Company for the sale of its production may be higher or lower than the prices
used in this evaluation, as described above, and the operating costs relating to
such production may also increase or decrease from existing levels, such
possible changes in prices and costs were, in accordance with rules adopted by
the SEC, omitted from consideration in making this evaluation for the SEC case.
Actual volumes produced, prices received and costs incurred by the Company may
vary significantly from the SEC case.

         Since January 1, 2003, the Company has not filed any estimates of its
oil and gas reserves with, nor were any such estimates included in any reports
to, any federal authority or agency, other than the Securities and Exchange
Commission, except Form EIA-23, Annual Survey of Domestic Oil and Gas Reserves,
filed with The Energy Information Administration of the U.S. Department of
Energy.


ITEM 3. LEGAL PROCEEDINGS.

         From time to time, the Company is party to certain legal actions and
claims arising in the ordinary course of business. While the outcome of these
events cannot be predicted with certainty, management does not expect these
matters to have a materially adverse effect on the financial position or results
of operations of the Company.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

         No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 2002, to a vote of the Company's security-holders through the
solicitation of proxies or otherwise.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's Common Stock is traded in the NASDAQ Stock Market,
trading symbol "PNRG". The high and low bid quotations for each quarterly period
during the two years ended December 31, 2002, were as follows:

<Table>
<Caption>
              2002                         High            Low                       2001                 High           Low
- --------------------------------        ----------     ----------           ------------------------    ---------     ---------
<S>                                     <C>            <C>                  <C>                         <C>           <C>
First Quarter ..................        $     8.53     $     7.90           First Quarter ..........    $    6.56     $    6.49
Second Quarter .................              9.07           8.00           Second Quarter .........         8.11          7.75
Third Quarter ..................              9.01           8.00           Third Quarter ..........         8.47          8.30
Fourth Quarter .................              8.25           8.00           Fourth Quarter .........         8.00          7.95

</Table>



                                       9
<PAGE>
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.

         The approximate number of record holders of the Company's Common Stock
as of March 25, 2003 was 1,025.

         No dividends have been declared or paid during the past two years on
the Company's Common Stock. Provisions of the Company's line of credit agreement
restrict the Company's ability to pay dividends. Such dividends may be declared
out of funds legally available therefore, when and as declared by the Company's
Board of Directors.


ITEM 6. SELECTED FINANCIAL DATA

         The following table summarizes certain selected financial data to
highlight significant trends in the Company's financial condition and results of
operations for the periods indicated. The selected financial data should be read
in conjunction with the Financial Statements and related notes included
elsewhere in this Report.

<Table>
<Caption>
                                       2002            2001            2000            1999             1998
                                    -----------     -----------     -----------     -----------      -----------
<S>                                 <C>              <C>             <C>             <C>              <C>
Revenues                            $35,934,000      42,408,000      39,182,000      25,520,000       24,795,000
Income (loss) from operations       $ 2,168,000       6,968,000       6,148,000      (2,116,000)      (2,061,000)
Net Income (loss)                   $ 1,757,000       5,413,000       5,365,000      (2,138,000)      (1,692,000)
Income (loss) per common share      $      0.47            1.39            1.26           (0.48)           (0.38)
Net Cash provided by operations     $ 9,644,000      12,313,000      11,498,000       7,677,000        6,846,000
Total Assets                        $44,887,000      35,816,000      35,094,000      30,475,000       28,611,000
Long-term obligations               $23,734,000      16,958,000      18,213,000      19,217,000       16,505,000
Cash Dividends                      None             None            None            None             None
</Table>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         This discussion should be read in conjunction with the financial
statements of the Company and notes thereto. The Company's subsidiaries are
defined in Note 1 of the financial statements. PEMC is the managing general
partner or managing trustee in several Limited Partnerships and Trusts
(collectively, the "Partnerships").

LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by operations was $9,644,000 in 2002, $12,313,000 in
2001, and $11,498,000 in 2000.

         As of December, 2002, the Company entered in to a credit agreement with
a new primary lender. The Company and the lender agreed to amend and restate in
its entirety the credit agreement dated April 26, 1995 between the Company and
its predecessor lender. This agreement will continue to provide for borrowings
under a Master Note. Advances under the agreement, as amended, are limited to
the borrowing base as defined in the agreement. The borrowing base is
re-determined by the lender on a semi-annual basis. The current borrowing base
is $25 million and includes a Term Loan of $4 million. The Term Loan will be
paid back in monthly installments of $66,667 beginning January 2003 and
continuing until December 19, 2004, when such Term Loan shall be paid in full.
The credit agreement provides for interest on outstanding borrowings at the
bank's base rate, as defined, payable monthly, or at rates 2% over the London
Inter-Bank Offered Rate (LIBO rate) payable at the end of the applicable
interest period.

         The Company had been party to a series of credit agreements with its
former lender or its predecessors since 1983. The agreement, entered into in
April 1995, provided for borrowings under a Master Note. Advances under the
agreement, as amended, were limited to the borrowing base as defined in the
agreement and re-determined by the lender on a semi-annual basis. Since the
beginning of 2000, the borrowing base ranged from $20 million to $23.7 million.
The credit agreement provided for interest on outstanding borrowings at the
bank's base rate, as defined, payable monthly, or at rates ranging from 1 1/2%
to 2% over the London Inter-Bank Offered Rate (LIBO rate) depending upon the
Company's utilization of the available line of credit, payable at the end of the
applicable interest period. This credit agreement was assigned to the Company's
primary lender effective December 2002.

         The average interest rates paid on outstanding borrowings subject to
interest at the bank's base rate during 2002 and 2001 were 4.25% and 6.92%,
respectively. During the same periods, the average rates paid on outstanding
borrowings bearing interest based upon the LIBO rate were 3.59% and 5.98% As of
December 31,


                                       10
<PAGE>
2002 and 2001, the total outstanding borrowings were $24,500,000 and
$16,950,000, respectively, with an additional $500,000 and $6,050,000 available.
As of December 31, 2001 $14,950,000 of the amounts outstanding accrued interest
at the LIBO rate option.

         The Company's oil and gas properties as well as certain receivables and
equipment are pledged as security under the credit agreement. The agreement
requires the Company to maintain, as defined, a minimum current ratio, tangible
net worth, debt coverage ratio and interest coverage ratio, and restrictions are
placed on the payment of dividends and the amount of treasury stock the Company
may purchase.

         The Company spent approximately $3,000,000 developing the East Wakita
field during 2002. Seven successful wells were drilled on this property in 2002,
and two more successful wells were drilled in the first quarter of 2003. Further
development of this prospect is planned for the future.

         The Company spent $2,200,000 developing the DSR prospect in Garvin
County, Oklahoma. First sales from this field occurred in January 2002.
Additional development of this field is planned for 2003.

         In total, the Company spent $13,186,000 on the acquisition and
development of oil and gas properties during 2002, including $1,203,500 spent to
repurchase partnership interests from investors in its oil and gas partnerships.

         The Company spent $1,310,000 on field service equipment during 2002,
and an additional $180,000 on computers, software and related equipment. The
Company spent $745,000 to repurchase shares of its treasury stock in 2002. As of
the date of this Report, the Company had spent an additional $27,000 on treasury
stock purchases in 2003.

         It is the goal of the Company to increase its oil and gas reserves and
production through the acquisition and development of oil and gas properties.
The Company also continues to explore and consider opportunities to further
expand its oilfield servicing revenues through additional investment in field
service equipment. However, the majority of the Company's capital spending is
discretionary, and the ultimate level of expenditures will be dependent on the
Company's assessment of the oil and gas business environment, the number and
quality of oil and gas prospects available, the market for oilfield services,
and oil and gas business opportunities in general.


RESULTS OF OPERATIONS:

         2002 AS COMPARED TO 2001

         The Company had net income of $1,757,000 in 2002 as compared to
$5,413,000 in 2001. The decrease in net income is primarily due to lower
commodity prices.

         Oil and gas sales were $18,330,000 in 2002 as compared to $22,998,000
in 2001 A chart summarizing oil and gas production and revenue, including the
Company's share of production and revenue from the Partnerships, follows.

<Table>
<Caption>
                               2002            2001       Increase (Decrease)
                            -----------     -----------   -------------------
<S>                         <C>             <C>           <C>
Barrels of Oil Produced         321,384         306,016             15,368
Average Price Received      $     23.37     $   24.9199        $   (1.5499)
                            -----------     -----------

Oil Revenue                 $ 7,510,000     $ 7,626,000        $  (117,000)
                            -----------     -----------

Mcf of Gas Produced           3,540,000       3,763,605           (259,605)
Average Price Received      $    3.0564     $    4.0843        $   (1.0279)
                            -----------     -----------

Gas Revenue                 $10,820,000     $15,372,000        $(4,552,000)
                            -----------     -----------

Total Oil & Gas Revenue     $18,330,000     $22,998,000        $(4,668,000)
                            ===========     ===========
</Table>

         District operating income decreased from $17,082,000 in 2001 to
$15,308,000 in 2002. This decrease is due to reduced utilization of equipment
combined with discounted rates in effect during the first half of 2002.



                                       11
<PAGE>
         Lease operating expenses decreased by 8% to $10,210,000 in 2002 as
compared to $11,083,000 in 2001. The difference is attributable to production
taxes related to lower prices combined with discounts on expenses due to the
weak price environment in the first half of 2002.

         Administrative revenue, which represents the reimbursement of general
and administrative overhead expended on behalf of the Partnerships and the
Company's joint venture partners decreased by 4% to $1,473,000 in 2002 as
compared to $1,535,000 in 2001. In both years, amounts received from certain of
the Partnerships were substantially less than the amounts allocable to these
Partnerships under the partnership agreements. The lower amounts reflect PEMC's
continuing efforts to reduce costs, both incurred and allocated to the
Partnerships.

         Reporting and management fees are earned from providing the accounting
and reporting functions for certain of the Partnerships.

         The Company receives reimbursement for costs incurred related to the
evaluation and acquisition of properties on behalf of the Partnerships and other
joint venture partners. To the extent that these property acquisition costs are
expended at the district level, the reimbursements are recorded as a reduction
of total district operating expenses. When expenses are incurred at the
corporate headquarters level, such reimbursements are recorded as a reduction of
total general and administrative expenses. During 2002 and 2001, the Company's
total reimbursements for property acquisition costs were approximately $450,000
and $558,000, respectively.

         General and administrative expenses increased to $4,888,000 in 2002 as
compared to $4,310,000 in 2001. This increase reflects the change in cost
reimbursement combined with an increase in the Company's share of general and
administrative expenses incurred by the Partnerships.

         Depreciation and depletion of oil and gas properties decreased by 12%
to $3,988,000 in 2002 as compared to $4,522,000 in 2001 as a result of increases
in estimates of proved reserves.

         Exploration costs of $894,000 were incurred during 2002 drilling five
dry holes. Exploration costs of $509,000 in 2001 consist primarily of the cost
of three dry holes drilled in 2001.

         Interest expense declined to $766,000 in 2002 as compared to $895,000
in 2001 due to a combination of lower interest rates and lower average
outstanding debt. The average interest rates paid on outstanding borrowings
subject to interest at the bank's base rate during 2002 and 2001 were 4.25% and
6.92%, respectively. During the same periods, the average rates paid on
outstanding borrowings bearing interest based upon the LIBO rate were 3.58% and
5.98%. As of December 31, 2002 and 2001, the total outstanding borrowings
were$24,500,000 and $16,950,000, respectively.

         Income tax expense of $443,000 in 2002 represents a 20% effective rate
as compared to the effective rate of 24% in 2001. Current tax expense in 2002
was $199,000, with the remainder being attributable to an increase in the
Company's deferred tax liability. The low current tax expense is primarily
attributable to federal tax credits for producing fuel from a nonconventional
source, percentage depletion deductions, larger depreciation deductions allowed
for tax purposes, and the utilization of federal net operating loss carry
forward.

         All of the Company's net operating loss carry forwards will have been
used or expired as of the end of 2002, and under current law the credit for
producing fuel from a nonconventional source will no longer be allowed after
2002. It is possible that the Company's current and overall tax rates may be
significantly higher in future years.



                                       12
<PAGE>
         2001 AS COMPARED TO 2000

         The Company had net income of $5,413,000 in 2001, as compared to
$5,365,000 in 2000. Oil and gas production and revenue remained flat, and
district operating income increased by 26% to $17,082,000, contributing to an 8%
increase in overall revenues to $42,408,000.

         Oil and gas sales were $22,998,000 in 2001 as compared to $23,223,000
in 2000, a drop of less than 1%. A chart summarizing oil and gas production and
revenue, including the Company's share of production and revenue from the
Partnerships, follows.

<Table>
<Caption>
                               2001            2000         Increase (Decrease)
                            -----------     -----------     -------------------
<S>                         <C>             <C>             <C>
Barrels of Oil Produced         306,016         297,562             8,454
Average Price Received      $   24.9199     $   28.3354         $ (3.4155)
                            -----------     -----------

Oil Revenue                 $ 7,626,000     $ 8,432,000         $(806,000)
                            -----------     -----------

Mcf of Gas Produced           3,763,605       3,929,532          (165,927)
Average Price Received      $    4.0843     $    3.7641         $  0.3202
                            -----------     -----------

Gas Revenue                 $15,372,000     $14,791,000         $ 581,000
                            -----------     -----------

Total Oil & Gas Revenue     $22,998,000     $23,223,000         $(225,000)
                            ===========     ===========
</Table>

         The Company completed a successful well on its Cadiz field in Bee
County, Texas during 2001. Two successful wells had been completed on this
prospect in 2000. These three wells contributed 3,400 barrels of oil, 380,000
Mcf of gas and $1,624,000 in revenue in 2001, as compared to 1,200 barrels,
168,000 Mcf of gas and $853,000 in 2000. No further drilling is currently
planned for this prospect.

         The Company drilled three successful wells on the East Wakita field
in 2001. This prospect contributed $915,000 to oil and gas revenues in 2001.

         The Francis Martin well experienced a natural decline in gas and oil
production and increase in water production as well as shut-ins for mechanical
work during 2001. This well contributed 2,000 barrels of oil, 115,000 Mcf of gas
and $654,000 in revenue in 2001, as compared to 6,000 barrels, 371,000 Mcf and
$1,654,000 in 2000.

         District operating income increased 26% to $17,082,000 in 2001 as
compared to $13,585,000 in 2000. This increase reflects the utilization of the
over $2,000,000 in field service equipment the Company purchased during the
year, and its focus on expanding the amount of work performed for third parties
on wells not operated by the Company. This increase also reflects full
administrative overhead charges on marginal properties where the Company had
previously discounted such fees.

         Lease operating expenses increased by 22% to $11,083,000 in 2001 as
compared to $9,114,000 in 2000. Approximately $874,000 of this amount is
attributable to properties purchased or developed during 2000 or 2001. The
remainder of the difference is primarily attributable to an increase in repair
and fix-up work performed, and a decrease in discounts received on
administrative overheads due to the strong price environment in 2001.

         Administrative revenue, which represents the reimbursement of general
and administrative overhead expended on behalf of the Partnerships and the
Company's joint venture partners decreased by 7% to $1,535,000 in 2001 as
compared to $1,655,000 in 2000. In both years, amounts received from certain of
the Partnerships were substantially less than the amounts allocable to these
Partnerships under the partnership agreements. The lower amounts reflect PEMC's
continuing efforts to reduce costs, both incurred and allocated to the
Partnerships.

         Reporting and management fees are earned from providing the accounting
and reporting functions for certain of the Partnerships.

         The Company receives reimbursement for costs incurred related to the
evaluation and acquisition of properties on behalf of the Partnerships and other
joint venture partners. To the extent that these property acquisition costs are
expended at the district level, the reimbursements are recorded as a reduction
of total district operating expenses. When expenses are incurred at the
corporate headquarters level, such reimbursements are



                                       13
<PAGE>
recorded as a reduction of total general and administrative expenses. During
2001 and 2000, the Company's total reimbursements for property acquisition costs
were approximately $558,000 and $1,100,000, respectively.

         General and administrative expenses increased 7% to $4,310,000 in 2001
as compared to $4,033,000 in 2000. This increase reflects the change in cost
reimbursement offset by savings related to overhead efficiencies.

         Depreciation and depletion of oil and gas properties decreased by 11%
to $4,522,000 in 2001 as compared to $5,060,000 in 2000, while impairments
increased to $753,000 in 2001 as compared to $295,000 in 2000. Total depletion
and impairment expense in 2001 was $5,275,000 in 2001 as compared to $5,355,000
in 2000, a decline of approximately 1%.

         Exploration costs of $509,000 in 2001 consist primarily of the cost of
three dry holes drilled in 2001. Exploration costs of $1,797,000 in 2000
consisted primarily of dry hole costs relating to the drilling of two offshore
wells in the fourth quarter of that year.

         Interest expense decreased by 40% to $895,000 in 2001 as compared to
$1,500,000 in 2000 due to a combination of lower interest rates and lower
average outstanding debt. The average interest rates paid on outstanding
borrowings subject to interest at the bank's base rate during 2001 and 2000 were
6.92% and 9.46%, respectively. During the same periods, the average rates paid
on outstanding borrowings bearing interest based upon the LIBO rate were 5.98%
and 8.46%. As of December 31, 2001 and 2000, the total outstanding borrowings
were $16,950,000 and $17,200,000, respectively, with an additional $6,050,000
and $1,750,000 available, and $14,950,000 and $13,500,000 of the amounts
outstanding accruing interest at the LIBO rate option.

         Income tax expense increased by 112% to $1,721,000 in 2001 as compared
to $811,000 in 2000. The effective rate was 24% in 2001 as compared to 13% in
2000. In both 1998 and 1999, the Company had large federal net operating losses.
The value of these loss carryforwards was fully reserved against due to the
uncertainty as to whether the Company would have future net income against which
these losses could be offset. The use of these previously reserved against
carryforwards were the primary reason for the low effective rate in 2000.

         Current tax expense in 2001 was $38,000, with the remainder of expense
being attributable to an increase in the Company's deferred tax liability. The
Company generates approximately $350,000 of federal tax credits under Internal
Revenue Code Section 29 for producing fuel from a non-conventional source. These
credits, which significantly lower current tax expense, are scheduled to expire
after 2002. Another contributing factor to the extremely low current expense is
that the Company is allowed to deduct currently for income tax purposes
intangible drilling costs which are capitalized for financial reporting
purposes. The Company had over $5,000,000 in such costs during 2001.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company is exposed to interest rate risk on its line of credit,
which has variable rates based upon the lenders base rate, as defined, and the
London Inter-Bank Offered rate. Based on the balance outstanding at December 31,
2002, a hypothetical 2% increase in the applicable interest rates would increase
interest expense by approximately $375,500.

         Oil and gas prices have historically been extremely volatile, and have
been particularly so in recent years. The Company did not enter into significant
hedging transactions during 2002, and had no open hedging transactions at
December 31, 2002. Declines in domestic oil and gas prices could have a material
adverse effect on the Company's revenues, operating results, estimates of
economically recoverable reserves and the net revenue therefrom.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Included on pages F-1 through F-26 of this Report. The Index to
Financial Statements is at page F-1 of this Report.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         None.



                                       14
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information relating to the Company's Directors, nominees for Directors
and executive officers is included in the Company's definitive proxy statement
relating to the Company's Annual Meeting of Stockholders to be held in June,
2003, which will be filed with the Securities and Exchange Commission within 120
days of December 31, 2002, and which is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION.

         Information relating to executive compensation is included in the
Company's definitive proxy statement relating to the Company's Annual Meeting of
Stockholders to be held in June, 2003, which will be filed with the Securities
and Exchange Commission within 120 days of December 31, 2002, and which is
incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

         Information relating to security ownership of certain beneficial owners
and management is included in the Company's definitive proxy statement relating
to the Company's Annual Meeting of Stockholders to be held in June, 2003, which
will be filed with the Securities and Exchange Commission within 120 days of
December 31, 2002, and which is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information relating to certain transactions by Directors and executive
officers of the Company is included in the Company's definitive proxy statement
relating to the Company's Annual Meeting of Stockholders to be held in June,
2003, which will be filed with the Securities and Exchange Commission within 120
days of December 31, 2002, and which is incorporated herein by reference.


ITEM 14. INTERNAL CONTROLS AND PROCEDURES.

         Based upon an evaluation within the 90 days prior to the filing date of
this Report, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures as defined in Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934, as amended, are effective, as
of the evaluation date, in timely alerting them to material information relating
to our Company required to be included in our reports filed or submitted under
the Exchange Act. Since the date of the evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect such controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

    (a)  The following documents are filed as a part of this Report:

         1.       Financial Statements (Index to Financial Statements at
                  page F-1 of this Report)

         2.       Financial Statement Schedules (Index to Financial Statements
                  -- Supplementary Information)

         3.       Exhibits:

         No.

         3.1      Restated Certificate of Incorporation of PrimeEnergy
                  Corporation. (Incorporated herein by reference to Exhibit 3.1
                  of PrimeEnergy Corporation Form 10-KSB for the year ended
                  December 31, 1999)

         3.2      Bylaws of PrimeEnergy Corporation. (Incorporated herein by
                  reference to Exhibit 3.2 of PrimeEnergy Corporation Form
                  10-KSB for the year ended December 31, 1999)

         10.3     Massachusetts Mutual Flexinvest 401(k) Plan as amended and
                  restated. (Incorporated herein by reference to Exhibit 10.3 of
                  PrimeEnergy Corporation Form 10-KSB for the year ended
                  December 31, 1994) (1)



                                       15
<PAGE>
      10.17    Amended Marketing Agreement between PrimeEnergy Management
               Corporation and Charles E. Drimal, Jr. (Incorporated herein by
               reference to Exhibit 10.17 of PrimeEnergy Corporation Form 10-KSB
               for the year ended December 31, 1994)(1)

      10.18    Composite copy of Non-Statutory Option Agreements (Incorporated
               by reference to Exhibit 10.18 of PrimeEnergy Corporation for
               10-KSB for the year ended December 31, 1997)(1)

      10.22    Credit Agreement dated as of December 19, 2002, between
               PrimeEnergy Corporation, PrimeEnergy Management Corporation,
               Eastern Oil Well Service Company, Southwest Oilfield
               Construction Company, EOWS Midland Company, and Guaranty Bank,
               FSB (filed herewith)

      10.23    Mortgage, Deed of Trust, Security Agreement, Financing Statement
               and Assignment of Production from PrimeEnergy Corporation and
               PrimeEnergy Management Corporation for the benefit of Guaranty
               Bank, FSB (filed herewith)

      10.24    Act of Mortgage and Security Agreement by PrimeEnergy Corporation
               and PrimeEnergy Management Corporation to Guaranty Bank, FSB
               (filed herewith)

      21       Subsidiaries. (filed herewith)

      23       Consent of Ryder Scott & Company L.P. (filed herewith)

      99.1     Certification of Chief Executive Officer pursuant to 18 U.S.C.
               Section 1350, as adopted pursuant to section 906 of the
               Sarbanes-Oxley Act of 2002 (filed herewith).

      99.2     Certification of Chief Financial Officer pursuant to 18 U.S.C.
               Section 1350, as adopted pursuant to section 906 of the
               Sarbanes-Oxley Act of 2002 (filed herewith).


       (b)     Reports on Form 8-K:

               No reports on Form 8-K have been filed during the last quarter of
               the year covered by this Report.

- -----------

(1)    Management contract or compensatory plan or arrangement required to be
       filed as an Exhibit to this Form 10-K.


                                       16
<PAGE>
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 2003.

                                        PrimeEnergy Corporation

                                        By: /s/ CHARLES E. DRIMAL, JR.
                                           ---------------------------
                                        Charles E. Drimal, Jr.
                                        President


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the 31st day of March, 2003.


<Table>
<S>                                 <C>                                          <C>                           <C>
/s/ CHARLES E. DRIMAL, JR.          Director and President;
- --------------------------          The Principal Executive Officer
Charles E. Drimal, Jr.


/s/ BEVERLY A. CUMMINGS             Director, Executive Vice President and Treasurer;
- --------------------------          The Principal Financial and Accounting Officer
Beverly A. Cummings


/s/ JAMES P. BOLDRICK               Director                                    /s/ CLINT HURT                  Director
- --------------------------                                                      ------------------------
James P. Boldrick                                                               Clint Hurt


                                    Director                                                                    Director
- --------------------------                                                      ------------------------
Samuel R. Campbell                                                              Robert de Rothschild


/s/ JAMES E. CLARK                  Director                                                                    Director
- --------------------------                                                      ------------------------
James E. Clark                                                                  Jarvis K. Slade


/s/ MATTHIAS ECKENSTEIN             Director                                    /s/ JAN K. SMEETS               Director
- --------------------------                                                      ------------------------
Matthias Eckenstein                                                             Jan K. Smeets


/s/ H. GIFFORD FONG                 Director                                                                    Director
- --------------------------                                                      ------------------------
H. Gifford Fong                                                                 Gaines Wehrle

                                    Director                                                                    Director
- --------------------------                                                      ------------------------
Thomas S.T. Gimbel                                                              Michael Wehrle
</Table>




                                      -17-
<PAGE>
                                 CERTIFICATION


I, Charles E. Drimal, Jr., certify that:


1. I have reviewed this annual report on Form 10-K of PrimeEnergy Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



March 31, 2003                            /s/ Charles E. Drimal Jr.
                                          -------------------------------------
                                          Charles E. Drimal Jr
                                          Chief Executive Officer
                                          PrimeEnergy Management Corporation
                                          Managing General Partner



<PAGE>
                                 CERTIFICATION


I, Beverly A. Cummings, certify that:


1. I have reviewed this annual report on Form 10-K of PrimeEnergy Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



March 31, 2003                                /s/ Beverly A. Cummings
                                              ----------------------------------
                                              Beverly A Cummings
                                              Chief Financial Officer
                                              PrimeEnergy Management Corporation
                                              Managing General Partner







<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

<Table>
<S>                                                                                                                  <C>
Financial Statements (Included herein at pages F-1 through F-26):

Report of Independent Public Accountants                                                                             F-2

Financial Statements

         Consolidated Balance Sheets -- December 31, 2002 and 2001                                                   F-3

         Consolidated Statements of Operations -- for the years ended December 31,
         2002, 2001 and 2000                                                                                         F-5

         Consolidated Statements of Stockholders' Equity -- for the years ended
         December 31, 2002, 2001 and 2000                                                                            F-6

         Consolidated Statements of Cash Flows -- for the years ended December 31,
         2002, 2001 and 2000                                                                                         F-7

         Notes to Consolidated Financial Statements                                                                  F-8

         Supplementary Information:                                                                                  F-20

                Capitalized Costs Relating to Oil and Gas Producing Operations
                December 31, 2002, 2001 and 2000                                                                     F-21

                Costs Incurred in Oil and Gas Property Acquisition, Exploration and
                Development Activities, years ended December 31, 2002, 2001 and 2000                                 F-21

                Standardized Measure of Discounted Future Net Cash Flows Relating
                to Proved Oil and Gas reserves, years ended December 31, 2002,
                2001 and 2000                                                                                        F-22

                Standardized Measure of Discounted Future Net Cash Flows and Changes
                Therein Relating to Proved Oil an Gas Reserves, years ended December 31,
                2002, 2001 and 2000                                                                                  F-23

                Reserve Quantity Information, years ended December 31, 2002, 2001
                and 2000                                                                                             F-24

                Results of Operations from Oil and Gas Producing Activities, years ended
                December 31, 2002, 2001 and 2000                                                                     F-25

                Notes to Supplementary Information                                                                   F-26
</Table>




                                      F-1
<PAGE>
                         PUSTORINO, PUGLISI, & CO., LLP

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of
  PrimeEnergy Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of PrimeEnergy
Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2002, 2001, and 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PrimeEnergy Corporation and
Subsidiaries as of December 31, 2002 and 2001, and the results of its operations
and their cash flows for the years ended December 31, 2002, 2001 and 2000 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ PUSTORINO, PUGLISI & CO., LLP
Pustorino, Puglisi & Co., LLP
New York, New York
March 28, 2003




                                      F-2
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             CONSOLIDATED BALANCE SHEETS, December 31, 2002 and 2001

<Table>
<Caption>
                                                                                2002              2001
                                                                            ------------      ------------
<S>                                                                         <C>               <C>
ASSETS:

Current assets:
      Cash and cash equivalents                                             $  1,886,000      $     85,000
      Restricted cash and cash equivalents (Note 12)                             750,000         1,174,000
      Accounts receivable, net (Note 3)                                        4,126,000         3,798,000
      Due from related parties (less allowance for doubtful
         accounts of $800,000 in 2002 and 2001) (Note 11)                      4,771,000         4,924,000
      Prepaid expenses                                                           239,000            64,000
      Other current assets (Notes 4 and 9)                                       322,000         1,006,000
      Deferred income taxes (Notes 1 and 9)                                      309,000           274,000
                                                                            ------------      ------------
         Total current assets                                                 12,403,000        11,325,000
                                                                            ------------      ------------

Property and equipment, at cost (Notes 1 and 2):
      Oil and gas properties(successful efforts method):
         Proved                                                               74,319,000        63,418,000
         Unproved                                                              1,134,000           286,000
      Furniture, fixtures and equipment including leasehold
         improvements                                                          8,949,000         8,622,000
                                                                            ------------      ------------
                                                                              84,402,000        72,326,000
      Accumulated depreciation, depletion and amortization                   (52,102,000)      (48,039,000)
                                                                            ------------      ------------
         Net property and equipment                                           32,300,000        24,287,000
                                                                            ------------      ------------


Other assets                                                                     206,000           204,000
                                                                            ------------      ------------

         Total assets                                                       $ 44,909,000      $ 35,816,000
                                                                            ============      ============

</Table>






               The accompanying notes are an integral part of the
                       consolidated financial statements.



                                      F-3
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             CONSOLIDATED BALANCE SHEETS, December 31, 2002 and 2001

<Table>
<Caption>
                                                                               2002              2001
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
LIABILITIES and STOCKHOLDERS' EQUITY:

Current liabilities:
        Accounts payable (Note 14)                                         $  6,100,000      $  5,788,000
        Current portion of other long-term obligations (Notes 5 and 6)          824,000           230,000
        Accrued liabilities:
           Payroll, Benefits, and Related Items                                 996,000         1,157,000
           Interest and other                                                   803,000         1,023,000
        Due to related parties (Note 11)                                      1,485,000           983,000
                                                                           ------------      ------------
        Total current liabilities                                            10,208,000         9,181,000

Long-term bank debt (Note 5)                                                 23,700,000        16,950,000
Other long-term obligations (Note 6)                                             34,000             8,000
Deferred income taxes (Note 9)                                                2,592,000         2,314,000
                                                                           ------------      ------------
        Total liabilities                                                    36,534,000        28,453,000
                                                                           ------------      ------------

Stockholders' equity:
        Preferred stock, $.10 par value, authorized 5,000,000 shares;
           none issued                                                               --                --
        Common stock, $.10 par value, authorized 10,000,000 shares;
           issued 7,694,970 in 2002 and 2001                                    769,000           769,000
        Paid in capital                                                      11,024,000        11,024,000
        Retained earnings                                                     9,676,000         7,919,000
                                                                           ------------      ------------
                                                                             21,469,000        19,712,000
        Treasury stock, at cost 4,001,964 common shares in 2002
           and 3,909,102 in 2001                                            (13,094,000)      (12,349,000)
                                                                           ------------      ------------
        Total stockholders' equity                                            8,375,000         7,363,000
                                                                           ------------      ------------
        Total liabilities and equity                                       $ 44,909,000      $ 35,816,000
                                                                           ============      ============
</Table>









               The accompanying notes are an integral part of the
                       consolidated financial statements.



                                      F-4
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              for the years ended December 31, 2002, 2001 and 2000

<Table>
<Caption>
                                                             2002             2001              2000
                                                         ------------      ------------     ------------
<S>                                                      <C>               <C>              <C>
Revenue:
Oil and gas sales                                        $ 18,330,000      $ 22,998,000     $ 23,223,000
District operating income                                  15,308,000        17,082,000       13,585,000
Administrative revenue (Note 11)                            1,473,000         1,535,000        1,655,000
Reporting and management fees (Note 11)                       275,000           297,000          321,000
Gains/(losses) on derivative instruments net                 (113,000)               --               --
Interest income                                                52,000           138,000          169,000
Other income                                                  609,000           358,000          229,000
                                                         ------------      ------------     ------------
                                                           35,934,000        42,408,000       39,182,000
                                                         ------------      ------------     ------------
Costs and expenses:
Lease operating expense                                    10,210,000        11,083,000        9,114,000
District operating expense                                 13,020,000        13,368,000       11,235,000
Depreciation and depletion of oil and gas properties        3,988,000         4,522,000        5,060,000
Impairment of oil and gas properties (Note 1)                      --           753,000          295,000
General and administrative expense                          4,888,000         4,310,000        4,033,000
Exploration costs                                             894,000           509,000        1,797,000
Interest expense (Note 5)                                     766,000           895,000        1,500,000
                                                         ------------      ------------     ------------
                                                           33,766,000        35,440,000       33,034,000
                                                         ------------      ------------     ------------
Income (loss) from operations                               2,168,000         6,968,000        6,148,000


Other income:
Gain on sale and exchange of assets                            32,000           166,000           28,000
                                                         ------------      ------------     ------------
Income before provision for income taxes                    2,200,000         7,134,000        6,176,000
Provision for income taxes (Notes 1 and 9)                    443,000         1,721,000          811,000
                                                         ------------      ------------     ------------
Net income                                               $  1,757,000      $  5,413,000     $  5,365,000
                                                         ============      ============     ============

Basic net income per common share (Notes 1 and 15)       $       0.47      $       1.39     $       1.26

Diluted net income per common share (Notes 1 and 15)
                                                         $       0.40      $       1.18     $       1.08
</Table>





               The accompanying notes are an integral part of the
                       consolidated financial statements



                                      F-5
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                 CONSOLIDATED STATEMENT of STOCKHOLDERS' EQUITY

              for the years ended December 31, 2002, 2001 and 2000

<Table>
<Caption>
                                                                              Retained
                                                              Additional      Earnings
                                       Common Stock             Paid In     (Accumulated      Treasury
                                  Shares         Amount         Capital       Deficit)         Stock           Total
                               ------------   ------------   ------------   ------------    ------------    ------------
<S>                            <C>            <C>            <C>            <C>             <C>             <C>
Balance at December 31, 1999      7,607,970   $    761,000   $ 10,902,000   $ (2,859,000)   $ (7,870,000)   $    934,000

Purchased 222,879 shares of
 common stock                                                                                 (1,323,000)     (1,323,000)

Net income                                                                     5,365,000                       5,365,000
                               ------------   ------------   ------------   ------------    ------------    ------------
Balance at December 31, 2000      7,607,970   $    761,000   $ 10,902,000   $  2,506,000    $ (9,193,000)   $  4,976,000

Exercised stock options              87,000          8,000        122,000                                        130,000

Purchased 420,160 shares of
 common stock                                                                                 (3,156,000)     (3,156,000)

Net income                                                                     5,413,000                       5,413,000
                               ------------   ------------   ------------   ------------    ------------    ------------
Balance at December 31, 2001      7,694,970   $    769,000   $ 11,024,000   $  7,919,000    $(12,349,000)   $  7,363,000

Purchased 92,862 shares of
 common stock                                                                                   (745,000)       (745,000)

Net income                                                                     1,757,000                       1,757,000
                               ------------   ------------   ------------   ------------    ------------    ------------

Balance at December 31, 2002      7,694,970   $    769,000   $ 11,024,000   $  9,676,000    $(13,094,000)   $  8,375,000
                               ============   ============   ============   ============    ============    ============
</Table>


               The accompanying notes are an integral part of the
                       consolidated financial statements.



                                      F-6
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                      CONSOLIDATED STATEMENTS of CASH FLOWS

              for the years ended December 31, 2002, 2001 and 2000

<Table>
<Caption>
                                                          2002            2001            2000
                                                      ------------    ------------    ------------
<S>                                                   <C>             <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                   $  1,757,000    $  5,413,000    $  5,365,000
  Adjustments to reconcile net loss to net cash
  provided by operating activities:
    Depreciation, depletion and amortization             5,231,000       5,599,000       6,000,000
    Impairment of oil and gas properties                        --         753,000         295,000
    Dry hole and abandonment costs                         894,000         496,000       1,787,000
    Gain on sale of properties                             (32,000)       (166,000)        (28,000)
    Provision (benefit) of deferred income taxes           243,000       1,684,000         356,000
Changes in assets and liabilities:
    (Increase) decrease in accounts receivable            (328,000)      1,865,000      (2,028,000)
    (Increase) decrease in due from related parties        153,000        (578,000)     (1,177,000)
    (Increase) decrease in other assets                    682,000        (874,000)         36,000
    (Increase) decrease in prepaid expenses               (175,000)         48,000         (28,000)
    Increase (decrease) in accounts payable                736,000      (1,086,000)       (346,000)
    Increase (decrease) in accrued liabilities             (19,000)       (559,000)        944,000
    Increase (decrease) in due to related parties          502,000        (282,000)        322,000
                                                      ------------    ------------    ------------
Net cash provided by operating activities                9,644,000      12,313,000      11,498,000
                                                      ------------    ------------    ------------
Cash flows from investing activities:
  Proceeds from sale of properties and equipment            32,000         520,000          71,000
  Additions to property and equipment                  (14,442,000)     (8,527,000)    (11,632,000)
  Proceeds from payment on notes receivable                                                453,000
                                                      ------------    ------------    ------------
      Net cash used in investing activities            (14,410,000)     (8,007,000)    (11,108,000)

Cash flows from financing activities:
    Purchase of stock for treasury                        (745,000)     (3,156,000)     (1,323,000)
    Repayment of long-term bank debt and other
    long-term obligations                              (43,260,000)    (40,619,000)    (27,844,000)
    Increase in long-term bank debt and other
    long-term obligations                               50,572,000      38,740,000      27,690,000
    Proceeds from exercised stock options                       --         130,000              --
                                                      ------------    ------------    ------------
      Net cash provided by (used in)
          financing activities                           6,567,000      (4,905,000)     (1,477,000)
                                                      ------------    ------------    ------------
      Net increase (decrease) in cash                    1,801,000        (599,000)     (1,087,000)

Cash and cash equivalents, beginning of year                85,000         684,000       1,771,000
                                                      ------------    ------------    ------------
Cash and cash equivalents, end of year                $  1,886,000          85,000         684,000
                                                      ============    ============    ============
Supplemental disclosures:
  Income taxes paid during the year                             --       1,200,000          53,000
  Net income tax refunds received during the year          745,000              --              --
  Interest paid during the year                            766,000         901,000       1,462,000

</Table>

Supplemental information of noncash investing and financing activities:

     In 2002, the Company recorded capital lease obligations in the amount of
$59,000.

     The accompanying notes are an integral part of the consolidated financial
statements.



                                      F-7
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

                                    ---------

1.       DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

         Nature of Operations:

         PrimeEnergy Corporation ("PEC"), a Delaware corporation, was organized
         in March 1973. PrimeEnergy Management Corporation ("PEMC"), a
         wholly-owned subsidiary, acts as the managing general partner,
         providing administration, accounting and tax preparation services for
         38 private and publicly-held limited partnerships and 2 trusts
         (collectively, the "Partnerships"). PEC owns Eastern Oil Well Service
         Company ("EOWSC"), EOWS Midland Company and Southwest Oilfield
         Construction Company ("SOCC"), all of which perform oil and gas field
         servicing. PEC also owns Prime Operating Company ("POC"), which serves
         as operator for most of the producing oil and gas properties owned by
         the Company and affiliated entities. Field service revenues and the
         administrative overhead fees earned as operator are reported as
         'District operating income' on the consolidated statement of
         operations. PrimeEnergy Corporation and its wholly-owned subsidiaries
         are herein referred to as the "Company."

         The Company is engaged in the development, acquisition and production
         of oil and natural gas properties. The Company owns leasehold, mineral
         and royalty interests in producing and non-producing oil and gas
         properties across the continental United States, including Colorado,
         Kansas, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North
         Dakota, Oklahoma, Texas, Utah, West Virginia and Wyoming. The Company
         operates 1,550 wells and owns non-operating interests in over 800
         additional wells. Additionally, the Company provides well-servicing
         support operations, site-preparation and construction services for oil
         and gas drilling and re-working operations, both in connection with the
         Company's activities and providing contract services for third parties.
         The Company is publicly traded on the NASDAQ under the symbol "PNRG."

         The markets for the Company's products are highly competitive, as oil
         and gas are commodity products and prices depend upon numerous factors
         beyond the control of the Company, such as economic, political and
         regulatory developments and competition from alternative energy
         sources.

         Principles of Consolidation:

         The consolidated financial statements include the accounts of
         PrimeEnergy Corporation and its wholly-owned subsidiaries. All material
         inter-company accounts and transactions between these entities have
         been eliminated. Oil and gas properties include ownership interests in
         the Partnerships. The statement of operations includes the Company's
         proportionate share of revenue and expenses related to oil and gas
         interests owned by the Partnerships.

         Use of Estimates:

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.

         Estimates of oil and gas reserves, as determined by independent
         petroleum engineers, are continually subject to revision based on
         price, production history and other factors. Depletion expense, which
         is computed based on the units of production method, could be
         significantly impacted by changes in such estimates. Additionally, FAS
         144 requires that if the expected future cash flow from an asset is
         less than its carrying cost, that asset must be written down to its
         fair market value. As the fair market value of an oil and gas property
         will usually be significantly less than the total future net revenue
         expected from that property, small changes in the estimated future net
         revenue from an asset could lead to the necessity of recording a
         significant impairment of that asset.




                                      F-8
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

                                    ---------

         Property and Equipment

         The Company follows the "successful efforts" method of accounting for
         its oil and gas properties. Under the successful efforts method, costs
         of acquiring undeveloped oil and gas leasehold acreage, including lease
         bonuses, brokers' fees and other related costs are capitalized.
         Provisions for impairment of undeveloped oil and gas leases are based
         on periodic evaluations. Annual lease rentals and exploration expenses,
         including geological and geophysical expenses and exploratory dry hole
         costs, are charged against income as incurred. Costs of drilling and
         equipping productive wells, including development dry holes and related
         production facilities, are capitalized. Costs incurred by the Company
         related to the exploration, development and acquisition of oil and gas
         properties on behalf of the Partnerships or joint ventures are deferred
         and charged to the related entity upon the completion of the
         acquisition. To the extent that the Company acquires an interest in the
         property, an appropriate allocation of internal costs are capitalized
         as part of the depletable base of the property.

         All other property and equipment are carried at cost. Depreciation and
         depletion of oil and gas production equipment and properties are
         determined under the unit-of-production method based on estimated
         proved recoverable oil and gas reserves. Depreciation of all other
         equipment is determined under the straight-line method using various
         rates based on useful lives. The cost of assets and related accumulated
         depreciation is removed from the accounts when such assets are disposed
         of, and any related gains or losses are reflected in current earnings.

         Income Taxes:

         The Company records income taxes in accordance with Statement of
         Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
         Taxes." SFAS No. 109 is an asset and liability approach to accounting
         for income taxes, which requires the recognition of deferred tax assets
         and liabilities for the expected future tax consequences of events that
         have been recognized in the Company's financial statements or tax
         returns.

         Deferred tax liabilities or assets are established for temporary
         differences between financial and tax reporting bases and are
         subsequently adjusted to reflect changes in the rates expected to be in
         effect when the temporary differences reverse. A valuation allowance is
         established for any deferred tax asset for which realization is not
         likely.

         General and Administrative Expenses:

         General and administrative expenses represent costs and expenses
         associated with the operation of the Company. Certain of the
         Partnerships sponsored by the Company reimburse general and
         administrative expenses incurred on their behalf.

         Income Per Common Share:

         Income per share of common stock has been computed based on the
         weighted average number of common shares outstanding during the
         respective periods in accordance with SFAS No. 128, "Earnings per
         Share".

         Statements of cash flows:

         For purposes of the consolidated statements of cash flows, the Company
         considers short-term, highly liquid investments with original
         maturities of less than ninety days to be cash equivalents.




                                      F-9
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

                                    ---------

         Concentration of Credit Risk:

         The Company maintains significant banking relationships with financial
         institutions in the State of Texas. The Company limits its risk by
         periodically evaluating the relative credit standing of these financial
         institutions. The Company's oil and gas production purchasers consist
         primarily of independent marketers and major gas pipeline companies.

         Hedging:

         The Company periodically enters into oil and gas financial instruments
         to manage its exposure to oil and gas price volatility. The oil and gas
         reference prices upon which the price hedging instruments are based
         reflect various market indices that have a high degree of historical
         correlation with actual prices received by the Company.

         The financial instruments are accounted for in accordance with
         Financial Accounting Standards ("SFAS") No. 133, "Accounting for
         Derivative Instruments and Hedging Activities", which established new
         accounting and reporting requirements for derivative instruments and
         hedging activities. SFAS No. 133, as amended by SFAS No. 138, requires
         that all derivative instruments subject to the requirements of the
         statement be measured at fair market value and recognized as assets or
         liabilities in the balance sheet. The accounting for changes in the
         fair value of a derivative depends on the intended use of the
         derivative and the resulting designation is generally established at
         the inception of a derivative. For derivatives designated as cash flow
         hedges and meeting the effectiveness guidelines of SFAS No. 133,
         changes in fair value, to the extent effective, are recognized in other
         comprehensive income until the hedged item is recognized in earnings.
         Hedge effectiveness is measured at least quarterly based on the
         relative changes in fair value between the derivative contract and the
         hedged item over time. Any change in fair value of a derivative
         resulting from ineffectiveness or an excluded component of the
         gain/loss is recognized immediately in the statement of operations.

         Recently Issued Accounting Standards:

         In December 1999, the Securities and Exchange Commission issued Staff
         Accounting Bulletin No. 101, Revenue Recognition in Financial
         Statements ("SAB No. 101"). SAB No. 101 provides guidance for revenue
         recognition under certain circumstances. The adoption of SAB 101 in
         2000 did not have a significant impact on the Company's financial
         position, results of operations or cash flows.

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 141, "Business Combinations." SFAS No. 141 is intended to
         improve the transparency of the accounting and reporting for business
         combinations by requiring that all business combinations be accounted
         for under a single method - the purchase method. SFAS 141 is effective
         for all transactions completed after June 30, 2001, except transactions
         using the pooling-of-interests method that were initiated prior to July
         1, 2001. The adoption of SFAS 141 did not have an impact on the
         Company's consolidated financial statements.

         In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
         Intangible Assets." This statement applies to intangibles and goodwill
         acquired after June 30, 2001, as well as goodwill and intangibles
         previously acquired. Under this statement, goodwill as well as other
         intangibles determined to have an infinite life will no longer be
         amortized; however, these assets will be reviewed for impairment on a
         periodic basis. The adoption of SFAS 142 did not have an impact on the
         Company's consolidated financial statements.

         In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
         Retirement Obligations." SFAS No. 143 requires the fair value of a
         liability for an asset retirement obligation to be recognized in the
         period in which it is incurred if a reasonable estimate of fair value
         can be made. The associated asset retirement costs are capitalized as
         part of the carrying amount of the long-lived asset. SFAS No. 143 is
         effective for fiscal years beginning after June 15, 2002. Management
         has not yet determined the impact of the adoption of this statement.



                                      F-10
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

                                    ---------

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
         Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires
         that long-lived assets be measured at the lower of carrying amount or
         fair value less cost to sell, whether reported in continuing operations
         or in discontinued operations. Therefore, discontinued operations will
         no longer be measured at net realizable value or include amounts for
         operating losses that have not yet occurred. SFAS No. 144 is effective
         for financial statements issued for fiscal years beginning after
         December 15, 2001 and generally, is to be applied prospectively. The
         adoption of SFAS 144 did not have an impact on the Company's
         consolidated financial statements.

         In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
         Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
         Technical Corrections." Prior to the adoption of the provisions of SFAS
         No. 145, generally accepted accounting principles required gains or
         losses on the early extinguishment of debt be classified in a company's
         periodic consolidated statements of operations as extraordinary gains
         or losses, net of associated income taxes, below the determination of
         income or loss from continuing operations. SFAS No. 145 changes
         generally accepted accounting principles to require, except in the case
         of events or transactions of a highly unusual and infrequent nature,
         gains or losses from the early extinguishment of debt be classified as
         components of a company's income or loss from continuing operations.
         The adoption of the provisions of SFAS No. 145 in 2003 is not expected
         to affect the Company's financial position or results of operations.

         In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
         Associated with Exit or Disposal Activities." SFAS No. 146 requires
         that a liability for a cost associated with an exit or disposal
         activity be recognized and measured initially at fair value only when
         the liability is incurred. SFAS No. 146 is effective for exit or
         disposal activities that are initiated after December 31, 2002. The
         adoption of SFAS No. 146 in 2003 is not expected to have an effect on
         the Company's financial position or results of operations.

         In November 2002, the FASB issued Financial Interpretation No. 45,
         "Guarantor's Accounting and Disclosure Requirements for Guarantees,
         including Indirect Guarantee of Indebtedness of Others" (FIN 45). FIN
         45 requires that upon issuance of a guarantee, the guarantor must
         recognize a liability for the fair value of the obligation it assumes
         under that guarantee. FIN 45's provisions for initial recognition and
         measurement should be applied on a prospective basis to guarantees
         issued or modified after December 31, 2002. The guarantor's previous
         accounting for guarantees that were issued before the date of FIN 45's
         initial application may not be revised or restated to reflect the
         effect of the recognition and measurement provisions of the
         Interpretation. The disclosure requirements are effective for financial
         statements of both interim and annual periods that end after December
         15, 2002. The adoption of FIN 45 did not have an impact on the
         Company's consolidated financial statements.

         In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
         Compensation--Transition and Disclosure." SFAS No. 148 amends FASB
         Statement No. 123, "Accounting for Stock-Based Compensation" to provide
         alternative methods of transition for a voluntary change to the fair
         value based method of accounting for stock-based employee compensation.
         In addition, this Statement amends the disclosure for stock-based
         employee compensation and the effect of the method used on the reported
         results. The provisions of SFAS 148 are effective for financial
         statements with fiscal years ending after December 15, 2002. The
         adoption of this statement did not impact the Company's financial
         position or results of operations.

         In January 2003, the FASB issued Financial Interpretation No. 46,
         "Consolidation of Variable Interest Entities--an interpretation of ARB
         No. 51" (FIN 46). FIN 46 is an interpretation of Accounting Research
         Bulletin 51, "Consolidated Financial Statements", and addresses
         consolidation by business enterprises of variable interest entities
         (VIE's). The primary objective of FIN 46 is to provide guidance on the
         identification of, and financial reporting for, entities over which
         control is achieved through means other than voting rights; such
         entities are known as VIE's. FIN 46 requires an enterprise to
         consolidate a variable interest entity if that enterprise has a
         variable interest that will absorb a majority of the entity's expected
         losses if they occur, receive a majority of the entity's expected
         residual return if they occur, or both. An enterprise shall consider
         the rights and obligations conveyed by its variable interests in making
         this determination. This guidance applies immediately to variable
         interest entities created after January 31, 2003, and to variable
         interest entities in which an enterprise obtains an interest after that
         date. It applies in the first fiscal



                                      F-11
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

                                    ---------

         year or interim period beginning after June 15, 2003, to variable
         interest entities in which an enterprise holds a variable interest that
         it acquired before February 1, 2003. The adoption of this
         interpretation is not expected to have an effect on the Company's
         financial position or results of operations.

2.       SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

         2002

         As more fully described in Note 7, the Company is committed to offer to
         repurchase the interests of the partners and trust unit holders in
         certain of the Partnerships. During 2002, the Company purchased such
         interests in an amount totaling $1,203,500.

         2001

         As more fully described in Note 7, the Company is committed to offer to
         repurchase the interests of the partners and trust unit holders in
         certain of the Partnerships. During 2001, the Company purchased such
         interests in an amount totaling $545,000.

         2000

         Effective January 1, 2000, the Company purchased additional interests
         in the San Pedro Ranch field of Dimmit and Maverick Counties, Texas for
         $150,000.

         Effective April 1, 2000, the Company purchased additional interest in
         the Eola Robberson field of Garvin County, Oklahoma for $400,000. These
         interests are related to certain contingency payments created at the
         time the Company made its original acquisition of the field in 1988,
         and are based on property performance.

         Effective July 1, 2000, the Company invested $265,000 in the purchase
         of various interests in five leases located in Garvin County, Oklahoma.
         These leases contain 26 producing wells and 5 salt-water injection
         wells. The Company assumed operation of the wells, which at the time of
         the acquisition were collectively producing 61 (26.63 net) barrels of
         oil per day.

         In September of 2000, the Company purchased nine wells in Upton Co.
         Texas. In October, the Company began a series of workovers to tap
         additional oil and gas behind pipe reserves in the wells. Through
         March, 2001 the Company has performed workovers on five of the nine
         wells, resulting in a three fold increase in oil production and over a
         six fold increase in gas production. Currently the acquisition is
         producing at a rate of 55 (39 net) barrels of oil per day and 250 (177
         net) Mcf of gas per day. The Company owns from 94% to 100% working
         interest and 69% to 73% net revenue interest in the properties.

         As more fully described in Note 7, the Company is committed to offer to
         repurchase the interests of the partners and trust unitholders in
         certain of the Partnerships. During 2000, the Company purchased such
         interests in an amount totaling $1,257,000.

3.       ACCOUNTS RECEIVABLE

         Accounts receivable at December 31, 2002 and 2001 consisted of the
         following:

<Table>
<Caption>
                                                        December 31,
                                                ----------------------------
                                                     2002           2001
                                                ------------    ------------
<S>                                             <C>             <C>
      Joint interest billing                    $    571,000    $  1,372,000
      Trade receivables                            1,243,000       1,151,000
      Oil and gas sales                            2,070,000       1,460,000
      Other                                          561,000         154,000
                                                ------------    ------------
                                                   4,445,000       4,137,000
      Less, allowance for doubtful accounts         (319,000)       (339,000)
                                                ------------    ------------
      Total                                     $  4,126,000    $  3,798,000
                                                ============    ============
</Table>



                                      F-12
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

                                    ---------

4.       OTHER CURRENT ASSETS

         Other current assets at December 31, 2002 and 2001 consisted of the
following:

<Table>
<Caption>
                                              December 31,
                                      ---------------------------
                                          2002           2001
                                      ------------   ------------

<S>                                   <C>            <C>
Tax overpayments                      $     73,000   $    708,000
Field service inventory                    249,000        268,000
Other                                            0         30,000
                                      ------------   ------------
Total                                 $    322,000   $  1,006,000
                                      ============   ============
</Table>

5.       LONG-TERM BANK DEBT

         As of December 2002, the Company entered in to a credit agreement with
         a new primary lender. The Company and the lender agreed to amend and
         restate in its entirety the credit agreement dated April 26, 1995
         between the Company and its predecessor lender. This agreement will
         continue to provide for borrowings under a Master Note. Advances under
         the agreement, as amended, are limited to the borrowing base as defined
         in the agreement. The borrowing base is re-determined by the lender on
         a semi-annual basis. The current borrowing base is $25 million and
         includes a Term Loan of $4 million. The Term Loan will be paid back in
         monthly installments of $66,667 beginning January 2003 and continuing
         until December 19, 2004 when such Term Loan shall be paid in full. The
         credit agreement provides for interest on outstanding borrowings at the
         bank's base rate, as defined, payable monthly, or at rates 2% over the
         London Inter-Bank Offered Rate (LIBO rate) payable at the end of the
         applicable interest period.

         The Company had been party to a series of credit agreements with its
         former lender or its predecessors since 1983. The agreement, entered
         into in April 1995, provided for borrowings under a Master Note.
         Advances under the agreement, as amended, were limited to the borrowing
         base as defined in the agreement and re-determined by the lender on a
         semi-annual basis. Since the beginning of 2000, the borrowing base
         ranged from $20 million to $23.7 million. The credit agreement provided
         for interest on outstanding borrowings at the bank's base rate, as
         defined, payable monthly, or at rates ranging from 1 1/2% to 2% over
         the London Inter-Bank Offered Rate (LIBO rate) depending upon the
         Company's utilization of the available line of credit, payable at the
         end of the applicable interest period. This credit agreement was
         assigned to the Company's primary lender effective December 2002.

         The average interest rates paid on outstanding borrowings subject to
         interest at the bank's base rate during 2002 and 2001 were 4.25% and
         6.92%, respectively. During the same periods, the average rates paid on
         outstanding borrowings bearing interest based upon the LIBO rate were
         3.59% and 5.98% As of December 31, 2002 and 2001, the total outstanding
         borrowings were $24,500,000 and $16,950,000, respectively, with an
         additional $500,000 and $6,050,000 available. As of December 31, 2001
         $14,950,000 of the amounts outstanding accrued interest at the LIBO
         rate option.

         The Company's oil and gas properties as well as certain receivables and
         equipment are pledged as security under the loan agreement. The
         agreement requires the Company to maintain, as defined, a minimum
         current ratio, tangible net worth, debt coverage ratio and interest
         coverage ratio, and restrictions are placed on the payment of dividends
         and the amount of treasury stock the Company may purchase.

6.       COMMITMENTS

         Operating Leases:

         The Company has several noncancelable operating leases, primarily for
         rental of office space, that have a term of more than one year.



                                      F-13
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS

6.       COMMITMENTS CONTINUED

         Capital Leases:

         The Company has two capital lease for office equipment in other
         long-term obligations. Future minimum lease payments under operating
         and capital leases are as follows:

<Table>
<Caption>
                                             Operating        Capital
                                               Leases         Leases
                                            ------------   ------------
<S>                                         <C>            <C>
      2003                                       434,000         26,000
      2004                                        83,000         24,000
      2005                                         5,000         11,000
      2006                                            --             --
      Thereafter                                      --             --
                                            ------------   ------------
      Total minimum payments                $    522,000         61,000
                                            ============
      Less imputed interest                                      (3,000)
                                                           ------------
      Present value of minimum
          Lease payments                                   $     58,000
                                                           ============
</Table>

7.       CONTINGENT LIABILITIES

         The Company, as managing general partner of the affiliated
         Partnerships, is responsible for all Partnership activities, including
         the review and analysis of oil and gas properties for acquisition, the
         drilling of development wells and the production and sale of oil and
         gas from productive wells. The Company also provides the
         administration, accounting and tax preparation work for the
         Partnerships, and is liable for all debts and liabilities of the
         affiliated Partnerships, to the extent that the assets of a given
         limited Partnership are not sufficient to satisfy its obligations.

         The Company is subject to environmental laws and regulations.
         Management believes that future expenses, before recoveries from third
         parties, if any, will not have a material effect on the Company's
         financial condition. This opinion is based on expenses incurred to date
         for remediation and compliance with laws and regulations which have not
         been material to the Company's results of operations.

         As a general partner, the Company is committed to offer to purchase the
         limited partners' interest in certain of its managed Partnerships at
         various annual intervals. Under the terms of a partnership agreement,
         the Company is not obligated to purchase an amount greater than 10% of
         the total partnership interest outstanding. In addition, the Company
         will be obligated to purchase interests tendered by the limited
         partners only to the extent of one hundred fifty percent of the
         revenues received by it from such partnership in the previous year.
         Purchase prices are based upon annual reserve reports of independent
         petroleum engineering firms discounted by a risk factor. Based upon
         historical production rates and prices, management estimates that if
         all such offers were to be accepted, the maximum annual future purchase
         commitment would be approximately $500,000.

         The Company owns approximately a 27% interest in a limited partnership
         which owns a shopping center in Alabama. The Company is a guarantor on
         a mortgage secured by the shopping center. The Company believes the
         cash flow from the center is sufficient to service the mortgage. The
         market value of the center is currently substantially higher than the
         balance owed on the mortgage. If the partnership were unable to pay its
         obligations under the mortgage agreement, the maximum amount the
         Company is committed to pay is $350,000.




                                      F-14
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   NOTES to CONSOLIDATED FINANCIAL STATEMENTS,

                                    ---------


8.       STOCK OPTIONS AND OTHER COMPENSATION

         In May 1989, non-statutory stock options were granted by the Company to
         four key executive officers for the purchase of shares of common stock.
         At December 31, 2001 and 2000, options on 767,500 shares were
         outstanding and exercisable at prices ranging from $1.00 to $1.25.

         On January 27, 1983, the Company adopted the 1983 Incentive Stock
         Option Plan. At December 31, 2000, options on 87,000 shares were
         exercisable at $1.50 per share. During July 2001, all outstanding
         options under this plan were exercised.

         PEMC has a marketing agreement with its current President to provide
         assistance and advice to PEMC in connection with the organization and
         marketing of oil and gas partnerships and joint ventures and other
         investment vehicles of which PEMC is to serve as general or managing
         partner. The Company had a similar agreement with its former Chairman.
         Although that agreement expired, the former Chairman was still entitled
         to receive certain payments relating to partnerships formed during the
         time the agreement was in effect. In October 2002, the President and
         the former Chairman sold and assigned all rights, title and interest
         related to certain Partnerships formed under these marketing agreements
         to the Company. The President is still entitled to a percentage of the
         Company's carried interest depending on total capital raised and annual
         performance of other Partnerships and joint ventures.

9.       INCOME TAXES

         The components of the provision for income taxes for the years ended
         December 31, 2002, 2001 and 2000 are as follows:

<Table>
<Caption>
                                    2002           2001           2000
                                ------------   ------------   ------------
<S>                             <C>            <C>            <C>
    Federal:
         Current                $     95,000   $     25,000   $    201,000
         Deferred                    216,000      1,500,000        141,000
    State:
         Current                     104,000         13,000        254,000
         Deferred                     28,000        183,000        215,000
                                ------------   ------------   ------------
    Total                       $    443,000   $  1,721,000   $    811,000
                                ============   ============   ============
</Table>




                                      F-15
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                    ---------

The components of net deferred tax assets (liabilities) are as follows:

<Table>
<Caption>
                                                             December 31,  December 31,
                                                                 2002          2001
                                                            ------------   ------------
<S>                                                         <C>            <C>
Current assets:
       Compensation and benefits                            $    184,000   $    185,000
       Allowance for doubtful accounts                           125,000         89,000
                                                            ------------   ------------
                                                                 309,000        274,000
                                                            ------------   ------------
Noncurrent assets:
       Depreciation                                              485,000        387,000
       Due from related parties reserve                          312,000        312,000
       Federal net operating loss carryforwards                       --        124,000
       Percentage depletion carryforwards                        297,000        367,000
       Alternative minimum tax credits                         1,040,000        943,000
                                                            ------------   ------------
                                                               2,134,000      2,133,000
                                                            ------------   ------------
Noncurrent liabilities:
       Basis differences relating to limited partnerships      1,211,000      1,798,000
       Depletion                                               3,515,000      2,649,000
                                                            ------------   ------------
                                                               4,726,000      4,447,000
                                                            ------------   ------------

Net deferred tax liabilities:                               $  2,283,000   $  2,040,000
                                                            ============   ============
</Table>

The total provision for income taxes for the years ended December 31, 2002, 2001
and 2000 varies from the federal statutory tax rate as a result of the
following:


<Table>
<Caption>
                                                  December 31,    December 31,    December 31,
                                                      2002            2001            2000
                                                  ------------    ------------    ------------
<S>                                               <C>             <C>             <C>
Expected tax expense                              $    748,000    $  2,426,000    $  2,100,000
State income tax, net of federal benefit               132,000         196,000         469,000
Benefit from net operating losses and other
      carryforwards previously reserved against             --              --      (1,670,000)
Credit for producing fuel from a
      non-conventional source                         (134,000)       (299,000)        (88,000)
Percentage depletion                                  (303,000)       (602,000)             --
                                                  ------------    ------------    ------------
Tax expense                                       $    443,000    $  1,721,000    $    811,000
                                                  ============    ============    ============
</Table>






                                      F-16
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                    ---------

         In both 1998 and 1999 the Company had large federal net operating
         losses. The value of these loss carryforwards was fully reserved
         against due to the uncertainty as to whether the Company would have
         future net income against which these losses could be offset. The use
         of these previously reserved against carryforwards were the primary
         reason for the low federal rate in the 2000 tax year.

         The Company will utilize the $366,000 of net operating loss
         carryforwards for both regular and alternate minimum tax purposes in
         2002. All of the Company's net operating losses will be used or have
         expired as of December 31, 2002.

         In 2002 the Company generated approximately $380,000 in federal tax
         credits for producing fuel from a non-conventional source. These
         credits may be used to reduce the regular tax, but not the alternative
         minimum tax liability of the taxpayer. To the extent they cannot be
         utilized due to the alternative minimum tax, they become part of the
         Company's alternative minimum tax credit carryforward. Under current
         law the credit for producing fuel from a non conventional source will
         no longer be allowed after 2002.

         The Company has percentage depletion carryforwards of approximately
         $760,000 for regular tax purposes. The Company has approximately
         $1,040,,000 in alternative minimum tax credit carryforwards. Both the
         percentage depletion deductions and the alternative minimum tax credits
         may be carried forward indefinitely for tax purposes.


10.      SEGMENT INFORMATION AND MAJOR CUSTOMERS

         The Company operates in one industry - oil and gas exploration,
         development, operation and servicing. The Company's oil and gas
         activities are entirely in the continental United States.

         The Company sells its oil and gas production to a number of purchasers.
         Listed below are the percent of the Company's total oil and gas sales
         made to each of the customers whose purchases represented more than 10%
         of the Company's oil and gas sales in the year 2002.

         Texon Distributing L.P.               18.6%

         Unimark LLC                           20.1%

         Plains All American, Inc.             10.1%

         Although there are no long-term oil and gas purchasing agreements with
         these purchasers, the Company believes that they will continue to
         purchase its oil and gas products and, if not, could be replaced by
         other purchasers.


11.      RELATED PARTY TRANSACTIONS

         PEMC is a general partner in several oil and gas Partnerships in which
         certain directors have limited and general partnership interests. As
         the managing general partner in each of the Partnerships, PEMC receives
         approximately 5% to 15% of the net revenues of each Partnership as a
         carried interest in the Partnerships' properties.

         The Partnership agreements allow PEMC to receive management fees for
         various services to the Partnerships as well as a reimbursement for
         property acquisition and development costs incurred on behalf of the
         Partnerships and general and administrative overhead, which is reported
         in the statements of operations as administrative revenue.

         Due to related parties at December 31, 2002 and 2001 primarily
         represent receipts collected by the Company, as agent, from oil and gas
         sales net of expenses. The amount of such receipts due the




                                      F-17
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                    ---------

         affiliated Partnerships was $1,485,000 and $983,000 at December 31,
         2002 and 2001, respectively. Receivables from related parties consist
         of reimbursable general and administrative costs, lease operating
         expenses and reimbursements for property acquisitions, development, and
         related costs.

         Treasury stock purchases in 2002 and 2001 included shares acquired from
         related parties. Purchases from related parties include a total of
         49,267 shares purchased for a total consideration of $394,000 in 2002,
         and 228,800 shares purchased for a total consideration of $1,676,000 in
         2001.


12.      RESTRICTED CASH AND CASH EQUIVALENTS

         Restricted cash and cash equivalents includes $750,000 and $1,174,000
         at December 31, 2002 and 2001, respectively, of cash primarily
         pertaining to unclaimed royalty payments. There were corresponding
         accounts payable recorded at December 31, 2002 and 2001 for these
         liabilities.


13.      SALARY DEFERRAL PLAN

         The Company maintains a salary deferral plan (the "Plan") in accordance
         with Internal Revenue Code Section 401(k), as amended. The Plan
         provides for discretionary and matching contributions which
         approximated $261,000 and $255,000 in 2002 and 2001, respectively.


14.      ACCOUNTS PAYABLE

         A summary of accounts payable at December 31, 2002 and 2001 is as
         follows:

<Table>
<Caption>
                                           2002             2001
                                       ------------     ------------
<S>                                    <C>              <C>
Payables to unaffiliated interests     $  5,816,000     $  5,743,000
Other                                       284,000           45,000
                                       ------------     ------------
                                       $  6,100,000     $  5,788,000
                                       ============     ============
</Table>


15.      EARNINGS PER SHARE

         Basic earnings per share are computed by dividing earnings available to
         common stockholders by the weighted average number of common shares
         outstanding during the period. Diluted earnings per share reflect per
         share amounts that would have resulted if dilutive potential common
         stock had been converted to common stock. The following reconciles
         amounts reported in the financial statements:

<Table>
<Caption>
                                                     Year ended December 31, 2002
                                             ----------------------------------------------
                                                               Number of        Per share
                                              Net Income         Shares          Amount
                                             ------------     ------------     ------------
<S>                                          <C>                 <C>           <C>
Net income per common share                  $  1,757,000        3,738,753     $       0.47
Effect of dilutive securities:
   Options                                                         666,839
                                             ------------     ------------
Diluted net income per common share          $  1,757,000        4,405,592     $       0.40
                                             ============     ============
</Table>




                                      F-18
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

              NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                    ---------

<Table>
<Caption>
                                                          Year ended December 31, 2001
                                                  ----------------------------------------------
                                                                     Number of       Per share
                                                   Net Income          Shares          Amount
                                                  ------------     ------------     ------------
<S>                                               <C>              <C>              <C>
Net income per common share                       $  5,413,000        3,882,721     $       1.39
Effect of dilutive securities:
   Options                                                              709,384
                                                  ------------     ------------     ------------
Diluted net income per common share               $  5,413,000        4,592,105     $       1.18
                                                  ============     ============     ============
</Table>

<Table>
<Caption>
                                                            Year ended December 31, 2000
                                                  ----------------------------------------------
                                                                     Number of       Per share
                                                  Net Income          Shares           Amount
                                                  ------------     ------------     ------------
<S>                                               <C>              <C>              <C>
Net income per common share                       $  5,365,000        4,266,186     $       1.26
Effect of dilutive securities:
   Options                                                              686,057
                                                  ------------     ------------     ------------
Diluted net income per common share               $  5,365,000        4,952,243     $       1.08
                                                  ============     ============     ============
</Table>


16.      SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<Table>
<Caption>
                                    December 31,         Fourth            Third            Second             First
                                        2002            Quarter           Quarter           Quarter           Quarter
                                   -------------     -------------     -------------     -------------     -------------
<S>                                <C>               <C>               <C>               <C>               <C>
Revenue                            $  35,934,000     $   9,764,000         9,580,000         8,434,000         8,155,000
Operating income                       2,168,000           752,000          795 ,000           593,000            85,000
Net income                             1,757,000           585,000           642,000           475,000            70,000
Net income per common share        $        0.47     $        0.16     $        0.17     $        0.13     $        0.02
Diluted net income per
  common share                     $        0.40     $        0.13     $        0.15     $        0.11     $        0.02
</Table>

<Table>
<Caption>
                                    December 31,         Fourth             Third            Second             First
                                        2001            Quarter            Quarter           Quarter           Quarter
                                    ------------      ------------       ------------      ------------      ------------
<S>                                 <C>               <C>                <C>               <C>               <C>
Revenue                             $ 42,408,000      $  8,880,000       $ 10,103,000      $ 11,113,000      $ 12,312,000

Operating income                       6,968,000           (67,000)         1,002,000         2,277,000         3,756,000

Net income                             5,413,000           207,000            630,000         1,571,000         3,005,000

Net income per common share         $       1.39      $        .06       $        .16      $        .41      $        .76
Diluted net income per share        $       1.18      $        .06       $        .14      $        .34      $        .64
</Table>



                                      F-19
<PAGE>

                    PRIMEENERGY CORPORATION AND SUBSIDIARIES

                            SUPPLEMENTARY INFORMATION

                                      -----

                                   (UNAUDITED)






                                      F-20
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

         CAPITALIZED COSTS RELATING to OIL and GAS PRODUCING ACTIVITIES

                        December 31, 2002, 2001 and 2000

                                    ---------

                                   (Unaudited)



<Table>
<Caption>

                                                             2002             2001             2000
                                                          -----------     -----------      -----------
<S>                                                       <C>             <C>              <C>
Developed oil and gas properties                          $74,319,000     $63,418,000      $57,439,000

Undeveloped oil and gas properties                          1,134,000         286,000          159,000
                                                          -----------     -----------      -----------
                                                           75,453,000      63,704,000       57,598,000
Accumulated depreciation, depletion and
valuation allowance                                        46,912,000      42,924,000       37,686,000
                                                          -----------     -----------      -----------
Net capitalized costs                                     $28,541,000     $20,780,000      $19,912,000
                                                          ===========     ===========      ===========
</Table>


               COSTS INCURRED in OIL and GAS PROPERTY ACQUISITION,
                     EXPLORATION and DEVELOPMENT ACTIVITIES

                  Years ended December 31, 2001, 2000 and 1999

                                    ---------

                                   (Unaudited)


<Table>
<Caption>
                                             2002              2001              2000
                                         ------------      ------------      ------------
<S>                                      <C>               <C>               <C>
Acquisition of Properties:
Developed                                 $ 1,668,000      $    316,000      $  4,679,000
Undeveloped                                   848,000           164,000           106,000

Exploration Costs                             894,000           509,000         1,797,000

Development Costs                           8,385,000         5,661,000         3,351,000



</Table>



              See accompanying notes to supplementary information.



                                      F-21
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                    STANDARDIZED MEASURE of DISCOUNTED FUTURE
             NET CASH FLOWS RELATING to PROVED OIL and GAS RESERVES

                  Years ended December 31, 2002, 2001 and 2000

                                    ---------

                                   (Unaudited)




<Table>
<Caption>
                                                                  2002               2001               2000
                                                             -------------       ------------       ------------
<S>                                                           <C>                 <C>                <C>
Future cash inflows                                          $ 201,750,000       $102,916,000      $ 315,680,000


Future production and development costs                       (104,232,000)       (60,841,000)      (116,417,000)

Future income tax expenses                                     (24,230,000)        (7,930,000)       (59,914,000)
                                                             -------------        -----------       ------------

Future net cash flows                                           73,288,000         34,145,000        139,349,000

10% annual discount for estimated timing of cash flow          (30,512,000)       (13,179,000)       (59,339,000)
                                                              ------------       ------------       ------------
Standardized measure of discounted future net cash flows     $  42,776,000       $ 20,966,000       $ 80,010,000
                                                              ============       ============       ============
</Table>


              See accompanying notes to supplementary information.



                                      F-22
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                    STANDARDIZED MEASURE of DISCOUNTED FUTURE
                   NET CASH FLOWS and CHANGES THEREIN RELATING
                         to PROVED OIL and GAS RESERVES


                  Years ended December 31, 2002, 2001 and 2000

                                    ---------

                                   (Unaudited)


The following are the principal sources of change in the standardized measure of
discounted future net cash flows during 2002, 2001 and 2000:

<Table>
<Caption>
                                                                   2002                2001                2000
                                                              -------------       -------------       -------------
<S>                                                           <C>                 <C>                 <C>
Sales of oil and gas produced, net of production costs           (8,120,000)        (11,915,000)      $ (14,109,000)
Net changes in prices and production costs                       18,488,000         (92,118,000)         69,822,000
Extensions, discoveries and improved recovery                     8,462,000           3,335,000          13,705,000
Revisions of previous quantity estimates                          5,192,000             422,000           3,577,000
Reserves purchased, net of development costs                      5,824,000           1,082,000          11,698,000
Net change in development costs                                    (311,000)           (594,000)            (99,000)
Accretion of discount                                             2,097,000           8,001,000           2,386,000
Net change in income taxes                                       (9,809,000)         33,127,000         (30,779,000)
Other                                                               (13,000)           (384,000)            (51,000)
                                                               ------------       -------------       -------------
Net change                                                       21,810,000         (59,044,000)         56,150,000

Standardized measure of discounted future net cash flow:

Beginning of year                                                20,966,000          80,010,000          23,860,000
                                                               ------------       -------------       -------------
End of year                                                    $ 42,776,000          20,966,000          80,010,000
                                                               ============       =============       =============
</Table>


               See accompanying notes to supplementary information



                                      F-23
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                          RESERVE QUANTITY INFORMATION

                  Years ended December 31, 2002, 2001 and 2000

                                    ---------

                                   (Unaudited)


<Table>
<Caption>
                                 2002            2002             2001               2001                2000               2000
                             ------------    ------------     ------------       ------------       ------------       ------------
                                 Gas              Oil             Gas                 Oil               Gas                 Oil
                                (Mcf)           (bbls.)          (Mcf)              (bbls.)            (Mcf)              (bbls.)
                             -----------     -----------      ------------       ------------       ------------       ------------
<S>                                                           <C>                <C>                <C>                <C>
Proved developed and
  undeveloped reserves:
Beginning of year            24,719,000        1,996,000        27,029,000          2,362,000         22,202,000          2,110,000
Extensions, discoveries
   and improved recovery      3,011,000          273,000         2,764,000            136,000          1,961,000             13,000
Revisions of previous
   estimates                  2,798,000          198,000        (2,458,000)          (307,000)         3,763,000            162,000
Purchases                     2,929,000          173,000         1,148,000            111,000          3,034,000            375,000
Production                   (3,540,000)        (321,000)       (3,764,000)          (306,000)        (3,931,000)          (298,000)
                             ----------      -----------      ------------       ------------       ------------       ------------
End of year                  29,917,000        2,319,000        24,719,000          1,996,000         27,029,000          2,362,000
                             ==========      ===========      ============       ============       ============       ============
Proved developed reserves    29,917,000        2,319,000        24,226,000          1,996,000         27,029,000          2,362,000
                             ==========      ===========      ============       ============       ============       ============
</Table>


               See accompanying notes to supplementary information



                                      F-24
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

           RESULTS of OPERATIONS from OIL and GAS PRODUCING ACTIVITIES

                  Years ended December 31, 2002, 2001 and 2000

                                    ---------

                                   (Unaudited)


<Table>
<Caption>
                                                              2002            2001             2000
                                                          -----------      -----------      -----------
<S>                                                       <C>              <C>              <C>
Revenue:
                Oil and gas sales                         $18,330,000      $22,998,000      $23,223,000
                                                          -----------      -----------      -----------

Costs and expenses:
                Lease operating expense                    10,210,000       11,083,000        9,114,000
                Exploration costs                             894,000          509,000        1,717,000
                Depreciation and depletion                  3,988,000        4,544,000        5,060,000
                Write down of oil and gas properties              ---          753,000          295,000
                Income tax expense                            443,000        1,473,000          811,000
                                                          -----------      -----------      -----------
                                                           15,535,000       18,362,000       16,997,000
                                                          -----------      -----------      -----------
Results of operations from producing activities           $ 2,735,000      $ 4,636,000      $ 6,226,000
(excluding corporate overhead and interest costs)         ===========      ===========      ===========
</Table>

               See accompanying notes to supplementary information



                                      F-25
<PAGE>
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                       NOTES to SUPPLEMENTARY INFORMATION

                                    ---------

                                   (Unaudited)



1.       PRESENTATION OF RESERVE DISCLOSURE INFORMATION

         Reserve disclosure information is presented in accordance with the
         provisions of Statement of Financial Accounting Standards No. 69 ("SFAS
         69"), "Disclosures About Oil and Gas Producing Activities".

2.       DETERMINATION OF PROVED RESERVES

         The estimates of the Company's proved reserves were determined by an
         independent petroleum engineer in accordance with the provisions of
         SFAS 69. The estimates of proved reserves are inherently imprecise and
         are continually subject to revision based on production history,
         results of additional exploration and development and other factors.
         Estimated future net revenues were computed by reserves, less estimated
         future development and production costs based on current costs.

3.       RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES

         The results of operations from oil and gas producing activities were
         prepared in accordance with the provisions of SFAS 69. General and
         administrative expenses, interest costs and other unrelated costs are
         not deducted in computing results of operations from oil and gas
         activities.

4.       STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
         CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES

         The standardized measure of discounted future net flows relating oil
         and gas reserves and the changes of standardized measure of discounted
         future net cash flows relating to proved oil and gas reserves were
         prepared in accordance with the provisions of SFAS 69.

         Future cash inflows are computed as described in Note 2 by applying
         current prices to year-end quantities of proved reserves.

         Future production and development costs are computed estimating the
         expenditures to be incurred in developing and producing the oil and gas
         reserves at year-end, based on year-end costs and assuming continuation
         of existing economic conditions.

         Future income tax expenses are calculated by applying the year-end U.S.
         tax rate to future pre-tax cash inflows relating to proved oil and gas
         reserves, less the tax basis of properties involved. Future income tax
         expenses give effect to permanent differences and tax credits and
         allowances relating to the proved oil and gas reserves.

         Future net cash flows are discounted at a rate of 10% annually
         (pursuant to SFAS 69) to derive the standardized measure of discounted
         future net cash flows. This calculation does not necessarily represent
         an estimate of fair market value or the present value of such cash
         flows since future prices and costs can vary substantially from
         year-end and the use of a 10% discount figure is arbitrary.





                                      F-26

<PAGE>
                                 EXHIBIT INDEX

<Table>
<Caption>

   EXHIBIT
   NUMBER                               DESCRIPTION
   -------                              -----------

   <S>      <C>

   3.1      Restated Certificate of Incorporation of PrimeEnergy Corporation.
            (Incorporated herein by reference to Exhibit 3.1 of PrimeEnergy
            Corporation Form 10-KSB for the year ended December 31, 1999)

   3.2      Bylaws of PrimeEnergy Corporation. (Incorporated herein by reference
            to Exhibit 3.2 of PrimeEnergy Corporation Form 10-KSB for the year
            ended December 31, 1999)

   10.3     Massachusetts Mutual Flexinvest 401(k) Plan as amended and restated.
            (Incorporated herein by reference to Exhibit 10.3 of PrimeEnergy
            Corporation Form 10-KSB for the year ended December 31, 1994) (1)

   10.17    Amended Marketing Agreement between PrimeEnergy Management
            Corporation and Charles E. Drimal, Jr. (Incorporated herein by
            reference to Exhibit 10.17 of PrimeEnergy Corporation Form 10-KSB
            for the year ended December 31, 1994)(1)

   10.18    Composite copy of Non-Statutory Option Agreements (Incorporated
            by reference to Exhibit 10.18 of PrimeEnergy Corporation for
            10-KSB for the year ended December 31, 1997)(1)

   10.22    Credit Agreement dated as of December 19, 2002, between
            PrimeEnergy Corporation, PrimeEnergy Management Corporation,
            Eastern Oil Well Service Company, Southwest Oilfield
            Construction Company, EOWS Midland Company, and Guaranty Bank,
            FSB (filed herewith)

   10.23    Mortgage, Deed of Trust, Security Agreement, Financing Statement
            and Assignment of Production from PrimeEnergy Corporation and
            PrimeEnergy Management Corporation for the benefit of Guaranty
            Bank, FSB (filed herewith)

   10.24    Act of Mortgage and Security Agreement by PrimeEnergy Corporation
            and PrimeEnergy Management Corporation to Guaranty Bank, FSB
            (filed herewith)

   21       Subsidiaries. (filed herewith)

   23       Consent of Ryder Scott & Company L.P. (filed herewith)

   99.1     Certification of Chief Executive Officer pursuant to 18 U.S.C.
            Section 1350, as adopted pursuant to section 906 of the
            Sarbanes-Oxley Act of 2002 (filed herewith).

   99.2     Certification of Chief Financial Officer pursuant to 18 U.S.C.
            Section 1350, as adopted pursuant to section 906 of the
            Sarbanes-Oxley Act of 2002 (filed herewith).


    (b)     Reports on Form 8-K:

            No reports on Form 8-K have been filed during the last quarter of
            the year covered by this Report.
</Table>

- -----------

(1)    Management contract or compensatory plan or arrangement required to be
       filed as an Exhibit to this Form 10-K.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>3
<FILENAME>d03089exv10w22.txt
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
<PAGE>
                                                                   Exhibit 10.22

                                CREDIT AGREEMENT

                                     BETWEEN

                             PRIMEENERGY CORPORATION
                       PRIMEENERGY MANAGEMENT CORPORATION
                             PRIME OPERATING COMPANY
                        EASTERN OIL WELL SERVICE COMPANY
                     SOUTHWEST OILFIELD CONSTRUCTION COMPANY
                              EOWS MIDLAND COMPANY

                                       AND

                               GUARANTY BANK, FSB
                               AS AGENT AND LENDER

                                DECEMBER 19, 2002

             REDUCING REVOLVING LINE OF CREDIT OF UP TO $50,000,000
                             TERM LOAN OF $4,000,000

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              PAGE
<S>                                                                           <C>
ARTICLE I      DEFINITIONS AND INTERPRETATION                                   1
         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                                           16
         1.6   Number and Gender                                               16
         1.7   Incorporation of Exhibits                                       16

ARTICLE II     TERMS OF FACILITY                                               16
         2.1A. Revolving Line of Credit                                        16
         2.2   Letter of Credit Facility                                       17
         2.3   Use of Loan Proceeds and Letters of Credit                      19
         2.4   Interest                                                        19
         2.5   Repayment of Loans and Interest                                 20
         2.6   Outstanding Amounts                                             20
         2.7   Time, Place, and Method of Payments                             20
         2.8   Pro Rata Treatment; Adjustments                                 21
         2.9   Borrowing Base Determinations                                   21
         2.10  Mandatory Prepayments                                           22
         2.11  Voluntary Prepayments and Conversions of Loans                  23
         2.12  Commitment Fee                                                  23
         2.13  Facility Fee                                                    23
         2.14  Letter of Credit Fee                                            23
         2.15  Loans to Satisfy Obligations of Borrower                        23
         2.16  Security Interest in Accounts; Right of Offset                  24
         2.17  General Provisions Relating to Interest                         24
         2.18  Yield Protection                                                25
         2.19  Limitation on Types of Loans                                    27
         2.20  Illegality                                                      28
         2.21  Regulatory Change                                               28
         2.22  Limitations on Interest Periods                                 28
         2.23  Letters in Lieu of Transfer Orders                              29
         2.24  Power of Attorney                                               29

ARTICLE III    CONDITIONS                                                      29
         3.1   Receipt of Loan Documents and Other Items                       29
         3.2   Each Loan and Letter of Credit                                  32

ARTICLE IV     REPRESENTATIONS AND WARRANTIES                                  34
         4.1   Due Authorization                                               34
</TABLE>


                                     - i -
<PAGE>

<TABLE>
<S>                                                                           <C>
         4.2   Corporate Existence                                             34
         4.3   Valid and Binding Obligations                                   34
         4.4   Security Instruments                                            34
         4.5   Title to Assets                                                 35
         4.6   No Material Misstatements                                       35
         4.7   Liabilities, Litigation, and Restrictions                       35
         4.8   Authorizations; Consents                                        35
         4.9   Compliance with Laws                                            35
         4.10  ERISA                                                           35
         4.11  Environmental Laws                                              36
         4.12  Compliance with Federal Reserve Regulations                     36
         4.13  Investment Company Act Compliance                               36
         4.14  Public Utility Holding Company Act Compliance                   36
         4.15  Proper Filing of Tax Returns; Payment of Taxes Due              37
         4.16  Refunds                                                         37
         4.17  Gas Contracts                                                   37
         4.18  Intellectual Property                                           37
         4.19  Casualties or Taking of Property                                37
         4.20  Locations of Borrower                                           37
         4.21  Subsidiaries                                                    38

ARTICLE V      AFFIRMATIVE COVENANTS                                           38
         5.1   Maintenance and Access to Records                               38
         5.2   Quarterly Financial Statements; Compliance Certificates         38
         5.3   Annual Financial Statements                                     38
         5.4   Oil and Gas Reserve Reports                                     38
         5.5   Title Opinions; Title Defects                                   39
         5.6   Notices of Certain Events                                       39
         5.7   Letters in Lieu of Transfer Orders; Division Orders             40
         5.8   Additional Information                                          40
         5.9   Compliance with Laws                                            41
         5.10  Payment of Assessments and Charges                              41
         5.11  Maintenance of Corporate Existence and Good Standing            41
         5.12  Payment of Notes; Performance of Obligations                    41
         5.13  Further Assurances                                              41
         5.14  Initial Fees and Expenses of Counsel to Lender                  41
         5.15  Subsequent Fees and Expenses of Lender                          42
         5.16  Operation of Oil and Gas Properties                             42
         5.17  Maintenance and Inspection of Properties                        42
         5.18  Maintenance of Insurance                                        42
         5.19  INDEMNIFICATION                                                 43

ARTICLE VI     NEGATIVE COVENANTS                                              44
         6.1   Indebtedness                                                    44
         6.2   Contingent Obligations                                          44
</TABLE>


                                      -ii -
<PAGE>

<TABLE>
<S>                                                                           <C>
         6.3   Liens                                                           45
         6.4   Sales of Assets                                                 45
         6.5   Leasebacks                                                      45
         6.6   Loans or Advances                                               45
         6.7   Investments                                                     45
         6.8   Dividends and Distributions                                     46
         6.9   Issuance of Stock; Changes in Corporate Structure               46
         6.10  Transactions with Affiliates                                    46
         6.11  Lines of Business                                               46
         6.12  ERISA Compliance                                                46
         6.13  Interest Coverage Ratio                                         46
         6.14  Current Ratio                                                   46
         6.15  Tangible Net Worth                                              46
         6.16  Bank Debt Coverage Ratio                                        46

ARTICLE VII    EVENTS OF DEFAULT                                               47
         7.1   Enumeration of Events of Default                                47
         7.2   Remedies                                                        49

ARTICLE VIII   THE AGENT                                                       49
         8.1   Appointment                                                     49
         8.2   Waivers, Amendments                                             50
         8.3   Delegation of Duties                                            50
         8.4   Exculpatory Provisions                                          50
         8.5   Reliance by Agent                                               51
         8.6   Notice of Default                                               51
         8.7   Non-Reliance on Agent and Other Lenders                         51
         8.8   Indemnification                                                 52
         8.9   Restitution                                                     52
         8.10  Agent in Its Individual Capacity                                53
         8.11  Successor Agent                                                 53
         8.12  Applicable Parties                                              53

ARTICLE IX     MISCELLANEOUS                                                   54
         9.1   Assignments; Participations                                     54
         9.2   Survival of Representations, Warranties, and Covenants          55
         9.3   Notices and Other Communications                                55
         9.4   Parties in Interest                                             56
         9.5   Rights of Third Parties                                         56
         9.6   Renewals; Extensions                                            56
         9.7   No Waiver; Rights Cumulative                                    57
         9.8   Survival Upon Unenforceability                                  57
         9.9   Amendments; Waivers                                             57
         9.10  Controlling Agreement                                           57
         9.11  Disposition of Collateral                                       57
</TABLE>


                                     - iii -
<PAGE>

<TABLE>
<S>                                                                           <C>
         9.12  GOVERNING LAW                                                   57
         9.13  JURISDICTION AND VENUE                                          57
         9.14  WAIVER OF RIGHTS TO JURY TRIAL                                  58
         9.15  ENTIRE AGREEMENT                                                58
         9.16  Counterparts                                                    58
</TABLE>

<TABLE>
<S>               <C>
LIST OF EXHIBITS

Exhibit I      -  Form of Note
Exhibit II     -  Form of Borrowing Request
Exhibit III    -  Form of Compliance Certificate
Exhibit IV     -  Form of Opinion of Counsel
Exhibit V      -  Facility Amounts
Exhibit VI     -  Disclosures
Exhibit VII    -  Form of Assignment Agreement
</TABLE>


                                     - iv -
<PAGE>

                                CREDIT AGREEMENT

      THIS CREDIT AGREEMENT is made and entered into this 19th day of December,
2002, by and between PRIMEENERGY CORPORATION, a Delaware corporation ("PEC"),
PRIMEENERGY MANAGEMENT CORPORATION, a New York corporation, PRIME OPERATING
COMPANY, a Texas corporation, EASTERN OIL WELL SERVICE COMPANY, a West Virginia
corporation, SOUTHWEST OILFIELD CONSTRUCTION COMPANY, an Oklahoma corporation,
and EOWS MIDLAND COMPANY, a Texas corporation (collectively, the "Borrower"),
with each other lender that is a signatory hereto or becomes a signatory hereto
as provided in Section 9.1, (individually, together with its successors and
assigns, a "Lender" and collectively together, with their respective successors
and assigns, the "Lenders") and GUARANTY BANK, FSB, a federal savings bank, as
agent for the Lenders (in such capacity, together with its successors in such
capacity pursuant to the terms hereof, the "Agent").

                              W I T N E S S E T H:

      In consideration of the mutual covenants and agreements herein contained,
the Borrower and the Lender hereby agree as follows amending and restating in
its entirety, the Credit Agreement dated April 26, 1995 by and between
PrimeEnergy Corporation and PrimeEnergy Management Corporation and Bank One,
N.A. (the "Existing Lender"), as heretofore amended, restated, or supplemented
(the "Existing Credit Agreement"):

                                   ARTICLE I

                         DEFINITIONS AND INTERPRETATION

      1.1 Terms Defined Above. As used in this Credit Agreement, the terms
"Borrower" 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 Lenders determine are
      attributable to its obligation to make or its making or maintaining any
      LIBO Rate Loan, or any reduction in any amount receivable by the Lenders
      in respect of any such obligation or any LIBO Rate Loan, resulting from
      any Regulatory Change which (a) changes the basis of taxation of any
      amounts payable to the Lenders under this Agreement or the Note in respect
      of any LIBO Rate Loan (other than taxes imposed on the overall net income
      of the Lenders), (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 LIBO Rate Loans and Dollar deposits
      in the London interbank market in connection with LIBO Rate Loans), or any
      commitments of the Lenders hereunder, (c) increases the Assessment Rate,
      or (d) imposes any other condition affecting this Agreement or any of such
      extensions of credit, liabilities, or commitments.

<PAGE>

            "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 Lenders 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 the LIBO
      Rate plus 2.00% on the revolving line of credit and the LIBO Rate plus
      2.50% on the Term Loan.

            "Assignment" shall mean the Assignment of Notes, Liens, Security
      Interests, and Other Rights, in form and substance satisfactory to the
      Lender, executed by the Existing Lender, assigning to the Lender the
      Existing Note, the indebtedness evidenced thereby, the Liens securing the
      Existing Note, and the rights of the Existing Lender under the Existing
      Loan Documents, and financing statement changes constituent thereto.

            "Assessment Rate" shall mean, for any Interest Period, the average
      rate (rounded upwards if necessary to the nearest 1/100 of 1%) charged by
      the Federal Deposit Insurance Corporation (or any successor thereto) to
      the Lender for deposit insurance for Dollar time deposits with the Lender
      at the Principal Office during such Interest Period, as determined by the
      Lender.

            "Assignment Agreement" shall mean an Assignment Agreement,
      substantially in the form of Exhibit VII, with appropriate insertions.


                                     - 2 -
<PAGE>

            "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 sum of the Loan Balance at such time plus the L/C Exposure
      at such time.

            "Bank Debt" shall mean the amount owed under this Agreement by the
      Borrower to the Lenders.

            "Base Rate" shall mean, at any time, the rate of interest per annum
      then most recently established by the Lender as its base rate, which rate
      may not be the lowest rate of interest charged by the Lender to its
      borrowers. Each change in any interest rate provided for herein based upon
      the Base Rate resulting from a change in the Base Rate shall take effect
      without notice to the Borrower at the time of such change in the Base
      Rate.

            "Benefitted Lender" shall have the meaning assigned to such term in
      Section 2.8(c).

            "Borrowing Base" shall mean, at any time, the amount determined by
      the Lender in accordance with Section 2.9 and then in effect.

            "Borrowing Request" shall mean each written request, in
      substantially the form attached hereto as Exhibit II, by the Borrower to
      the Agent for a borrowing, conversion, or prepayment pursuant to Sections
      2.1 or 2.11, each of which shall:

                  (a) be signed by a Responsible Officer of the Borrower;

                  (b) when requesting a borrowing, be accompanied by a
            Compliance Certificate;

                  (c) 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);

                  (d) when requesting a Floating Rate Loan, be delivered to the
            Agent no later than 5:00 p.m., Central Standard or Daylight Savings
            Time, as the case may be, on the Business Day preceding the day of
            the requested borrowing, conversion, or prepayment;

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


                                     - 3 -
<PAGE>

            "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.

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

            "Code" shall mean the United States Internal Revenue Code of 1986,
      as amended from time to time.

            "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.

            "Commitment" shall mean the obligation of the Lenders, subject to
      applicable provisions of this Agreement, to make Loans to or for the
      benefit of the Borrower pursuant to Section 2.1 and to issue Letters of
      Credit pursuant to Section 2.2

            "Commitment Amount" shall mean, subject to the applicable provisions
      of this Agreement, at any time, the lesser of (a) the sum of the Facility
      Amounts of the Lenders, or (b) the Borrowing Base in effect at such time.

            "Commitment Fee" shall mean each fee payable to the Lender by the
      Borrower pursuant to Section 2.12.

            "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 December 19, 2004.

            "Commodity Hedge Agreement" shall mean any crude oil, natural gas,
      or other hydrocarbon floor, collar, cap, price protection, or swap
      agreement, in form and substance with a Person acceptable to the Lender.

            "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


                                     - 4 -
<PAGE>

      Borrower and furnished to the Agent from time to time in accordance with
      Sections 5.2 and 5.3.

            "Contingent Obligation" shall mean, as to any Person, without
      duplication, 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 therefore, (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.

            "Current Assets" shall mean all assets which would, in accordance
      with GAAP, be included as current assets on a balance sheet of the
      Borrower as of the date of calculation, plus availability under this
      facility.

            "Current Liabilities" shall mean all liabilities which would, in
      accordance with GAAP, be included as current liabilities on a balance
      sheet of the Borrower as of the date of calculation, but excluding the
      current maturities in respect of the Obligations, both principal and
      interest.

            "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
      Prime Rate plus five percent (5%), but in no event exceeding the Highest
      Lawful Rate.

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

            "EBITDA" shall mean, for any period, net income for such period plus
      interest expense, federal and state income taxes, depreciation,
      amortization, and other non-cash expenses, less non-cash gains for such
      period deducted in the determination of net income for such period.


                                     - 5 -
<PAGE>

            "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 or any other
      Person 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, (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 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
      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 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.

            "Existing Loan Documents" shall mean the Loan Documents, as such
      term is defined in the Existing Credit Agreement, in existence on the
      Closing Date immediately prior to the Assignment.

            "Existing Note" shall mean the Note, as such term is defined in the
      Existing Credit Agreement, in existence on the Closing Date immediately
      prior to the Assignment.

            "Existing Security Instruments" shall mean the Security Documents,
      as such term is defined in the Existing Credit Agreement, in existence on
      the Closing Date immediately prior to the Assignment.

            "Facility Amount" shall mean, for each Lender, the amount set forth
      opposite the name of such Lender on Exhibit V under the caption "Facility


                                     - 6 -
<PAGE>

      Amounts," as modified from time to time to reflect assignments permitted
      by Section 9.1 or otherwise pursuant to the terms hereof and to give
      effect to any written request of the Borrower (any such request being
      irrevocable, absent written agreement of the Agent and the Required
      Lenders, which written agreement may be expressly conditioned on the
      payment of a fee (other than with respect to a reduction) by the Borrower
      to the Agent, for the account of the Lenders) to a reduction in the sum of
      the then existing Facility Amounts of the Lenders.

            "Facility Fee" shall mean the fee payable to the Lender by the
      Borrower pursuant to Section 2.13.

            "Final Maturity" shall mean December 19, 2004.

            "Financial Statements" shall mean statements of the financial
      condition of the Borrower 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 and, when required by applicable provisions of
      this Agreement to be audited, accompanied by the unqualified certification
      of an independent certified public accountants or other independent
      certified public accountants acceptable to the Agent 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.

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

            "Floating Rate" shall mean an interest rate per annum equal to the
      Base Rate from time to time in effect plus one-half of one percent (1/2 of
      1%), on the revolver and Base Rate plus one percent (1%) on the Term Loan,
      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 has requested, in the initial Borrowing Request
      for such Loan or a subsequent Borrowing Request for such portion of the
      Loan Balance, bearing 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.


                                     - 7 -
<PAGE>

            "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,
      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). (Provided, however, Indebtedness shall
      not include preferred stock).

            "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.

            "Intellectual Property" shall mean patents, patent applications,
      trademarks, tradenames, copyrights, technology, know-how, and processes.


                                     - 8 -
<PAGE>

            "Interest Expense" shall mean, for any period, the total interest
      expense (including, without limitation, interest expense attributable to
      capitalized leases) of the Borrower for such period, determined in
      accordance with GAAP.

            "Interest Period" shall mean, subject to the limitations set forth
      in Section 2.22, 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, or three months
      thereafter, as the Borrower 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.

            "L/C Exposure" shall mean, at any time, the aggregate maximum amount
      available to be drawn under outstanding Letters of Credit at such time.

            "Letter of Credit" shall mean any standby letter of credit issued by
      the Lender for the account of the Borrower pursuant to Section 2.2.

            "Letter of Credit Application" shall mean the standard letter of
      credit application employed by the Lender from time to time in connection
      with letters of credit, provided that in the event of a conflict between
      the terms of each Letter of Credit Application and this Agreement, this
      Agreement shall control.

            "Letter of Credit Fee" shall mean each fee payable to the Lender by
      the Borrower pursuant to Section 2.14 upon or in connection with the
      issuance of a Letter of Credit.

            "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 1/16 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) as of approximately 10:00 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 1/16 of 1%) quoted by the Lender at approximately 11:00 a.m.,
      London time (or as soon


                                     - 9 -
<PAGE>

      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.

            "LIBO Rate Loan" shall mean any Loan and any portion of the Loan
      Balance which the Borrower has requested, in the initial Borrowing Request
      for such Loan or a subsequent Borrowing Request for such portion of the
      Loan Balance, bearing 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 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, with respect to any Lender, any
      period while any amount remains owing on the Note payable to such Lender
      and interest on such amount, calculated at the applicable interest rate,
      plus any fees or other sums payable to such Lender 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 any Lender to or for the benefit
      of the Borrower pursuant to this Agreement and any payment made by the
      Lender under a Letter of Credit.

            "Loan Balance" shall mean, at any time, the outstanding principal
      balance of the Notes at such time plus the L/C Exposure at such time.

            "Loan Documents" shall mean this Agreement, the Note, the Letter of
      Credit Applications, the Letters of Credit, the Security Instruments, and
      all other documents and instruments now or hereafter delivered pursuant to
      the terms of or


                                     - 10 -
<PAGE>

      in connection with this Agreement, the Note, the Letter of Credit
      Applications, the Letters of Credit, 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 adverse effect on the
      business, operations, properties, condition (financial or otherwise), or
      prospects of the Borrower, which substantially increases the risk that any
      of the Obligations will not be repaid as and when due, or (b) any
      substantially adverse effect upon the Collateral.

            "Mortgaged Properties" shall mean all Oil and Gas Properties of the
      Borrower subject to a perfected first-priority Lien in favor of the Agent
      for the benefit of the Lenders, subject only to Permitted Liens, as
      security for the Obligations.

            "Multiemployer Plan" shall mean a Plan which is a multiemployer plan
      as defined in Section 4001(a)(3) of ERISA.

            "Net Income" shall mean, for any period, the net income (or loss) of
      the Borrower for such period, determined in accordance with GAAP.

            "Notes" shall mean, collectively, each of the promissory notes of
      the Borrower payable to a Lender in the amount of the Facility Amount of
      such Lender in the form attached hereto as Exhibit I with all blanks in
      such form completed appropriately, 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 Reimbursement Obligations, (c) the undrawn,
      unexpired amount of all outstanding Letters of Credit, (d) the obligation
      of the Borrower for the payment of Commitment Fees, Facility Fees, Letter
      of Credit Fees, and Engineering Fees, (e) all obligations and liabilities
      whether now existing or hereafter arising of the Borrower to the Lender in
      connection with any Commodity Hedge Agreement or Rate Management
      Transaction, and (f) all other obligations and liabilities of the Borrower
      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.

            "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


                                     - 11 -
<PAGE>

      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.

            "Percentage Share" shall mean, as to each Lender, the percentage
      such Lender's Facility Amount constitutes of the sum of the Facility
      Amounts of all Lenders.

            "PBGC" shall mean the Pension Benefit Guaranty Corporation
      established pursuant to Subtitle A of Title IV of ERISA or any entity
      succeeding to any or all of its functions under ERISA.

            "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 therefore,
      (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 therefore, (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 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 therefore, (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
      Indebtedness and provided that such Liens do not secure obligations to
      deliver hydrocarbons at some future date without receiving full payment
      therefore 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, (h) Liens in favor of the Agent and
      other Liens expressly permitted under the Security Instruments, and (i)
      the lien shown on Exhibit VI as a Permitted Lien.


                                     - 12 -
<PAGE>

            "Person" shall mean an individual, corporation, partnership, trust,
      unincorporated organization, limited liability company, 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 333 Clay Street, Suite 4400, Houston,
      Texas 77002.

            "Prohibited Transaction" shall have the meaning assigned to such
      term in Section 4975 of the Code.

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

            "Rate Management Transaction" shall mean any transaction (including
      an agreement with respect thereto) now existing or hereafter entered into
      between Borrower and Lenders which is a rate swap, basis swap, forward
      rate transaction, commodity swap, commodity option, equity or equity index
      swap, equity or equity index option, bond option, interest rate option,
      foreign exchange transaction, cap transaction, floor transaction, collar
      transaction, forward transaction, currency swap transaction,
      cross-currency rate swap transaction, currency option or any other similar
      transaction (including any option with respect to any of these
      transactions) or any combination thereof, whether linked to on or more
      interest rates, foreign currencies, commodity prices, equity prices or
      other financial measures.

            "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 (whether or not having the force of law) 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.


                                     - 13 -
<PAGE>

            "Reimbursement Obligation" shall mean the obligation of the Borrower
      to provide to the Lenders or reimburse the Lenders for any amounts
      payable, paid, or incurred by the Lenders with respect to Letters of
      Credit.

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

            "Reorganization" shall mean, with respect to any Multiemployer Plan,
      that such Plan is in reorganization within the meaning of such term in
      Section 4241 of ERISA.

            "Reportable Event" shall mean any of the events set forth in Section
      4043(b) of ERISA, other than those events as to which the thirty-day
      notice period is waived under subsections .13, .14, .16, .18, .19 or .20
      of PBGC Reg. Section 2615.

            "Required Lenders" shall mean, Lenders (including the Agent) holding
      more than 66 2/3% of the then Loan Balance, or, if there is no Loan
      Balance, Lenders (including the Agent) having more than 66 2/3% of the
      aggregate amount of the Commitments.

            "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 Agent and
      each Lender pursuant to Section 5.4, provided that Borrower shall not be
      required to deliver more than three reports.

            "Responsible Officer" shall mean, as to any Person, its President,
      Chief Executive 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(g), and all other documents and instruments at any time executed as
      security for all or any portion


                                     - 14 -
<PAGE>

      of the Obligations, as such instruments may be amended, restated, or
      supplemented from time to time.

            "Single Employer Plan" shall mean any Plan which is covered by Title
      IV of ERISA, but which is not a Multiemployer Plan.

            "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 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 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 in accordance with GAAP.

            "Term Loan" shall mean the Term Loan described in Section 2.1.B.

            "Term Notes" shall mean, collectively, each of the promissory notes
      of the Borrower payable to a Lender in the amount of Term Loan Facility
      Amount of such Lender in the form attached hereto as Exhibit I(a) with all
      blanks in such form completed appropriately, together with all renewals,
      extensions for any period, increases, and rearrangements thereof.

            "Transferee" shall mean any Person to which any Lender has sold,
      assigned, transferred, or granted a participation in any of the
      Obligations, as authorized pursuant to Section 9.1, 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


                                     - 15 -
<PAGE>

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.

      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 A. Revolving Line of Credit. Upon the terms and conditions (including,
without limitation, the right of the Lenders 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, each Lender severally 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 in an aggregate principal amount not to exceed at any time outstanding
the lessor of the Facility Amount of such Lender or the Percentage Share of such
Lender of the Borrowing Base then in effect. Loans shall be made from time to
time on any Business Day designated by the Borrower following receipt by the
Agent of a Borrowing Request.

            (b) Subject to the terms of this Agreement, during the Commitment
Period, the Borrower 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 2.10, 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 LIBO 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


                                     - 16 -
<PAGE>

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.

            (c) The Loans shall be made and maintained at the Applicable Lending
Office or the Principal Office and shall be evidenced by the Notes.

            (d) Not later than 2:00 p.m., Central Standard or Daylight Savings
Time, as the case may be, on the date specified for each borrowing, each Lender
shall make available an amount equal to its Percentage Share of the borrowing to
be made on such date to the Agent, at an account designated by the Agent, in
immediately available funds, for the account of the Borrower. The amount so
received by the Agent shall, subject to the terms and conditions hereof, be made
available to the Borrower in immediately available funds at the Principal Office
by the end of that Business Day. All Loans by each Lender shall be maintained at
the Applicable Lending Office of such Lender and shall be evidenced by the Note
of such Lender.

            (e) The failure of any Lender to make any Loan required to be made
by it hereunder shall not relieve any other Lender of its obligation to make any
Loan required to be made by it, and no Lender shall be responsible for the
failure of any other Lender to make any Loan.

            (f) The face amounts of the Notes have been established as an
administrative convenience and do not commit any Lender to advance funds
hereunder in excess of the then current Borrowing Base.

      A. Term Loan.

            (a) The Term Loan shall be in the total amount of $4,000,000, with
interest payable monthly by the Borrower to the Lenders beginning on January 1,
2003, and continuing on the first day of each calendar month thereafter until
such Term Loan is fully paid.

            (b) The Borrower shall pay to the Lenders principal payments on such
Term Loan in the amount of $66,667 per month beginning January 1, 2003, and
continuing on the first day of each calendar month thereafter until December 19,
2004, when such Term Loan shall be paid in full.

            (c) The terms of Section 2.1.A.(c), (d), (e) and (f) are applicable
to the Term Loan.

      2.2 Letter of Credit Facility. (a) Upon the terms and conditions and
relying on the representations and warranties contained in this Agreement, the
Agent, as issuing bank for the Lenders, agrees from the date of this Agreement
until the date which is thirty days prior to the Commitment Termination Date, to
issue on behalf of the Lenders in their respective Percentage Shares Letters of
Credit for the account of the Borrower and/or the benefit of any Subsidiary of
the Borrower and to renew and extend such Letters of Credit. Letters of Credit
shall be issued, renewed, or extended from time to time on any Business Day
designated by the Borrower following the receipt in accordance with the terms
hereof by the Agent of the written (or oral,


                                     - 17 -
<PAGE>

confirmed promptly in writing) request by a Responsible Officer of the Borrower
and a Letter of Credit Application. Letters of Credit shall be issued in such
amounts as the Borrower may request; provided, however, that (i) no Letter of
Credit shall have an expiration date which is more than 365 days after the
issuance thereof or subsequent to Final Maturity, (ii) each automatically
renewable Letter of Credit shall provide that it may be terminated by the Agent
at its then current expiry date by not less than 30 days' written notice by the
Agent to the beneficiary of such Letter of Credit, and (iii) the Agent shall not
be obligated to issue any Letter of Credit if (A) the face amount thereof would
exceed the Available Commitment, or (B) after giving effect to the issuance
thereof, (B) the L/C Exposure, when added to the Loan Balance then outstanding,
would exceed the Commitment Amount, or (C) the L/C Exposure would exceed
$3,000,000.

            (b) Prior to any payment in respect of any Letter of Credit, each
Lender shall be deemed to be a participant through the Agent with respect to the
relevant Letter of Credit in the obligation of the Agent, as the issuer of such
Letter of Credit, in an amount equal to the Percentage Share of such Lender of
the maximum amount which is or at any time may become available to be drawn
thereunder. Upon delivery by such Lender of funds requested pursuant to Section
2.2(c), such Lender shall be treated as having purchased a participating
interest in an amount equal to such funds delivered by such Lender to the Agent
in the obligation of the Borrower to reimburse the Agent, as the issuer of such
Letter of Credit, for any amounts payable, paid, or incurred by the Agent, as
the issuer of such Letter of Credit, with respect to such Letter of Credit.

            (c) Each Lender shall be unconditionally and irrevocably liable,
without regard to the occurrence of any Default or Event of Default, to the
extent of the Percentage Share of such Lender at the time of issuance of each
Letter of Credit, to reimburse, on demand, the Agent, as the issuer of such
Letter of Credit, for the amount of each Letter of Credit Payment under such
Letter of Credit. Each payment in respect of any Letter of Credit shall be
deemed to be a Floating Rate Loan by each Lender to the extent of funds
delivered by such Lender to the Agent with respect to such payment and shall to
such extent be deemed a Floating Rate Loan under and shall be evidenced by the
Note of such Lender.

            (d) EACH LENDER AGREES TO SEVERALLY INDEMNIFY THE AGENT, AS THE
ISSUER OF EACH LETTER OF CREDIT, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT AND AFFILIATES OF THE AGENT (TO THE EXTENT NOT REIMBURSED BY
THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF THE BORROWER TO DO SO),
RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER AT THE TIME OF ISSUANCE
OF SUCH LETTER OF CREDIT, FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES AND DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME
(INCLUDING, WITHOUT LIMITATION, ANY TIME FOLLOWING THE PAYMENT AND PERFORMANCE
OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE IMPOSED ON,
INCURRED BY OR ASSERTED AGAINST THE


                                     - 18 -
<PAGE>

AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY RELATING TO OR
ARISING OUT OF THIS AGREEMENT OR SUCH LETTER OF CREDIT OR ANY ACTION TAKEN OR
OMITTED BY THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR
IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING, WITHOUT LIMITATION, ANY
LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS IMPOSED, INCURRED OR
ASSERTED AS A RESULT OF THE NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF THE AGENT
AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT NO LENDER
(OTHER THAN THE AGENT AS THE ISSUER OF A LETTER OF CREDIT) SHALL BE LIABLE FOR
THE PAYMENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING
FROM THE GROSS NEGLIGENCE WHETHER SOLE OR CONCURRENT OR WILLFUL MISCONDUCT OF
THE AGENT AS THE ISSUER OF A LETTER OF CREDIT. THE AGREEMENTS IN THIS SECTION
2.2(D) SHALL SURVIVE THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE
TERMINATION OF THIS AGREEMENT.

      2.3 Use of Loan Proceeds and Letters of Credit. (a) As of the date hereof,
indebtedness in the amount of $20,076,885.43 is outstanding under the Existing
Note. The Lender shall use proceeds of the initial Loan to purchase such
indebtedness. Such indebtedness shall be renewed, extended, and rearranged
pursuant to the terms of this Agreement, the Note, and the relevant Borrowing
Request and shall for all purposes be deemed a borrowing hereunder. Proceeds of
all subsequent Loans shall be used solely for acquisitions and development of
Oil and Gas Properties and for general corporate purposes.

            (b) Letters of Credit shall be used solely for other general
corporate purposes and to support Commodity Hedge Agreements and Rate Management
Transactions.

      2.4 Interest. Subject to the terms of this Agreement (including, without
limitation, Section 2.17), 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 applicable, for
the 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 for the 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, for the actual days elapsed (including the first day but excluding the
last day) during the period for

                                     - 19 -
<PAGE>

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 fails to
select the duration of any Interest Period for any LIBO Rate Loan within the
time period and otherwise as provided herein, such Loan (if outstanding as a
LIBO 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.

      2.5 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 1, 2003, 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 LIBO Rate Loan shall be due and payable on the last day of the
Interest Period for such LIBO Rate Loan and, in the case of any Interest Period
in excess of three 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 shall specify to the Lender
the Loans or other amounts payable by the Borrower hereunder to which such
payment is to be applied. In the event the Borrower fails 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.

      2.6 Outstanding Amounts. The outstanding principal balance of the Notes
reflected by the notations by the Lenders on their records shall be deemed
rebuttably presumptive evidence of the principal amount owing on the Notes. The
liability for payment of principal and interest evidenced by the Notes 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.

      2.7 Time, Place, and Method of Payments. All payments required pursuant to
this Agreement or the Notes shall be made in lawful money of the United States
of America and in immediately available funds, shall be deemed received by the
Agent on the Business Day received, or 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 Notes 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.


                                     - 20 -
<PAGE>

      2.8 Pro Rata Treatment; Adjustments. (a) Except to the extent otherwise
expressly provided herein, (i) each borrowing pursuant to this Agreement shall
be made from the Lenders pro rata in accordance with their respective Percentage
Shares, (ii) each reduction of the sum of the Facility Amounts of the Lenders at
the request of the Borrower, as well as any subsequent increase in the sum of
the Facility Amounts of the Lenders at the request of the Borrower and with
written agreement of the Agent and the Required Lenders shall serve to adjust
the Facility Amounts of the Lenders pro rata in accordance with the Facility
Amounts of the Lenders in effect immediately prior to any such adjustment, (iii)
each payment by the Borrower of fees shall be made for the account of the
Lenders pro rata in accordance with their respective Percentage Shares, (iv)
each payment of principal of Loans shall be made for the account of the Lenders
pro rata in accordance with their respective shares of the Loan Balance, and (v)
each payment of interest on Loans shall be made for the account of the Lenders
pro rata in accordance with their respective shares of the aggregate amount of
interest due and payable to the Lenders.

            (b) The Agent shall distribute all payments with respect to the
Obligations to the Lenders promptly upon receipt in like funds as received. In
the event that any payments made hereunder by the Borrower at any particular
time are insufficient to satisfy in full the Obligations due and payable at such
time, such payments shall be applied (i) first, to fees and expenses due
pursuant to the terms of this Agreement or any other Loan Document, (ii) second,
to accrued interest, (iii) third, to the Loan Balance, and (iv) last, to any
other Obligations.

            (c) If any Lender (for purposes of this Section, a "Benefitted
Lender") shall at any time receive any payment of all or part of its portion of
the Obligations, or receive any Collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 7.1(f) or Section 7.1(g), or otherwise) in an
amount greater than such Lender was entitled to receive pursuant to the terms
hereof, such Benefitted Lender shall purchase for cash from the other Lenders
such portion of the Obligations of such other Lenders, or shall provide such
other Lenders with the benefits of any such Collateral or the proceeds thereof,
as shall be necessary to cause such Benefitted Lender to share the excess
payment or benefits of such Collateral or proceeds with each of the Lenders
according to the terms hereof. If all or any portion of such excess payment or
benefits is thereafter recovered from such Benefitted Lender, such purchase
shall be rescinded and the purchase price and benefits returned by such Lender,
to the extent of such recovery, but without interest. The Borrower agrees that
each such Lender so purchasing a portion of the Obligations of another Lender
may exercise all rights of payment (including rights of set-off) with respect to
such portion as fully as if such Lender were the direct holder of such portion.
If any Lender ever receives, by voluntary payment, exercise of rights of set-off
or banker's lien, counterclaim, cross-action or otherwise, any funds of the
Borrower to be applied to the Obligations, or receives any proceeds by
realization on or with respect to any Collateral, all such funds and proceeds
shall be forwarded immediately to the Agent for distribution in accordance with
the terms of this Agreement.

      2.9 Borrowing Base Determinations. (a) The Borrowing Base as of the
Closing Date, is acknowledged by the Borrower and the Lenders to be $21,000,000.


                                     - 21 -
<PAGE>

            (b) The Borrowing Base shall be redetermined semi-annually 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
relevant information available to the Lenders. In addition, the Lenders shall,
in the normal course of business following a request of the Borrower,
redetermine the Borrowing Base; provided, however, the Lenders shall not be
obligated to respond to more than four such requests during any calendar year,
and in no event shall the Lenders be required to redetermine the Borrowing Base
more than once in any two-month period, including, without limitation, each
scheduled semi-annual redetermination provided for above. Notwithstanding the
foregoing, the Lenders may at their discretion redetermine the Borrowing Base
and the amount by which the Borrowing Base shall be reduced each calendar month
as set forth in Section 2.9(a) at any time and from time to time.

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

            (d) The Borrowing Base shall represent the determination by the
Lenders, in accordance with the applicable definitions and provisions herein
contained and their customary lending practices for loans of this nature, of the
value, for loan purposes, of the Mortgaged Properties, subject, in the case of
any increase in the Borrowing Base, to the credit approval process of the
Lenders. Furthermore, the Borrower acknowledges that the determination of the
Borrowing Base contains an equity cushion (market value in excess of loan
value), which is acknowledged by the Borrower to be essential for the adequate
protection of the Lenders.

      2.10 Mandatory Prepayments. If at any time the sum of the Loan Balance and
the L/C Exposure exceeds the Borrowing Base then in effect, the Borrower shall,
within 60 days of notice from the Agent of such occurrence, (a) prepay, or make
arrangements acceptable to the Lenders 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 Lenders in their reasonable
discretion, to secure the Obligations by the execution and delivery to the
Lenders of security instruments in form and substance satisfactory to the
Lenders in the exercise of their reasonable discretion, or (c) effect any
combination of the alternatives described in clauses (a) and (b) of this Section
and acceptable to the Lenders in their reasonable discretion. In the event that
a mandatory prepayment is required under this Section and the Loan Balance is
less than the amount required to be prepaid, the Borrower shall repay the entire
Loan Balance and, in accordance with the provisions of the relevant Letter of
Credit Applications executed by the Borrower or otherwise to the reasonable
satisfaction of the Lenders, deposit with the Lenders, as additional collateral
securing the Obligations, an amount of cash, in immediately available funds,
equal to the L/C Exposure minus the Borrowing Base. The cash deposited with the
Lenders in satisfaction of the requirement provided in this Section may be
invested, at the reasonable discretion of the Lenders and then only at the
express direction of the Borrower as to investment vehicle and maturity (which
shall be no later than the latest expiry date of any then outstanding


                                     - 22 -
<PAGE>

Letter of Credit), for the account of the Borrower in cash or cash equivalent
investments offered by or through the Lenders.

      2.11 Voluntary Prepayments and Conversions of Loans. Subject to applicable
provisions of this Agreement, the Borrower 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 different Interest Period;
provided, however, that (a) the Borrower shall give the Agent notice of each
such prepayment or conversion of all or any portion of a LIBO Rate Loan no less
than two Business Days prior to prepayment or conversion, (b) any LIBO Rate Loan
may be prepaid or converted only on the last day of an Interest Period for such
Loan, (c) the Borrower 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.

      2.12 Commitment Fee. In addition to interest on the Note as provided
herein and all other fees payable hereunder and to compensate the Lender for
maintaining funds available, the Borrower shall pay to the Agent for the account
of the Lenders, in immediately available funds, on the first day of April, 2003,
and on the first day of each third calendar month thereafter during the
Commitment Period, a fee in the amount of .375% per annum, calculated on the
basis of a year of 365 or 366 days, as the case may be, for the 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.

      2.13 Facility Fee. In addition to interest on the Note as provided herein
and all other fees payable hereunder and to compensate the Lenders for the costs
of the extension of credit hereunder, the Borrower shall pay to the Agent for
the account of the Lenders, in immediately available funds, a facility fee in
the amount of $100,000 which is due on the Closing Date and one-half of one
percent (1/2 of 1%) of any future increase in the Borrowing Base then in effect.

      2.14 Letter of Credit Fee. In addition to interest on the Note as provided
herein and all other fees payable hereunder, the Borrower agrees to pay to the
Lender, on the date of issuance of each Letter of Credit, a fee equal to the
greater of $500 or the Applicable Margin, calculated on the basis of a year of
365 or 366 days, as the case may be, for the actual days elapsed (including the
first day but excluding the last day), on the face amount of such Letter of
Credit during the period for which such Letter of Credit is issued; provided,
however, in the event such Letter of Credit is canceled prior to its original
expiry date or a payment is made by the Lender with respect to such Letter of
Credit, the Lender shall, within 30 days after such cancellation or the making
of such payment, rebate to the Borrower the unearned portion of such fee. The
Borrower also agrees to pay to the Lender on demand its customary letter of
credit transactional fees, including, without limitation, amendment fees,
payable with respect to each Letter of Credit.

      2.15 Loans to Satisfy Obligations of Borrower. The Lenders may, but shall
not be obligated to, but only if an Event of Default exists, make Loans for the
benefit of the Borrower and apply proceeds thereof to the satisfaction of any
condition, warranty, representation, or


                                     - 23 -
<PAGE>

covenant of the Borrower 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.

      2.16 Security Interest in Accounts; Right of Offset. As security for the
payment and performance of the Obligations, the Borrower hereby transfers,
assigns, and pledges to the Agent for the benefit of the Lenders and grants to
the Agent for the benefit of the Lenders a security interest in all funds of the
Borrower now or hereafter or from time to time on deposit with the Agent and
such Lender, with such interest of the Lender to be retransferred, reassigned,
and/or released by the Agent and each Lender, as the case may be, at the expense
of the Borrower upon payment in full and complete performance by the Borrower of
all Obligations. All remedies as secured party or assignee of such funds shall
be exercisable by the Lender during the existence of 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 hereby grants to the Agent and each Lender the right,
exercisable during the existence of an Event of Default, of offset or banker's
lien against all funds of the Borrower now or hereafter or from time to time on
deposit with the Agent and each 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, provided that such Obligation shall have matured, whether
by acceleration of maturity or otherwise.

      2.17 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
Chapter 303 of the Texas Finance Code (Vernon's 1999), the Borrower agrees that
the Highest Lawful Rate shall be the "weekly ceiling" as defined in such
Section, provided that the Lenders 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 Lenders, if greater.

            (b) Notwithstanding anything herein or in the Notes to the contrary,
during any Limitation Period, the interest rate to be charged on amounts
evidenced by the Notes shall be the Highest Lawful Rate, and the obligation, if
any, of the Borrower 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 Lenders (i) the amount of interest in excess of that
accruing at the Highest Lawful Rate that the Lenders 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 Lenders 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


                                     - 24 -
<PAGE>

interest and which would exceed the amount permitted if the Highest Lawful Rate
were in effect, the Borrower stipulates that such payment and collection will
have been and will be deemed to have been, to the extent permitted by applicable
laws of the State of Texas or the United States of America, the result of
mathematical error on the part of the Borrower and the Lenders; and the Lenders
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
Lenders or notice thereof from the Borrower. In the event that the maturity of
any Obligation is accelerated, by reason of an election by the Lenders 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 Lenders 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.

            (d) All sums paid, or agreed to be paid, to the Lenders 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.

      2.18 Yield Protection. (a) Without limiting the effect of the other
provisions of this Section (but without duplication), the Borrower shall pay to
the Lenders from time to time such amounts as the Lenders may determine are
necessary to compensate it for any Additional Costs incurred by the Lenders.

            (b) Without limiting the effect of the other provisions of this
Section (but without duplication), the Borrower shall pay to the Lenders from
time to time on request such amounts as the Lenders may determine are necessary
to compensate the Lenders for any costs attributable to the maintenance by the
Lenders (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 Lenders (or any Applicable Lending Office) to a level below that
which the Lenders (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), in the event that any Requirement of Law or
Regulatory Change or the compliance by the Lenders therewith shall (i) impose,
modify, or hold applicable any reserve, special deposit, or similar requirement
against any Letter of Credit or obligation to issue Letters of Credit, or (ii)
impose upon the Lenders any other condition regarding any Letter of Credit or
obligation to issue Letters of Credit, and the result of any such event shall be
to increase the cost to the Lenders of issuing or maintaining any Letter of
Credit or obligation to issue Letters of Credit or any liability with respect to
payments by the Lender under Letters of Credit, or to reduce any amount
receivable in connection therewith, then within 15 days of demand by the
Lenders, the Borrower shall pay to the Lenders, from time to time as specified
by the Lender,


                                     - 25 -
<PAGE>

additional amounts which shall be sufficient to compensate the Lenders for such
increased cost or reduced amount receivable.

            (d) Without limiting the effect of the other provisions of this
Section (but without duplication), the Borrower shall pay to the Lenders such
amounts as shall be sufficient in the reasonable opinion of the Lenders to
compensate them for any loss, cost, or expense incurred by and as a result of:

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

                  (ii) any failure by the Borrower to borrow a LIBO 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, 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 Lenders) of the amount (as
reasonably determined by the Lenders) the Lenders would have bid in the London
interbank market for Dollar deposits of amounts comparable to such principal
amount and maturities comparable to such period; provided, however, that the
Lenders shall be limited to recover their actual losses and not anticipated
profits.

            (e) Determinations by the Lenders for purposes of this Section of
the effect of any Regulatory Change on capital maintained, their costs or rate
of return, maintaining Loans, issuing Letters of Credit, its obligation to make
Loans and issue Letters of Credit, or on amounts receivable by it in respect of
Loans, Letters of Credit, or such obligations, and the additional amounts
required to compensate the Lenders under this Section shall be rebuttable
presumptions of the additional amounts due, provided that such determinations
are made on a reasonable basis. The Lenders 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 rebuttable presumptions of the
additional amounts due. The Lenders 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 therefore, of any event occurring after the Closing Date which will
entitle the Lenders 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 after the earlier of (A) the Final
Maturity (provided that the


                                     - 26 -
<PAGE>

Obligations have been paid in full) and (B) the expiration of the Commitment
(provided that the Obligations have been paid in full) to the extent such
Additional Costs or other sums accrued more than 90 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 Lenders affected by such event if
such designation will avoid the need for or reduce the amount of such
compensation and will not, in the sole opinion of the Lenders, be materially
disadvantageous to the Lenders. If the Lenders request compensation from the
Borrower under this Section, the Borrower may, by notice to the Lenders, require
that the Loans by the Lenders of the type with respect to which such
compensation is requested be converted into Floating Rate Loans in accordance
with Section 2.11. Any compensation requested by the Lenders pursuant to this
Section shall be due and payable to the Lender within fifteen days of delivery
of any such notice by the Lenders to the Borrower.

            (f) The Lenders agree that they shall not request, and the Borrower
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 Lenders against other customers of the
Lenders similarly situated where such customers are subject to documents
providing for such assessment.

            (g) Upon the receipt by the Borrower from any Lender (an "Affected
Bank") of a claim for compensation under this Section 2.17, the Borrower may (i)
request the Affected Bank to use its best efforts to obtain a replacement bank
or financial institution satisfactory to the Borrower to acquire and assume all
or a ratable part of all of such Affected Bank's Loans and Commitment (a
"Replacement Bank"); (ii) request one or more of the other Lenders to acquire
and assume all or part of such Affected Bank's Loans and Commitment; or (iii)
designate a Replacement Bank under clause (i) or (iii) shall be subject to the
prior written consent of the Agent (which consent will not be unreasonably
withheld).

      2.19 Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, no more than 5 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 Lenders determine (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 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 Lenders determine (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 Lenders of making or maintaining such Loan for such Interest
      Period,


                                     - 27 -
<PAGE>

then the Lenders shall give the Borrower prompt notice thereof; and so long as
such condition remains in effect, the Lenders 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 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 2.11. Before
giving such notice pursuant to this Section, the Lenders will designate a
different available Applicable Lending Office for LIBO Rate Loans or take such
other action as the Borrower 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 Lenders, be materially
disadvantageous to the Lenders.

      2.20 Illegality. Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for the Lenders or their Applicable Lending
Office to (a) honor its obligation to make any type of LIBO Rate Loans
hereunder, or (b) maintain any type of LIBO Rate Loans hereunder, then the
Lenders shall promptly notify the Borrower thereof; and the obligation of the
Lenders hereunder to make such type of LIBO Rate Loans and to convert other
types of Loans into LIBO Rate Loans of such type shall be suspended until such
time as the Lenders may again make and maintain LIBO Rate Loans of such type,
and the outstanding LIBO Rate Loans of such type shall be converted into
Floating Rate Loans in accordance with Section 2.11. Before giving such notice
pursuant to this Section, the Lenders will designate a different available
Applicable Lending Office for LIBO Rate Loans or take such other action as the
Borrower may request if such designation or action will avoid the need to
suspend the obligation of the Lenders to make LIBO Rate Loans and will not, in
the opinion of the Lenders, be disadvantageous to the Lenders.

      2.21 Regulatory Change. In the event that by reason of any Regulatory
Change, the Lenders (a) incur Additional Costs based on or measured by the
excess above a specified level of the amount of a category of deposits or other
liabilities of the Lenders which includes deposits by reference to which the
interest rate on any LIBO Rate Loan is determined as provided in this Agreement
or a category of extensions of credit or other assets of such Lenders which
includes any LIBO 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 Lenders with notice to the Borrower, the obligation of the
Lenders to make such LIBO Rate Loans and to convert Floating Rate Loans into
such LIBO Rate Loans shall be suspended until such time as such Regulatory
Change ceases to be in effect, and all such outstanding LIBO Rate Loans shall be
converted into Floating Rate Loans in accordance with Section 2.11.

      2.22 Limitations on Interest Periods. Each Interest Period selected by the
Borrower (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, with respect to any LIBO Rate Loan, 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


                                     - 28 -
<PAGE>

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.

      2.23 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
pursuant to Section 3.1(g)(iii) 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 of any of its other rights
and remedies, send any or all of such letters.

      2.24 Power of Attorney. The Borrower hereby designates the Lender as its
agent and attorney-in-fact, to act in its 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 to
the Lender pursuant to Section 3.1(g)(iii) or Section 5.7, including, without
limitation, completing any blanks contained in such letters and attaching
exhibits thereto describing the relevant Collateral. The Borrower hereby
ratifies and confirms 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 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 Agent and the Lenders to enter into this Agreement
and to make Loans and issue Letters of Credit are subject to the satisfaction of
the following conditions precedent:

      3.1 Receipt of Loan Documents and Other Items. The Lenders 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 Agent or its counsel of the title of the Borrower
to its Oil and Gas Properties, shall be satisfactory to the Agent, and the Agent
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, all in form and substance
satisfactory to the Agent and dated, where applicable, of even date herewith or
a date prior thereto and acceptable to the Agent:


                                     - 29 -
<PAGE>

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

            (b) the Existing Notes, endorsed payable to the Agent;

            (c) the Note and the Term Note;

            (d) copies of the Articles of Incorporation of the Borrower and all
      amendments thereto, accompanied by a certificate dated the Closing Date
      issued by the secretary or an assistant secretary or another authorized
      representative of the Borrower to the effect that each such copy is
      correct and complete;

            (e) a certificate of incumbency dated the Closing Date, including
      specimen signatures of all officers or other representatives of the
      Borrower who are authorized to execute Loan Documents on behalf of the
      Borrower, such certificate being executed by the manager or another
      authorized representative of the Borrower;

            (f) copies of resolutions of the Borrower, adopted by the board of
      directors of the Borrower approving the Loan Documents to which the
      Borrower is a party and authorizing the transactions contemplated herein
      and therein, accompanied by a certificate dated the Closing Date issued by
      the manager or another authorized representative of the Borrower to the
      effect that such copies are true and correct copies of resolutions duly
      adopted and that such resolutions constitute all the resolutions adopted
      with respect to such transactions, have not been amended, modified, or
      rescinded in any respect, and are in full force and effect as of the date
      of such certificate;

            (g) 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) Ratification of Mortgage and 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) undated letters, in form and substance satisfactory to
            the Agent, from the Borrower 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


                                     - 30 -
<PAGE>

            make future payments attributable to production from the Mortgaged
            Properties directly to the Agent;

                  (iv) Security Agreement from the Borrower pledging contract
            rights, etc.;

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

                  (vi) Assignment of Partnership Interest (Security Agreement)
            from the Borrower pledging certain partnership interest;

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

            (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 in its jurisdictions of
      formation and in any other jurisdictions where it does business;

            (i) unaudited Financial Statements of the Borrower as of September
      30, 2002;

            (j) schedule of Shareholder advances for the next 12 months;

            (k) results of searches of the UCC Records of the Secretary of State
      of the States of Texas, New York, Delaware, West Virginia and the County
      Clerk of Oklahoma County, Oklahoma, from a source acceptable to the Agent
      and reflecting no 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 Agent for the benefit of the Lenders;

            (l) confirmation, acceptable to the Agent, of the title of the
      Borrower to the Mortgaged Properties, free and clear of Liens other than
      Permitted Liens;

            (m) all operating, lease, sublease, royalty, sales, exchange,
      processing, farm-out, bidding, pooling, unitization, communitization, and
      other material agreements relating to the Mortgaged Properties reasonably
      requested by the Lender;

            (n) engineering reports covering the Mortgaged Properties;

            (o) the opinion of James F. Gilbert, counsel to the Borrower, in the
      form attached hereto as Exhibit IV, with such changes thereto as may be
      approved by the Agent;


                                     - 31 -
<PAGE>

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

            (q) payment of the Facility Fee as described in Section 2.13 and
      Agency Fee;

            (r) payment of the fees described in Section 5.14;

            (s) such other agreements, documents, instruments, opinions,
      certificates, waivers, consents, and evidence as the Agent may reasonably
      request; and

            (t) the Borrower shall furnish to the Agent on or before 30 days
      after the Closing Date, the necessary descriptions of the property listed
      on Exhibit VIII so that a Security Agreement and Certificate of Title may
      be prepared granting the Agent a first lien on such property. The Borrower
      agrees to execute the documents necessary to grant the Agent a first lien
      on such properties.

      3.2 Each Loan and Letter of Credit. In addition to the conditions
precedent stated elsewhere herein, the Lender shall not be obligated to make any
Loan or issue any Letter of Credit unless:

            (a) the Borrower shall have delivered to the Agent a Borrowing
      Request at least the requisite time prior to the requested date for the
      relevant Loan, or a Letter of Credit Application at least three Business
      Days prior to the requested issuance date for the relevant Letter of
      Credit; and each statement or certification made in such Borrowing Request
      or Letter of Credit Application, as the case may be, shall be true and
      correct in all material respects on the requested date for such Loan or
      the issuance of such Letter of Credit;

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

            (c) if requested by the Agent, the Borrower shall have delivered
      evidence satisfactory to the Agent substantiating any of the material
      matters contained in this Agreement which are necessary to enable the
      Borrower to qualify for such Loan or the issuance of such Letter of
      Credit;

            (d) no event shall have occurred which, in the reasonable opinion of
      the Agent or any of the Lenders, would have a Material Adverse Effect;

            (e) 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 as if made on the requested date for such Loan or the
      issuance of such Letter of Credit (except to the extent such
      representations and warranties


                                     - 32 -
<PAGE>

      expressly refer to an earlier date, in which case, they shall be true and
      correct as of such earlier date) provided, however, for purposes of this
      Section 3.2, in each representation and warranty in Article IV that makes
      reference to an Exhibit, the representation under this Section 3.2 that
      such representation and warranty in Article IV is true on and as of the
      date of the making of such Loan or the issuance of such Letter of Credit
      shall take into account (i) any subsequent amendments to any Exhibit
      referred to therein, (ii) any exception contained in a written notice
      received by the Agent which makes specific reference to the applicable
      Exhibit, or (iii) any written disclosure made by the Borrower or any of
      its Subsidiaries prior to the date as of which such representation or
      warranty is made, provided that such amendment, exception or disclosure
      has been consented to by the Required Banks if such amendment, exception
      or disclosure amends or waives provisions of this Agreement or is
      otherwise required under the terms of this Agreement.

            (f) all of the Security Instruments shall be in full force and
      effect and provide to the Lenders the security intended thereby;

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

            (h) the Borrower shall hold full legal title to the Collateral and
      be the sole beneficial owner thereof;

            (i) the Agent and the Lenders shall have received the payment of all
      fees payable to the Agent and the Lenders hereunder and reimbursement from
      the Borrower, or special legal counsel for the Agent shall have received
      payment from the Borrower, for (i) all reasonable fees and expenses of
      counsel to the Agent for which the Borrower is responsible pursuant to
      applicable provisions of this Agreement and for which invoices have been
      presented at least 15 days prior to the date of the relevant Loan or
      Letter of Credit Application (otherwise the initial Borrowing which must
      be presented at least five days prior to the Closing Date), 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 or Letter of Credit Application
      (otherwise the initial Borrowing which must be presented at least five
      days prior to the Closing Date); and

            (j) all matters incident to the consummation of the transactions
      hereby contemplated shall be satisfactory to the Agent and each Lender.


                                     - 33 -
<PAGE>

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

      To induce the Agent and the Lenders to enter into this Agreement and to
make the Loans and issue Letters of Credit, the Borrower represents and warrants
to the Agent and each Lender (which representations and warranties shall survive
the delivery of the Notes) that:

      4.1 Due Authorization. The execution and delivery by the Borrower of this
Agreement and the borrowings hereunder, the execution and delivery by the
Borrower of the Notes, the repayment of the Notes and interest and fees provided
for in the Notes and this Agreement, the execution and delivery of the Security
Instruments by the Borrower and the performance of all obligations of the
Borrower under the Loan Documents are within the power of the Borrower, have
been duly authorized by all necessary corporate action by the Borrower, and do
not and will not (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) except as shown on
Exhibit VI, contravene or conflict with any indenture, 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, except where such contravention
or conflict would not individually or in the aggregate result in a Material
Adverse Effect, or (d) result in or require the creation or imposition of any
Lien in, upon or of any Property of the Borrower under any such indenture,
instrument, or other agreement, other than the Loan Documents.

      4.2 Corporate Existence. The Borrowers are corporations duly organized,
legally existing, and in good standing under the laws of their state 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, will be the legal, valid, and binding obligations
of the Borrower, enforceable against the Borrower in accordance with their
respective terms except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relative to enforceability.

      4.4 Security Instruments. The provisions of each Security Instrument are
effective to create in favor of the Agent for the benefit of the Lender, a
legal, valid, and enforceable Lien in all right, title, and interest of the
Borrower in the Collateral described therein, except as enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors' rights generally or by equitable principles relative
to enforceability, 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 in the Collateral described therein
subject to Permitted Liens.


                                     - 34 -
<PAGE>

      4.5 Title to Assets. The Borrower has good and indefeasible title to all
of its interests in its Properties then owned by it, free and clear of all Liens
except Permitted Liens.

      4.6 No Material Misstatements. As of the Closing Date, no information,
exhibit, statement, or report furnished to the Agent by or at the direction of
the Borrower 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.

      4.7 Liabilities, Litigation, and Restrictions. As of the Closing Date,
other than as listed under the heading "Liabilities" on Exhibit VI attached
hereto, the Borrower has no liabilities, direct, or contingent, which would
result in a Material Adverse Effect, except as set forth under the heading
"Litigation" on Exhibit VI hereto, no litigation or other action of any nature
affecting the Borrower is pending before any Governmental Authority or, to the
best knowledge of the Borrower, threatened against or affecting the Borrower
which might reasonably be expected to result in any material impairment of its
ownership of any Collateral or have a Material Adverse Effect. To the best
knowledge of the Borrower, 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 the
ownership and operation of the Collateral would result in a Material Adverse
Effect, other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower.

      4.8 Authorizations; Consents. Except as expressly contemplated by this
Agreement, no authorization, consent, approval, exemption, franchise, permit, or
license of, or filing 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 hereby, the repayment by the Borrower of the Note and interest and
fees provided in the Note and this Agreement, or the performance by the Borrower
of the Obligations.

      4.9 Compliance with Laws. The Borrower and its Property, including,
without limitation, the Mortgaged Property, are in compliance with all material
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. No Reportable Event has occurred with respect to any Single
Employer Plan, and each Single Employer Plan has complied with and been
administered in all material respects in accordance with applicable provisions
of ERISA and the Code. To the best knowledge of the Borrower, (a) no Reportable
Event has occurred with respect to any Multiemployer Plan, and (b) each
Multiemployer Plan has complied with and been administered in all material
respects with applicable provisions of ERISA and the Code. The present value of
all benefits vested under each Single Employer Plan maintained by the Borrower
or any Commonly Controlled Entity (based on the assumptions used to fund such
Plan) did not, as of the last annual valuation date applicable thereto, exceed
the value of the assets of such Plan


                                     - 35 -
<PAGE>

allocable to such vested benefits. Neither the Borrower nor any Commonly
Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan for which there is any withdrawal liability. As of the most
recent valuation date applicable to any Multiemployer Plan, neither the Borrower
nor any Commonly Controlled Entity would become subject to any liability under
ERISA if the Borrower or such Commonly Controlled Entity were to withdraw
completely from such Multiemployer Plan. Neither the Borrower nor any Commonly
Controlled Entity has received notice that any Multiemployer Plan is Insolvent
or in Reorganization. To the best knowledge of the Borrower, no such Insolvency
or Reorganization is reasonably likely to occur. Based upon GAAP existing as of
the date of this Agreement and current factual circumstances, the Borrower has
no reason to believe that the annual cost during the term of this Agreement to
the Borrower and all Commonly Controlled Entities for post-retirement benefits
to be provided to the current and former employees of the Borrower and all
Commonly Controlled Entities under Plans which are welfare benefit plans (as
defined in Section 3(1) of ERISA) will, in the aggregate, have a Material
Adverse Effect.

      4.11 Environmental Laws. To the best knowledge and belief of the Borrower,
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 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 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
      or from, affecting, or related to any Property of the Borrower or adjacent
      to any Property of the Borrower has occurred; and

            (d) no Environmental Complaint has been received by the Borrower.

      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 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.

      4.14 Public Utility Holding Company Act Compliance. The Borrower is not a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a


                                     - 36 -
<PAGE>

"holding company," within the meaning of the Public Utility Holding Company Act
of 1935, as amended.

      4.15 Proper Filing of Tax Returns; Payment of Taxes Due. The Borrower has
duly and properly filed its 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 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 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 (a) is 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) has
not produced gas, in any material amount, subject to, and neither the Borrower
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 has reflected in the most recent
engineering report or established monetary reserves adequate in amount to
satisfy such obligations and has segregated such reserves from other accounts.

      4.18 Intellectual Property. The Borrower owns or is licensed to use all
Intellectual Property necessary to conduct all business material to its
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 knows of no valid basis for any such claim. The use of such
Intellectual Property by the Borrower 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.

      4.19 Casualties or Taking of Property. Except as disclosed on Exhibit VI
under the heading "Casualties," except as would not result in a Material Adverse
Effect, neither the business nor any Property of the Borrower has 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 is located at the address of the Borrower set
forth in Section 9.3 or at such other


                                     - 37 -
<PAGE>

location as the Borrower 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. As of the Closing Date, the Borrower has no
Subsidiaries except those described on Exhibit VI under the heading
"Subsidiaries".

                                   ARTICLE V

                              AFFIRMATIVE COVENANTS

      So long as any Obligation remains outstanding or unpaid or any Commitment
exists, the Borrower 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 promptly following the reasonable request of the Agent, make such records
available for inspection by the Agent and, at the expense of the Borrower, allow
the Agent to make and take away copies thereof.

      5.2 Quarterly Financial Statements; Compliance Certificates. Deliver to
the Agent, (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, a copy of the
unaudited consolidated Financial Statements of PEC and its Subsidiaries 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 Borrower as having been prepared in accordance with
GAAP consistently applied and as a fair presentation of the condition of the
Borrower, subject to changes resulting from normal year-end audit adjustments,
and (b) on or before the 60th day after the close of each fiscal quarter, with
the exception of the last fiscal quarter, a Compliance Certificate.

      5.3 Annual Financial Statements. Deliver to the Agent, on or before the
90th day after the close of each fiscal year of the Borrower, a copy of the
annual audited consolidated Financial Statements of PEC and its Subsidiaries and
a Compliance Certificate on the 105th day after the close of each fiscal year.

      5.4 Oil and Gas Reserve Reports. (a) Deliver to the Agent no later than
May 1of each year during the term of this Agreement, engineering reports in form
and substance satisfactory to the Agent, 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 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, 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.


                                     - 38 -
<PAGE>

            (b) Deliver to the Agent no later than November 1 of each year
during the term of this Agreement, engineering reports in form and substance
satisfactory to the Agent prepared by or under the supervision of any nationally
or regionally-recognized independent consulting petroleum engineer evaluating
the Mortgaged Properties 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 5.4(a).

            (c) Each of the reports provided pursuant to this Section shall be
submitted to the Agent together with additional data concerning pricing,
quantities of production from the Mortgaged Properties, 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.

      5.5 Title Opinions; Title Defects. Promptly upon the request of the Agent,
furnish to the Agent title opinions, in form and substance and by counsel
satisfactory to the Lender, or other confirmation of title acceptable to the
Agent, covering Oil and Gas Properties constituting not less than 90% of the
value, determined by the Agent in its sole discretion, of the Mortgaged
Properties; and promptly, but in any event within 60 days after notice by the
Agent of any defect, material in the opinion of the Agent in value, in the title
of the Borrower 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 Agent to do so.

      5.6 Notices of Certain Events. Deliver to the Agent, 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 setting forth the relevant event or circumstance and
the steps being taken by the Borrower 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, or any litigation, investigation, or proceeding between
      the Borrower 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 as a
      defendant or in which any Property of the Borrower is subject to a claim
      and in which the amount involved is $500,000 or more and which is not
      covered by insurance or in which injunctive or similar relief is sought;

            (d) the receipt by the Borrower 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
      or adjacent to any


                                     - 39 -
<PAGE>

      Property of the Borrower following any allegation of a violation of any
      Requirement of Law;

            (f) any Release of Hazardous Substances by the Borrower or from,
      affecting, or related to any Property of the Borrower or adjacent to any
      Property of the Borrower 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 proceeds from the sale of hydrocarbon production from or
      attributable to any Mortgaged Property;

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

            (i) any Reportable Event or imminently expected Reportable Event
      with respect to any Plan; any withdrawal from, or the termination,
      Reorganization or Insolvency of, any Multiemployer Plan; the institution
      of proceedings or the taking of any other action by the PBGC, the Borrower
      or any Commonly Controlled Entity or Multiemployer Plan with respect to
      the withdrawal from, or the termination, Reorganization or Insolvency of,
      any Single Employer Plan or Multiemployer Plan; or any Prohibited
      Transaction in connection with any Plan or any trust created thereunder
      and the action being taken by the Internal Revenue Service with respect
      thereto;

            (j) any pledge of Oil and Gas Property by the partnerships listed on
      Exhibit A to the document listed in Section 3.1(g)(vi); and

            (k) 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 Agent 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
delivered to the Lender in satisfaction of the condition set forth in Section
3.1(g)(iii) 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.

      5.8 Additional Information. Furnish to the Agent, promptly upon the
request of the Agent, such additional financial or other information concerning
the assets, liabilities, operations, and transactions of the Borrower as the
Agent may from time to time request; and notify the Agent 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


                                     - 40 -
<PAGE>

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 Agent, execute such additional Security Instruments as may be
necessary or appropriate in connection therewith.

      5.9 Compliance with Laws. Except to the extent the failure to comply or
cause compliance would not have a Material Adverse Effect, 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 (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, (ii)
required for the performance of the operations of the Borrower, or (iii)
applicable to the use, generation, handling, storage, treatment, transport, or
disposal of any Hazardous Substances; and cause all employees, crew members,
agents, contractors, subcontractors, and future lessees (pursuant to appropriate
lease provisions) of the Borrower, while such Persons are acting within the
scope of their relationship with the Borrower, to comply with all such
Requirements of Law as may be necessary or appropriate to enable the Borrower 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, 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 its
corporate existence or qualification and good standing in its jurisdictions of
incorporation or formation 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.

      5.12 Payment of Notes; Performance of Obligations. Pay the Notes and the
Term 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. 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
Agent, promptly reimburse the Agent for all reasonable fees and expenses of
Jackson Walker L.L.P., special counsel to the Agent, 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.


                                     - 41 -
<PAGE>

      5.15 Subsequent Fees and Expenses of Lender. Upon request by the Agent,
promptly reimburse the Agent (to the fullest extent permitted by law) for all
amounts reasonably expended, advanced, or incurred by or on behalf of the Agent
to satisfy any obligation of the Borrower 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 Agent under any of the Loan Documents;
and to protect the Properties or business of the Borrower, including, without
limitation, the Collateral, which amounts shall be deemed compensatory in nature
and liquidated as to amount upon notice to the Borrower by the Agent 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 Agent, (d) fees and expenses incurred
in connection with the participation by the Agent 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 Agent 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 the Agent until the date it is
repaid to the Agent, 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 a trustee, receiver,
custodian, or liquidator of the Borrower 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 any authorized representative of the
Lender to visit and inspect, at the expense of the Borrower, any tangible
Property of the Borrower.

      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 Agent, maintained by Borrower, naming the Agent as loss payee,
and, upon any renewal of any such insurance and at other times upon request by
the Agent, furnish to the Agent evidence, satisfactory to the Agent, within 30
days of the Closing Date of the maintenance of such insurance. The Agent shall
have the right to collect, and the Borrower hereby assigns to the Agent, any and
all monies that may become payable under any policies of insurance relating to
business interruption, if any, 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, if any, or
Collateral exceed $500,000, the Agent may, at its option, apply all such sums or
any part thereof received by it toward the


                                     - 42 -
<PAGE>

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 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 $500,000 or less,
provided that no Default or Event of Default has occurred and is continuing, the
Agent shall deliver any such proceeds received by it to the Borrower. In the
event the Agent receives insurance proceeds not attributable to Collateral or
business interruption, the Agent shall deliver any such proceeds to the
Borrower.

      5.19 INDEMNIFICATION. INDEMNIFY AND HOLD THE AGENT AND EACH LENDER AND
THEIR SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT,
AND AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE AGENT AND EACH 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, WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED
ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR
DURING THE TERM HEREOF, AND WHETHER BY THE BORROWER OR ANY PREDECESSOR IN TITLE,
EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER
PERSON AT ANY TIME OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE
HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION,
OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR
UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF
THE BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING
IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING
WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF
WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY
LOAN DOCUMENT OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT
LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF THE AGENT AND EACH LENDER OR ANY OF
ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR
AFFILIATES OR ANY TRUSTEE FOR THE


                                     - 43 -
<PAGE>

BENEFIT OF THE AGENT AND EACH LENDER UNDER ANY SECURITY INSTRUMENT; WITH THE
FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE
TERMINATION OF THIS AGREEMENT.

      5.20 Partnership Debt. No Oil and Gas Properties of the partnerships in
which PrimeEnergy Corporation and PrimeEnergy Management Corporation own general
or limited partnership interest and which have been pledged to the Agent by the
document described in Section 3.1(g)(vi) have been mortgaged. The partnerships
have no debt except that PrimeEnergy Asset & Income Fund LP AA-4 which owes
PrimeEnergy Management Corporation and/or Prime Operating Company the sum of
$153,280.37 and the Borrower agrees that if any payment is made on such debt at
a time the Borrower is in Default under this Agreement, such funds shall be paid
to the Agent for the benefit of the Lenders.

                                   ARTICLE VI

                               NEGATIVE COVENANTS

      So long as any Obligation remains outstanding or unpaid or any Commitment
exists, the Borrower will not:

      6.1 Indebtedness. Create, incur, assume, or suffer to exist any
Indebtedness in excess of $1,500,000, whether by way of loan or otherwise;
provided, however, the foregoing restriction shall not apply to (a) the
Obligations, (b) unsecured accounts payable incurred in the ordinary course of
business, which are not unpaid in excess of 60 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 , (c) crude oil, natural gas, or other hydrocarbon floor,
collar, cap, price protection, or swap agreements ("Commodity Hedge
Agreements"), in form and substance and with a Person acceptable to the Lender,
provided that (i) each commitment issued under such agreement must also be
approved by the Lender, (ii) such agreements shall not be entered into with
respect to Mortgaged Properties constituting more than 70% of monthly production
of proven producing reserves as forecast in Lender's most recent engineering
evaluation, (iii) that the strike prices in such agreements are not less than
the prices used by the Lender in its most recent Borrowing Base determination,
and (iv) the Lender shall receive a security interest in the Commodity Hedge
Agreements, (d) Rate Management Transactions, in form and substance and with a
Person acceptable to the Lender, or (e) indebtedness with respect to payments to
sellers of Oil and Gas Properties acquired subsequent to the date of this
Agreement of a portion of the cash flow attributable to such properties that is
acceptable to the Agent and the Lenders in their sole good faith discretion.

      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.


                                     - 44 -
<PAGE>

      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 Lenders,
sell, transfer, or otherwise dispose of, in one or any series of transactions
within any 12-month period, assets, whether now owned or hereafter acquired, the
book value of which exceeds $250,000 in the aggregate for both Borrowers, or
enter into any agreement to do so; provided, however, the foregoing restriction
shall not apply to the sale of hydrocarbons or inventory in the ordinary course
of business or the sale or other disposition of Property destroyed, lost, worn
out, damaged or having only salvage value or no longer used or useful in the
business of either Borrower.

      6.5 Leasebacks. Enter into any agreement to sell or transfer any Property
and thereafter rent or lease as lessee such 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; 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 for the payment of expenses in the
ordinary course of business, (c) the outstanding Guarantee in the amount of
$1,000,000 to Alabama Shopping Center Associates, and (d) loans or advances to
PrimeEnergy asset and Income Fund L.P. A-1, PrimeEnergy Asset and Income Fund
L.P. A-2, PrimeEnergy Asset and Income Fund L.P. A-3, PrimeEnergy Asset and
Income Fund L.P. AA-1, PrimeEnergy Asset and Income Fund L.P. AA-2, PrimeEnergy
Asset and Income Fund L.P. AA-3, PrimeEnergy Asset and Income Fund L.P. AA-4,
PrimeEnergy Asset and Income Trust A-1, PrimeEnergy Asset and Income Trust A02
and any other oil and gas limited partnership for which either Borrower is the
managing general partner and any business trust formed in the ordinary course of
business of the Borrowers for which either Borrower is the managing trustee,
provided that no default or event of default exists under any material
contractual obligation of such partnership or trust.

      6.7 Investments. Acquire Investments in, or purchase or otherwise acquire
all or substantially all of the assets of, any Person; provided, however, the
foregoing restriction shall not apply to the purchase or acquisition of (a) Oil
and Gas Properties, (b) Investments in the form of (i) debt securities issued or
directly and fully guaranteed or insured by the United States Government or any
agency or instrumentality thereof, with maturities of no more than one year,
(ii) commercial paper of a domestic issuer rated at the date of acquisition at
least P-2 by Moody's Investor Service, Inc. or A-2 by Standard & Poor's
Corporation and with maturities of no more than one year from the date of
acquisition, or (iii) repurchase agreements covering debt securities or
commercial paper of the type permitted in this Section, certificates of deposit,
demand deposits, eurodollar time deposits, overnight bank deposits and bankers'
acceptances, with maturities of no more than one year from the date of
acquisition, issued by or acquired from or through the Lender or any bank or
trust company organized under the laws of the United States or any state thereof
and having capital surplus and undivided profits aggregating at least


                                     - 45 -
<PAGE>

$100,000,000, (c) other short-term Investments similar in nature and degree of
risk to those described in clause (b) of this Section, or (d) money-market
funds.

      6.8 Dividends and Distributions. Declare, pay, or make, whether in cash or
Property of the Borrower, any dividend or distribution on, or purchase, redeem,
or otherwise acquire for value, any share of any class of its capital stock,
except that the foregoing restriction shall not apply to dividends paid in
capital stock of the Borrower other than the purchase of capital stock of PEC
for an amount not exceeding $1,000,000 in any fiscal year provided that no
Default or Event of Default exists or will occur as the result of such purchase.

      6.9 Issuance of Stock; Changes in Corporate Structure. Issue or agree to
issue additional shares of capital stock, in one or any series of transactions;
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 is engaged as of the
date hereof.

      6.12 ERISA Compliance. Permit any Plan maintained by it or any Commonly
Controlled Entity to (a) engage in any Prohibited Transaction, (b) incur any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA, or (c) terminate in a manner which could result in the imposition of a
Lien on any Property of the Borrower pursuant to Section 4068 of ERISA; or
assume an obligation to contribute to any Multiemployer Plan; or acquire any
Person or the assets of any Person which has now or has had at any time an
obligation to contribute to any Multiemployer Plan.

      6.13 Interest Coverage Ratio. Permit, as of the close of any fiscal
quarter, the ratio of (a) quarterly EBITDA on a trailing four-quarter basis to
(b) Interest Expense to be less than 3.00 to 1.00, measured on a trailing four
quarter basis.

      6.14 Current Ratio. Permit, as of the close of any fiscal quarter, the
ratio of Current Assets to Current Liabilities to be less than 1.00 to 1.00,
measured on a trailing four-quarter basis.

      6.15 Tangible Net Worth. Permit Tangible Net Worth, as of the close of any
fiscal quarter, to be less than $6,000,000 at December 31, 2002, plus 75% of
positive quarterly net income thereafter.

      6.16 Bank Debt Coverage Ratio. Permit, as of the close of any fiscal
quarter, the ratio of (a) Bank Debt to (b) EBITDA to be greater than 4.00 to
1.00, measured on a trailing four quarter basis.


                                     - 46 -
<PAGE>

                                  ARTICLE VII

                                EVENTS OF DEFAULT

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

            (a) default shall be made in the payment when due of any installment
      of principal or interest under this Agreement or the Notes or in the
      payment when due of any fee or other sum payable under any Loan Document
      and such default as to interest or fees only shall have continued for
      three days;

            (b) default shall be made by the Borrower 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 knowledge thereof by
      the Borrower;

            (c) any representation or warranty made by the Borrower 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 (as principal or guarantor
      or other surety) in the payment or performance of any bond, debenture,
      note, or other Indebtedness or under any credit agreement, loan agreement,
      indenture, promissory note, or similar agreement or instrument executed in
      connection with any of the foregoing, and such default shall remain
      unremedied for in excess of the period of grace, if any, with respect
      thereto;

            (e) the Borrower 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 to obtain a Loan or the
      issuance of a Letter of Credit and such inability shall continue for a
      period in excess of 30 days;

            (f) either the Borrower 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 by any court of competent jurisdiction or by any other duly
      authorized


                                     - 47 -
<PAGE>

      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 60 days;

            (h) the levy against any significant portion of the Property of the
      Borrower, 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 for money damages and/or Indebtedness due in
      an amount in excess of $500,000, except as disclosed on the Closing Date
      in Exhibit V and such order, judgment, or decree shall not be paid in
      full, dismissed, or stayed within 60 days;

            (j) any charges are filed or any other action or proceeding is
      instituted by any Governmental Authority against either the Borrower 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 subject to a Lien in
      favor of the Agent and/or the Lenders 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 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,
      (iii) made any transfer of its Property to or for the benefit of a
      creditor at a time when other creditors similarly situated have not been
      paid, or (iv) 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 not, or cease to,
      create valid and perfected first-priority Liens against the Collateral
      purportedly covered thereby;

            (m) the Borrower shall cease to be owned by its presently existing
      shareholders;

            (n) 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;


                                     - 48 -
<PAGE>

            (o) the failure to furnish the information required by Section
      3.1(t) or execute the Security Agreements and/or Certificate of Title
      necessary to grant to the Agent a first lien on the property listed on
      Exhibit VIII.

      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; (ii) the Commitment shall
immediately cease and terminate unless and until reinstated by the Lenders in
writing; and (iii) the Lenders are hereby authorized at any time and from time
to time, without notice to the Borrower (any such notice being expressly waived
by the Borrower), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) held by the Lenders and any and all other
indebtedness at any time owing by the Lender to or for the credit or account of
the Borrower against any and all of the Obligations although such Obligations
may be unmatured.

            (b) Upon the occurrence of any Event of Default other than those
specified in Sections 7.1(f) or 7.1(g), (i) the Required Lenders may, by notice
to the Borrower, 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; (ii) the Commitment
shall immediately cease and terminate unless and until reinstated by the Lenders
in writing; and (iii) the Lenders are hereby authorized at any time and from
time to time, without notice to the Borrower (any such notice being expressly
waived by the Borrower), to set-off and apply any and all deposits (general or
special, time or demand, provisional or final) held by the Lenders and any and
all other indebtedness at any time owing by the Lenders to or for the credit or
account of the Borrower against any and all of the Obligations although such
Obligations may be unmatured.

            (c) Upon the occurrence of any Event of Default, the Lenders and the
Agent 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.

                                  ARTICLE VIII

                                    THE AGENT

      8.1 Appointment. Each Lender hereby designates and appoints the Agent as
the agent of such Lender under this Agreement and the other Loan Documents. Each
Lender authorizes the Agent, as the agent for such Lender, to take such action
on behalf of such Lender under the provisions of this Agreement and the other
Loan Documents and to exercise such powers and perform such duties as are
expressly delegated to the Agent by the terms of this Agreement and the other
Loan Documents, together with such other powers as are reasonably incidental
thereto.


                                     - 49 -
<PAGE>

Notwithstanding any provision to the contrary elsewhere in this Agreement or in
any other Loan Document, the Agent shall not have any duties or responsibilities
except those expressly set forth herein or in any other Loan Document or any
fiduciary relationship with any Lender; and no implied covenants, functions,
responsibilities, duties, obligations, or liabilities on the part of the Agent
shall be read into this Agreement or any other Loan Document or otherwise exist
against the Agent.

      8.2 Waivers, Amendments. The provisions of this Agreement and of each
other Loan Document may from time to time be amended, modified or waived, if
such amendment, modification, or waiver is in writing and consented to by the
Borrower and the Required Lenders; provided, however, that no such amendment,
modification or waiver would: (a) modify any requirement hereunder that any
particular action be taken by all of the Lenders or by the Required Lenders
unless consented to by each Lender; (b) modify this Section 8.2, change the
definition of "Required Lenders", or change the Commitment Amount or Percentage
Share of any Lender, reduce the fees described in Article II, extend the
Commitment Termination Date or Final Maturity, release any Security Instrument
or Lien, or initiate any foreclosure, enforcement or collection procedure
without the consent of each Lender; (c) extend the due date for, (or reduce the
amount of any scheduled repayment or prepayment of principal of or interest on
any Loan) without the consent of the holder of that Note evidencing such Loan;
(d) affect, adversely the interests, rights, or obligations of the Agent without
the consent of the Agent; or (e) to modify the Borrowing Base or modify the
monthly amount by which the Borrowing Base shall be reduced.

      8.3 Delegation of Duties. The Agent may execute any of its duties under
this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible to any
Lender for the negligence or misconduct of any agents or attorneys-in-fact
selected by it with reasonable care.

      8.4 Exculpatory Provisions. Neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or affiliates shall be (a)
required to initiate or conduct any litigation or collection proceedings
hereunder, except with the concurrence of the Required Lenders and contribution
by each Lender of its Percentage Share of costs reasonably expected by the Agent
to be incurred in connection therewith, (b) liable for any action lawfully taken
or omitted to be taken by it or such Person under or in connection with this
Agreement or any other Loan Document (except for gross negligence or willful
misconduct of the Agent or such Person), or (c) responsible in any manner to any
Lender for any recitals, statements, representations or warranties made by the
Borrower or any officer thereof contained in this Agreement or any other Loan
Document or in any certificate, report, statement or other document referred to
or provided for in, or received by the Agent under or in connection with, this
Agreement or any other Loan Document, or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document or for any failure of the Borrower to perform its obligations hereunder
or thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained


                                     - 50 -
<PAGE>

in, or conditions of, this Agreement or any other Loan Document, or to inspect
the properties, books or records of the Borrower.

      8.5 Reliance by Agent. The Agent shall be entitled to rely, and shall be
fully protected in relying, upon any Note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including counsel to
the Borrower), independent accountants and other experts selected by the Agent.
The Agent may deem and treat the payee of any Note as the owner thereof for all
purposes unless and until a written notice of assignment, negotiation, or
transfer thereof shall have been received by the Agent. The Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Loan Document unless it shall first receive such advice or concurrence of
the Required Lenders as it deems appropriate and contribution by each Lender of
its Percentage Share of costs reasonably expected by the Agent to be incurred in
connection therewith. The Agent shall in all cases be fully protected in acting,
or in refraining from acting, under this Agreement and the other Loan Documents
in accordance with a request of the Required Lenders. Such request and any
action taken or failure to act pursuant thereto shall be binding upon the
Lenders and all future holders of the Notes. In no event shall the Agent be
required to take any action that exposes the Agent to personal liability or that
is contrary to any Loan Document or applicable Requirement of Law.

      8.6 Notice of Default. The Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default unless the Agent has
received notice from a Lender or the Borrower referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default." In the event that the Agent receives such a notice, the
Agent shall promptly give notice thereof to the Lenders. The Agent shall take
such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders; provided that unless and until the
Agent shall have received such directions, subject to the provisions of Section
7.2, the Agent may (but shall not be obligated to) take such action, or refrain
from taking such action, with respect to such Default or Event of Default as it
shall deem advisable in the best interests of the Lenders. In the event that the
officer of the Agent primarily responsible for the lending relationship with the
Borrower or the officer of any Lender primarily responsible for the lending
relationship with the Borrower becomes aware that a Default or Event of Default
has occurred and is continuing, the Agent or such Lender, as the case may be,
shall use its good faith efforts to inform the other Lenders and/or the Agent,
as the case may be, promptly of such occurrence. Notwithstanding the preceding
sentence, failure to comply with the preceding sentence shall not result in any
liability to the Agent or any Lender.

      8.7 Non-Reliance on Agent and Other Lenders. Each Lender expressly
acknowledges that neither the Agent nor any other Lender nor any of their
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates has made any representation or warranty to such Lender and that no
act by the Agent or any other Lender hereafter taken, including any review of
the affairs of the Borrower, shall be deemed to constitute any representation or
warranty by the Agent or any Lender to any other Lender. Each Lender represents
to the Agent that it has,


                                     - 51 -
<PAGE>

independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
condition (financial and otherwise) and creditworthiness of the Borrower and the
value of the Collateral and other Properties of the Borrower and has made its
own decision to enter into this Agreement. Each Lender also represents that it
will, independently and without reliance upon the Agent or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigation as it deems necessary to inform itself as to the
business, operations, property, condition (financial and otherwise) and
creditworthiness of the Borrower and the value of the Collateral and other
Properties of the Borrower. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Agent hereunder, the
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the business, operations, property,
condition (financial and otherwise), or creditworthiness of the Borrower or the
value of the Collateral or other Properties of the Borrower which may come into
the possession of the Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or affiliates.

      8.8 Indemnification. EACH LENDER AGREES TO INDEMNIFY THE AGENT AND ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES (TO THE
EXTENT NOT REIMBURSED BY THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF THE
BORROWER TO DO SO), RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER,
FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY
KIND WHATSOEVER WHICH MAY AT ANY TIME (INCLUDING ANY TIME FOLLOWING THE PAYMENT
AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY
RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
OTHER DOCUMENT CONTEMPLATED OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR ANY ACTION TAKEN OR OMITTED BY THE AGENT OR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR
IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING ANY LIABILITIES, CLAIMS,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES AND DISBURSEMENTS IMPOSED, INCURRED OR ASSERTED AS A RESULT OF THE
NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF THE AGENT OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT NO
LENDER SHALL BE LIABLE FOR THE PAYMENT OF ANY PORTION OF SUCH LIABILITIES,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES OR DISBURSEMENTS RESULTING SOLELY FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE AGENT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT OR AFFILIATES. THE AGREEMENTS IN THIS SECTION SHALL SURVIVE
THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS
AGREEMENT.

      8.9 Restitution. Should the right of the Agent or any Lender to realize
funds with respect to the Obligations be challenged and any application of such
funds to the Obligations be reversed, whether by Governmental Authority or
otherwise, or should the Borrower otherwise be entitled to a refund or return of
funds distributed to the Lenders in connection with the


                                     - 52 -
<PAGE>

Obligations, the Agent or such Lender, as the case may be, shall promptly notify
the Lenders of such fact. Not later than Noon, Central Standard or Central
Daylight Savings Time, as the case may be, of the Business Day following such
notice, each Lender shall pay to the Agent an amount equal to the ratable share
of such Lender of the funds required to be returned to the Borrower. The ratable
share of each Lender shall be determined on the basis of the percentage of the
payment all or a portion of which is required to be refunded originally
distributed to such Lender, if such percentage can be determined, or, if such
percentage cannot be determined, on the basis of the Percentage Share of such
Lender. The Agent shall forward such funds to the Borrower or to the Lender
required to return such funds. If any such amount due to the Agent is made
available by any Lender after Noon, Central Standard or Central Daylight Savings
Time, as the case may be, of the Business Day following such notice, such Lender
shall pay to the Agent (or the Lender required to return funds to the Borrower,
as the case may be) for its own account interest on such amount at a rate equal
to the Federal Funds Rate for the period from and including the date on which
restitution to the Borrower is made by the Agent (or the Lender required to
return funds to the Borrower, as the case may be) to but not including the date
on which such Lender failing to timely forward its share of funds required to be
returned to the Borrower shall have made its ratable share of such funds
available.

      8.10 Agent in Its Individual Capacity. The Agent and its affiliates may
make loans to, accept deposits from and generally engage in any kind of business
with the Borrower as though the Agent were not the agent hereunder. With respect
to any Note issued to the Lender serving as the Agent, the Agent shall have the
same rights and powers under this Agreement as a Lender and may exercise such
rights and powers as though it were not the Agent. The terms "Lender" and
"Lenders" shall include the Agent in its individual capacity.

      8.11 Successor Agent. The Agent may resign as Agent upon ten days' notice
to the Lenders and the Borrower. If the Agent shall resign as Agent under this
Agreement and the other Loan Documents, Lenders for which the Percentage Shares
aggregate at least fifty-one percent (51%) shall appoint from among the Lenders
a successor agent for the Lenders, subject to the reasonable consent of the
Borrower, whereupon such successor agent shall succeed to the rights, powers and
duties of the Agent. The term "Agent" shall mean such successor agent effective
upon its appointment. The rights, powers, and duties of the former Agent as
Agent shall be terminated, without any other or further act or deed on the part
of such former Agent or any of the parties to this Agreement or any holders of
the Notes. After the removal or resignation of any Agent hereunder as Agent, the
provisions of this Article VIII and those of any Section hereof relating to the
Agent, including Section 5.14, Section 5.15 and Section 5.19 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement and the other Loan Documents.

      8.12 Applicable Parties. The provisions of this Article are solely for the
benefit of the Agent and the Lenders, and the Borrower shall not have any rights
as a third party beneficiary or otherwise under any of the provisions of this
Article. In performing functions and duties hereunder and under the other Loan
Documents, the Agent shall act solely as the agent of the Lenders and does not
assume, nor shall it be deemed to have assumed, any obligation or


                                     - 53 -
<PAGE>

relationship of trust or agency with or for the Borrower or any legal
representative, successor, and assign of the Borrower.

                                   ARTICLE IX

                                  MISCELLANEOUS

      9.1 Assignments; Participations. Each Lender may assign or sell
participations in its Loans and Commitments to one or more other Persons in
accordance with this Section 9.1.

            (a) Assignments. Any Lender,

                  (i) with the written consent of the Borrower and the Agent
            (which consent shall not be unreasonably delayed or withheld), may
            at any time, assign and delegate to one or more commercial banks or
            other financial institutions, and

                  (ii) with notice to the Borrower and the Agent, but without
            the consent of the Borrower or the Agent, may assign and delegate to
            any of its Affiliates or to any other Lender

(each Person described in (i) or (ii) above as being the Person to whom such
assignment and delegation is to be made, being hereinafter referred to as an
"Assignee Lender"), all or any fraction of such Lender's total Loans and
Commitments (which assignment and delegation shall be of a constant, and not a
varying percentage, of all the assigning Lender's Loans and Commitments), in a
minimum aggregate amount of $1,000,000 of such Lender's Percentage Share of the
Maximum Commitment Amount, if less; provided, however, that such Assignee Lender
will comply with all the provisions of this Agreement, and further, provided,
however, that the Borrower and Agent shall be entitled to continue to deal
solely and directly with such assigning Lender in connection with the interests
so assigned and delegated to an Assignee Lender until:

                  (iii) written notice of such assignment and delegation
            together with payment instructions, addresses and related
            information with respect to such Assignee Lender, shall have been
            given to the Borrower and the Agent by such Lender and such Assignee
            Lender,

                  (iv) such Assignee Lender shall have executed and delivered to
            the Borrower and the Agent a Lender Assignment Agreement, accepted
            by the Borrower and the Agent and attached hereto as Exhibit VII,
            and

                  (v) the processing fees described below shall have been paid.


                                     - 54 -
<PAGE>

From and after the date that the Borrower and the Agent accept such Lender
Assignment Agreement, (a) the Assignee Lender thereunder shall be deemed
automatically to have become a party hereto and to the extent that rights and
obligations hereunder have been assigned and delegated to such Assignee Lender
in connection with such Lender Assignment Agreement, shall have the rights and
obligations of a Lender hereunder and under the other Loan Documents, and (b)
the Assignor Lender, to the extent that rights and obligations hereunder have
been assigned and delegated by it in connection with such Lender Assignment
Agreement, shall be released from its obligations hereunder and under the other
Loan Documents. Within five Business Days after its receipt of notice that the
Agent has received an executed Lender Assignment Agreement, the Borrower shall
execute and deliver to the Agent (for delivery to the relevant Assignee Lender)
new Notes evidencing such Assignee Lender's assigned Loans and Commitments and,
if the assignor Lender has retained Loans and Commitments hereunder, replacement
Notes in the principal amount of the Loans and Commitments retained by the
assignor Lender hereunder (such Notes to be in exchange for, but not in payment
of, those Notes then held by such assignor Lender). Each such Note shall be
dated the date of the predecessor Notes. The assignor Lender shall mark the
predecessor Notes "exchanged" and deliver them to the Borrower. Accrued interest
on that part of the predecessor Notes evidenced by the new Notes, and accrued
fees, shall be paid as provided in the Lender Assignment Agreement. Accrued
interest on that part of the predecessor Notes evidenced by the replacement
Notes shall be paid to the assignor Lender. Accrued interest and accrued fees
shall be paid at the same time or times provided in the predecessor Notes and in
this Agreement. Such assignor Lender or such assignee Lender must also pay a
processing fee to the Agent upon delivery of any Lender Assignment Agreement in
the amount of $3,000. Any attempted assignment and delegation not made in
accordance with this Section 9.1 shall be null and void.

            (b) Participations. Any Lender, with the prior written consent of
the Borrower in its sole discretion, may at any time sell to one or more
commercial banks (each of such commercial banks being herein called a
"Participant") participating interests in any of the Loans, Commitments, or
other interests of such Lender hereunder; provided, however, that (a) no
participation contemplated in this Section 9.1 shall relieve such Lender from
its Commitments or its other obligations hereunder or under any other Loan
Document, (b) such Lender shall remain solely responsible for the performance of
its Commitments and such other obligations, (c) the Borrower and the Agent shall
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement and each of the other Loan
Documents, (d) no Participant shall be entitled to require such Lender to take
or refrain from taking any action hereunder or under any other Loan Document.

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

      9.3 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


                                     - 55 -
<PAGE>

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, 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 Agent and Lender, to:

                  Guaranty Bank, FSB
                  333 Clay Street, Suite 4400
                  Houston, Texas  77002
                  Attention: Richard E. Menchaca
                  Telecopy: (713) 890-8868

            (b)   if to the Borrower, to:

                  PrimeEnergy Corporation
                  PrimeEnergy Management Corporation
                  Prime Operating Company
                  Eastern Oil Well Service Company
                  Southwest Oilfield Construction Company
                  EOWS Midland Company
                  One Landmark Square
                  Stamford, Connecticut  06901
                  Attention: Ms. Beverly A. Cummings
                  Telecopy: (203) 358-5786

      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.

      9.4 Parties in Interest. Subject to applicable restrictions contained
herein, all covenants and agreements herein contained by or on behalf of the
Borrower, the Agent or the Lenders shall be binding upon and inure to the
benefit of the Borrower, the Agent or the Lenders, as the case may be, and their
respective legal representatives, successors, and assigns.

      9.5 Rights of Third Parties. All provisions herein are imposed solely and
exclusively for the benefit of the Agent, Lenders and the Borrower. 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.

      9.6 Renewals; Extensions. All provisions of this Agreement relating to the
Notes 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 under this Agreement, the Notes, or any
other Loan Document.


                                     - 56 -
<PAGE>

      9.7 No Waiver; Rights Cumulative. No course of dealing on the part of the
Agent or the Lender, its officers or employees, nor any failure or delay by the
Agent or the Lender with respect to exercising any of its rights under any Loan
Document shall operate as a waiver thereof. The rights of the Agent or 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.
Neither the making of any Loan nor the issuance of a Letter of Credit shall
constitute a waiver of any of the covenants, warranties, or conditions of the
Borrower contained herein. In the event the Borrower is unable to satisfy any
such covenant, warranty, or condition, neither the making of any Loan nor the
issuance of a Letter of Credit shall have the effect of precluding the Lender
from thereafter declaring such inability to be an Event of Default as
hereinabove provided.

      9.8 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.

      9.9 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.

      9.10 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.

      9.11 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.

      9.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTES 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 CHAPTER 345 OF THE TEXAS
FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.

      9.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION


                                     - 57 -
<PAGE>

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 HEREBY SUBMITS 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.

      9.14 WAIVER OF RIGHTS TO JURY TRIAL. THE BORROWER, AGENT AND THE LENDERS
HEREBY KNOWINGLY, VOLUNTARILY, 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.

      9.15 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. 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.

      9.16 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.


                                     - 58 -
<PAGE>

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

                                   BORROWER:

                                   PRIMEENERGY CORPORATION
                                   PRIMEENERGY MANAGEMENT
                                   CORPORATION, PRIME OPERATING
                                   COMPANY, EASTERN OIL WELL SERVICE
                                   COMPANY, SOUTHWEST OILFIELD
                                   CONSTRUCTION COMPANY
                                   EOWS MIDLAND COMPANY


                                   By:__________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer


                                     - 59 -
<PAGE>

                                      AGENT AND LENDER:

                                      GUARANTY BANK, FSB


                                      By:___________________________________
                                           Richard E. Menchaca
                                           Vice President


                                     - 60 -
<PAGE>

                                    EXHIBIT I

                                 [FORM OF NOTE]

                                 PROMISSORY NOTE

$50,000,000                       Houston, Texas               December 19, 2002

      FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker") promises
to pay to the order of GUARANTY BANK, FSB ("Payee"), at its banking quarters in
Houston, Harris County, Texas, the sum of FIFTY MILLION DOLLARS ($50,000,000),
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 CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL
NOT APPLY TO THIS NOTE.

                           (Page One of Two Page Note)


                                      I-i
<PAGE>

                                    PRIMEENERGY CORPORATION
                                    PRIMEENERGY MANAGEMENT
                                    CORPORATION, PRIME OPERATING
                                    COMPANY, EASTERN OIL WELL SERVICE
                                    COMPANY, SOUTHWEST OILFIELD
                                    CONSTRUCTION COMPANY
                                    EOWS MIDLAND COMPANY


                                    By:_________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer


                                      I-ii
<PAGE>

                                  EXHIBIT I(A)

                               [FORM OF TERM NOTE]

                                      TERM
                                 PROMISSORY NOTE

$4,000,000                        Houston, Texas               December 19, 2002

      FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker") promises
to pay to the order of GUARANTY BANK, FSB ("Payee"), at its banking quarters in
Houston, Harris County, Texas, the sum of FOUR MILLION DOLLARS ($4,000,000), 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 CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL
NOT APPLY TO THIS NOTE.

                           (PAGE ONE OF TWO PAGE NOTE)


                                     I(A)-i
<PAGE>

                                PRIMEENERGY CORPORATION
                                PRIMEENERGY MANAGEMENT
                                CORPORATION, PRIME OPERATING
                                COMPANY, EASTERN OIL WELL SERVICE
                                COMPANY, SOUTHWEST OILFIELD
                                CONSTRUCTION COMPANY
                                EOWS MIDLAND COMPANY


                                By:_____________________________________________
                                      Beverly A. Cummings
                                      Executive Vice President, Treasurer, and
                                      Chief Financial Officer


                                     I(A)-ii
<PAGE>

                                   EXHIBIT II

                           [FORM OF BORROWING REQUEST]

GUARANTY BANK, FSB
333 CLAY STREET, SUITE 4400
HOUSTON, TEXAS  77002
Attention:  Richard E. Menchaca

      Re:   Credit Agreement dated as of December 19, 2002, by and between
            PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT CORPORATION, PRIME
            OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY, SOUTHWEST
            OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY and GUARANTY
            BANK, FSB, as Agent, and the Lenders signatory thereto from time to
            time (as amended, restated, or supplemented from time to time, the
            "Credit Agreement")

Ladies and Gentlemen:

      Pursuant to the Credit Agreement, the Borrower hereby makes the requests
indicated below:

      1.    Loans

      (a)   Amount of new Loan: $

      (b)   Requested funding date: , 20

      (c)   $________________ of such Loan is to be a Floating Rate Loan;

            $________________ of such Loan is to be a LIBO Rate Loan.

      Requested Interest Period for LIBO Rate Loan: ____ months.

      2.    Continuation or conversion of LIBO Rate Loan maturing on :

      (a)   Amount to be continued as a LIBO Rate Loan is $        , with an
            Interest Period of              months;

      (b)   Amount to be converted to a Floating Rate Loan is $      ; and

      3.    Conversion of Floating Rate Loan:

      (a)   Requested conversion date:     , 20 .


                                      II-i
<PAGE>

      (b)   Amount to be converted to a LIBO Rate Loan is $       , with an
            Interest Period of _____ months.

      The undersigned certifies that she/he is the ____________ of the Borrower,
has obtained all consents necessary, and as such she/he is authorized to execute
this request on behalf of the Borrower. The undersigned further certifies,
represents, and warrants on behalf of the Borrower that the Borrower is entitled
to receive the requested borrowing, continuation, or conversion under the terms
and conditions of the Credit Agreement and are in full compliance with all the
terms and conditions of the Credit Agreement. Each capitalized term used but not
defined herein shall have the meaning assigned to such term in the Credit
Agreement.

                                   BORROWER:

                                   PRIMEENERGY CORPORATION
                                   PRIMEENERGY MANAGEMENT
                                   CORPORATION, PRIME OPERATING
                                   COMPANY, EASTERN OIL WELL SERVICE
                                   COMPANY, SOUTHWEST OILFIELD
                                   CONSTRUCTION COMPANY
                                   EOWS MIDLAND COMPANY


                                   By:__________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer


                                     II-ii
<PAGE>

                                   EXHIBIT III

                        [FORM OF COMPLIANCE CERTIFICATE]

                                 ________, 2002

GUARANTY BANK, FSB
333 CLAY STREET, SUITE 4400
HOUSTON, TEXAS  77002
Attention:  Richard E. Menchaca

      Re:   Credit Agreement dated as of December 19, 2002, by and between
            PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT CORPORATION, PRIME
            OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY, SOUTHWEST
            OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY and GUARANTY
            BANK, FSB, as Agent, and the Lenders signatory thereto from time to
            time (as amended, restated, or supplemented from time to time, the
            "Credit Agreement")

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 6.13: Interest Coverage Ratio. Permit, as of the close of
            any fiscal quarter, the ratio of (a) quarterly EBITDA on a tailing
            four-quarter basis to (b) Interest Expense to be less than 3.00 to
            1.00, measured on a trailing four quarter basis.

                                    Actual
                                    ------

                                    _____ to 1.0


                                      III-i
<PAGE>

      (b)   Section 6.14: Current Ratio. Permit, as of the close of any fiscal
            quarter, the ratio of Current Assets to Current Liabilities to be
            less than 1.00 to 1.00 measured on a trailing four quarter basis.

                                    Actual
                                    ------

                                    _____ to 1.0

      (c)   Section 6.15: Tangible Net Worth. Permit Tangible Net Worth, as of
            the close of any fiscal quarter, to be less than $6,000,000, plus
            75% of positive quarterly net income thereafter.

                                     Actual
                                     ------

      (d)   Section 6.16: Bank Debt Coverage Ratio. Permit, as of the close of
            any fiscal quarter, the ratio of (a) Bank Debt to (b) EBITDA to be
            greater than 4.00 to 1.00, measured on a trailing four quarter
            basis.

                                    Actual
                                    ------

                                    _____ to 1.0

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


                                     III-ii
<PAGE>

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

                                Very truly yours,

                                PRIMEENERGY CORPORATION
                                PRIMEENERGY MANAGEMENT
                                CORPORATION, PRIME OPERATING
                                COMPANY, EASTERN OIL WELL SERVICE
                                COMPANY, SOUTHWEST OILFIELD
                                CONSTRUCTION COMPANY
                                EOWS MIDLAND COMPANY


                                By:_____________________________________________
                                        Beverly A. Cummings
                                        Executive Vice President, Treasurer, and
                                        Chief Financial Officer


                                    III-iii
<PAGE>

                                   EXHIBIT IV

                          [FORM OF OPINION OF COUNSEL]

                                 [Closing Date]

GUARANTY BANK, FSB
333 CLAY STREET, SUITE 4400
HOUSTON, TEXAS 77002
Attention: Richard E. Menchaca

      Re:   Credit Agreement dated as of December 19, 2002, by and between
            PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT CORPORATION, PRIME
            OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY, SOUTHWEST
            OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY and GUARANTY
            BANK, FSB, as Agent, and the Lenders signatory thereto from time to
            time (as amended, restated, or supplemented from time to time, the
            "Credit Agreement")

Ladies and Gentlemen:

      We have acted as counsel to PRIMEENERGY CORPORATION, PRIMEENERGY
MANAGEMENT CORPORATION, PRIME OPERATING COMPANY, EASTERN OIL WELL SERVICE
COMPANY, SOUTHWEST OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY
(collectively, 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 and the Term 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 debtors, constituent
      to the Mortgage (the "Financing Statement").

                                      IV-i
<PAGE>

            (e) a certificate of incumbency dated the Closing Date, including
      specimen signatures of all officers or other representatives of the
      Borrower who are authorized to execute Loan Documents on behalf of the
      Borrower, such certificate being executed by the manager or another
      authorized representative of the Borrower;

            (f) copies of resolutions, to the extent required under the
      Operating Agreement of the Borrower, adopted by the board of directors of
      the Borrower approving the Loan Documents to which the Borrower is a party
      and authorizing the transactions contemplated herein and therein,
      accompanied by a certificate dated the Closing Date issued by the manager
      or another authorized representative of the Borrower to the effect that
      such copies are true and correct copies of resolutions duly adopted and
      that such resolutions constitute all the resolutions adopted with respect
      to such transactions, have not been amended, modified, or rescinded in any
      respect, and are in full force and effect as of the date of such
      certificate;

            (g) 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) Ratification of Mortgage and 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) undated letters, in form and substance satisfactory to
            the Agent, from the Borrower 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 Agent;

                  (iv) Security Agreement from the Borrower pledging contract
            rights, etc.;

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


                                      IV-ii
<PAGE>

                  (vi) Assignment of Partnership Interest (Security Agreement)
            from the Borrower pledging certain partnership interest;

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

            (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 in its jurisdictions of
      formation and in any other jurisdictions where it does business;

      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;

            (c) the Lender is authorized and has the power to enter into and
      perform its obligations under the Credit Agreement;

            (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 or limited liability companies duly
      organized, legally existing, and in good standing under the laws of their
      respective states of incorporation and are duly qualified as foreign
      corporations or limited liability companies and are in good standing in
      all jurisdictions wherein the ownership of their respective Property or
      the operation of their respective businesses 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


                                     IV-iii
<PAGE>

      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, 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 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


                                      IV-iv
<PAGE>

      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 the 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,
      as the case may be.

            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.

            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.

            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


                                      IV-v
<PAGE>

      from the limitations and other effects of such statutes or rules of law
      upon the validity and binding effect of credit agreements, promissory
      notes, guaranties, 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,


                                      IV-vi
<PAGE>

                                    EXHIBIT V

                                FACILITY AMOUNTS

1.    Revolving Line of Credit

<TABLE>
<CAPTION>
                                                          Facility
      Name of Lender                                      Amount
      --------------                                      ------
<S>                                                       <C>
      Guaranty Bank, FSB                                  $50,000,000

      Total                                               $50,000,000
</TABLE>

2.    Term Loan

<TABLE>
<CAPTION>
                                                          Facility
      Name of Lender                                      Amount
      --------------                                      ------
<S>                                                       <C>
      Guaranty Bank, FSB                                  $4,000,000

      Total                                               $4,000,000
</TABLE>


                                       V-i
<PAGE>

                                   EXHIBIT VI

                                   DISCLOSURES

Section 1.2                    Permitted Liens

                               Liens in favor the "Jackson Group" composed of
                               Jeral W. Jackson, Inc., Pangaea Properties, Inc.
                               and William H. Nichols by PrimeEnergy
                               Corporation, Sterling Asset and Income Funds A-1,
                               A-2, AA-1 and AA-2 (now PrimeEnergy Asset and
                               Income Funds A-1, A-2, AA-1 and AA-2) to secure
                               the payment to the Jackson Group of the "JPN
                               Fee", being an amount of certain of the proceeds
                               and accounts arising from the sale of oil and gas
                               from certain properties located in Garvin County,
                               Oklahoma, as determined pursuant to the terms of
                               that certain Memorandum of Agreement dated
                               October 1, 1990, and as evidenced by Financing
                               Statement filed January 23, 1991, Volume 1295,
                               Page 58, Garvin County, Oklahoma, and Financing
                               Statement filed January 28, 1991, N-00844,
                               Central Filing Office, Oklahoma County Clerk.

Section 4.7                    Liabilities

                               None

                               Litigation

                               None

Section 4.12                   Environmental Matters

                               None

Section 4.17                   Refunds

                               None

Section 4.18                   Gas Contracts

                               None

Section 4.20                   Casualties

                               None

Section 4.22                   Subsidiaries

                               None except those listed as Borrowers


                                      VI-i
<PAGE>


                                     VI-ii
<PAGE>

                                   EXHIBIT VII

                         [FORM OF ASSIGNMENT AGREEMENT]

                              ASSIGNMENT AGREEMENT

      This ASSIGNMENT AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, this "Agreement") is dated as of ________,_____, by
and between __________ (the "Assignor") and _____________ (the "Assignee").

                                    RECITALS

      WHEREAS, the Assignor is a party to the Credit Agreement dated as of
December 19, 2002, (as amended, supplemented or restated from time to time, the
"Credit Agreement") by and among PRIMEENERGY CORPORATION, PRIMEENERGY MANAGEMENT
CORPORATION, PRIME OPERATING COMPANY, EASTERN OIL WELL SERVICE COMPANY,
SOUTHWEST OILFIELD CONSTRUCTION COMPANY, EOWS MIDLAND COMPANY (collectively, the
"Borrower"), each of the lenders that is or becomes a party thereto as provided
in Section 9.1(b) of the Credit Agreement (individually, together with its
successors and assigns, a "Lender", and collectively, together with their
successors and assigns, the "Lenders"), and Guaranty Bank, FSB, a federal
savings bank, as a Lender (in such capacity, "Guaranty") and as agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"Agent"); and

      WHEREAS, the Assignor proposes to sell, assign and transfer to the
Assignee, and the Assignee proposes to purchase and assume from the Assignor,
[ALL][A PORTION] of the Assignor's Facility Amount and its outstanding Loans,
all on the terms and conditions of this Agreement;

      NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

                                   ARTICLE I

                         DEFINITIONS AND INTERPRETATION

      1.1 Definitions from Credit Agreement. All capitalized terms used but not
defined herein have the respective meanings given to such terms in the Credit
Agreement.

      1.2 Additional Defined Terms. As used herein, the following terms have the
following respective meanings:

            "Assigned Interest" shall mean all of Assignor's (in its capacity as
      a "Lender") rights and obligations (i) under the Credit Agreement and the
      other Loan Documents in respect of [ALL OF] [THE PORTION OF THE] Facility
      Amount of the Assignor in the principal amount equal to $______ and (ii)
      to make Loans under its Commitment up to such


                                      VI-i
<PAGE>

      amount referenced above and any right to receive payments for the Loans
      currently outstanding under its Commitment in the principal amount of
      $_______ (the "Loan Balance"), plus the interest and fees which will
      accrue with respect thereto from and after the Assignment Date.

                  "Assignment Date" shall mean                   ,         .

      1.3 References. References in this Agreement to Schedule, Exhibit,
Article, or Section numbers shall be to Schedules, 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 Schedule, Exhibit,
Article, or Section in which such reference appears. Except as otherwise
indicated, references in this Agreement to statutes, sections, or regulations
are to be construed as including all statutory or regulatory provisions
consolidating, amending, replacing, succeeding, or supplementing the statute,
section, or regulation referred to. References in this Agreement to "writing"
include printing, typing, lithography, facsimile reproduction, and other means
of reproducing words in a tangible visible form. References in this Agreement to
agreements and other contractual instruments shall be deemed to include all
exhibits and appendices attached thereto and all subsequent amendments and other
modifications to such instruments, but only to the extent such amendments and
other modifications are not prohibited by the terms of this Agreement.
References in this Agreement to Persons include their respective successors and
permitted assigns.

      1.4 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.

      1.5 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.

      1.6 Negotiated Transaction. Each party to this Agreement affirms to the
other that it has had the opportunity to consult, and discuss the provisions of
this Agreement with, independent counsel and fully understands the legal effect
of each provision.


                                     VI-ii
<PAGE>

                                   ARTICLE II

                               SALE AND ASSIGNMENT

      2.1 Sale and Assignment. On the terms and conditions set forth herein,
effective on and as of the Assignment Date, the Assignor hereby sells, assigns
and transfers to the Assignee, and the Assignee hereby purchases and assumes
from the Assignor, all of the right, title and interest of the Assignor in and
to, and all of the obligations of the Assignor in respect of, the Assigned
Interest. Such sale, assignment and transfer is without recourse and, except as
expressly provided in this Agreement, without representation or warranty.

      2.2 Assumption of Obligations. The Assignee agrees with the Assignor (for
the express benefit of the Assignor and the Borrower) that the Assignee will,
from and after the Assignment Date, assume and perform all of the obligations of
the Assignor in respect of the Assigned Interest. From and after the Assignment
Date: (a) the Assignor shall be released from the Assignor's obligations in
respect of the Assigned Interest, and (b) the Assignee shall be entitled to all
of the Assignor's rights, powers and privileges under the Credit Agreement and
the other Loan Documents in respect of the Assigned Interest.

      2.3 Consent by Agent. By executing this Agreement as provided below, in
accordance with Section 9.1(b) of the Credit Agreement, the Agent hereby
acknowledges notice of the transactions contemplated by this Agreement and
consents to such transactions.

                                  ARTICLE III

                                    PAYMENTS

      3.1 Payments. As consideration for the sale, assignment and transfer
contemplated by Section 2.1, the Assignee shall, on the Assignment Date, assume
Assignor's obligations in respect of the Assigned Interest and pay to the
Assignor an amount equal to the Loan Balance, if any, all accrued and unpaid
interest and fees with respect to the Assigned Interest as of the Assignment
Date. Except as otherwise provided in this Agreement, all payments hereunder
shall be made in Dollars and in immediately available funds, without setoff,
deduction or counterclaim.

      3.2 Allocation of Payments. The Assignor and the Assignee agree that (i)
the Assignor shall be entitled to any payments of principal with respect to the
Assigned Interest made prior to the Assignment Date, together with any interest
and fees with respect to the Assigned Interest accrued prior to the Assignment
Date, (ii) the Assignee shall be entitled to any payments of principal with
respect to the Assigned Interest made from and after the Assignment Date,
together with any and all interest and fees with respect to the Assigned
Interest accruing from and after the Assignment Date, and (iii) the Agent is
authorized and instructed to allocate payments received by it for the account of
the Assignor and the Assignee as provided in the foregoing clauses. Each party
hereto agrees that it will hold any interest, fees or other amounts that it may
receive to which the other party hereto shall be entitled pursuant to the


                                     VI-iii
<PAGE>

preceding sentence for account of such other party and pay, in like money and
funds, any such amounts that it may receive to such other party promptly upon
receipt.

      3.3 Delivery of Notes. Promptly following the receipt by the Assignor of
the consideration required to be paid under Section 3.1 hereof, the Assignor
shall, in the manner contemplated by Section 9.1(b) of the Credit Agreement, (i)
deliver to the Agent (or its counsel) the Note held by the Assignor and (ii)
notify the Agent to request that the Borrower execute and deliver new Notes to
the Assignor, if Assignor continues to be a Lender, and the Assignee, dated the
Assignment Date in respective principal amounts equal to the respective Facility
Amounts of the Assignor (if appropriate) and the Assignee after giving effect to
the sale, assignment and transfer contemplated hereby.

      3.4 Further Assurances. The Assignor and the Assignee hereby agree to
execute and deliver such other instruments, and take such other actions, as
either party may reasonably request in connection with the transactions
contemplated by this Agreement.

                                   ARTICLE IV

                              CONDITIONS PRECEDENT

      The effectiveness of the sale, assignment and transfer contemplated hereby
is subject to the satisfaction of each of the following conditions precedent:

            (a) the execution and delivery of this Agreement by the Assignor and
      the Assignee;

            (b) the receipt by the Assignor of the payments required to be made
      under Section 3.1; and

            (c) the acknowledgment and consent by the Agent contemplated by
      Section 2.3.

                                   ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

      5.1 Representations and Warranties of Assignor. The Assignor represents
and warrants to the Assignee as follows:

            (a) it has all requisite power and authority, and has taken all
      action necessary to execute and deliver this Agreement and to fulfill its
      obligations under, and consummate the transactions contemplated by, this
      Agreement;

            (b) the execution, delivery and compliance with the terms hereof by
      the Assignor and the delivery of all instruments required to be delivered
      by it hereunder do not and will not violate any Requirement of Law
      applicable to it;


                                     VI-iv
<PAGE>

            (c) this Agreement has been duly executed and delivered by it and
      constitutes the legal, valid and binding obligation of the Assignor,
      enforceable against it in accordance with its terms;

            (d) all approvals and authorizations of, all filings with and all
      actions by any Governmental Authority necessary for the validity or
      enforceability of its obligations under this Agreement have been obtained;

            (e) the Assignor has good title to, and is the sole legal and
      beneficial owner of, the Assigned Interest, free and clear of all Liens,
      claims, participations or other charges of any nature whatsoever; and

            (f) the transactions contemplated by this Agreement are commercial
      banking transactions entered into in the ordinary course of the banking
      business of the Assignor.

      5.2 Disclaimer. Except as expressly provided in Section 5.1 hereof, the
Assignor does not make any representation or warranty, nor shall it have any
responsibility to the Assignee, with respect to the accuracy of any recitals,
statements, representations or warranties contained in the Credit Agreement or
in any other Loan Document or for the value, validity, effectiveness,
genuineness, execution, legality, enforceability or sufficiency of the Credit
Agreement, the Notes or any other Loan Document or for any failure by the
Borrower or any other Person (other than Assignor) to perform any of its
obligations thereunder or for the existence, value, perfection or priority of
any collateral security or the financial or other condition of the Borrower or
any other Person, or any other matter relating to the Credit Agreement or any
other Loan Document or any extension of credit thereunder.

      5.3 Representations and Warranties of Assignee. The Assignee represents
and warrants to the Assignor as follows:

            (a) it has all requisite power and authority, and has taken all
      action necessary to execute and deliver this Agreement and to fulfill its
      obligations under, and consummate the transactions contemplated by, this
      Agreement;

            (b) the execution, delivery and compliance with the terms hereof by
      the Assignee and the delivery of all instruments required to be delivered
      by it hereunder do not and will not violate any Requirement of Law
      applicable to it;

            (c) this Agreement has been duly executed and delivered by it and
      constitutes the legal, valid and binding obligation of the Assignee,
      enforceable against it in accordance with its terms;

            (d) all approvals and authorizations of, all filings with and all
      actions by any Governmental Authority necessary for the validity or
      enforceability of its obligations under this Agreement have been obtained;


                                      VI-v
<PAGE>

            (e) the Assignee has received copies of the Credit Agreement and the
      other Loan Documents, as well as copies of all Financial Statements
      previously provided by the Borrower in satisfaction of obligations under
      the Credit Agreement.

            (f) the Assignee has fully reviewed the terms of the Credit
      Agreement and the other Loan Documents and has independently and without
      reliance upon the Assignor, and based on such information as the Assignee
      has deemed appropriate, made its own credit analysis and decision to enter
      into this Agreement;

            (g) if the Assignee is not incorporated under the laws of the United
      Sates of America or a state thereof, the Assignee has contemporaneously
      herewith delivered to the Agent and the Borrower such documents as are
      required by Section 2.25(b) of the Credit Agreement; and

            (h) the transactions contemplated by this Agreement are commercial
      banking transactions entered into in the ordinary course of the banking
      business of the Assignee.

                                   ARTICLE VI

                                  MISCELLANEOUS

      6.1 Notices. All notices and other communications provided for herein
(including any modifications of, or waivers, requests or consents under, this
Agreement) shall be given or made in writing (including by telecopy) to the
intended recipient at its "Address for Notices" specified below its name on the
signature pages hereof or, as to either party, at such other address as shall be
designated by such party in a notice to the other party.

      6.2 Amendment, Modification or Waiver. No provision of this Agreement may
be amended, modified or waived except by an instrument in writing signed by the
Assignor and the Assignee, and consented to by the Agent.

      6.3 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns. The representations and warranties made herein by the
Assignee are also made for the benefit of the Agent, and the Assignee agrees
that the Agent is entitled to rely upon such representations and warranties.

      6.4 Assignments. Neither party hereto may assign any of its rights or
obligations hereunder except in accordance with the terms of the Credit
Agreement.

      6.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be identical and all of which, taken together,
shall constitute one and the


                                     VI-vi
<PAGE>

same instrument, and each of the parties hereto may execute this Agreement by
signing any such counterpart.

      6.6 Governing Law. This Agreement (including the validity and
enforceability hereof) shall be governed by, and construed in accordance with,
the laws of the State of Texas, other than the conflict of laws rules thereof.

      6.7 Expenses. To the extent not paid by the Borrower pursuant to the terms
of the Credit Agreement, each party hereto shall bear its own expenses in
connection with the execution, delivery and performance of this Agreement.

      6.8 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.

                    [SIGNATURES APPEAR ON THE FOLLOWING PAGE]


                                     VI-vii
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.

                                 ASSIGNOR

                                      By:____________________________________
                                      Name:__________________________________
                                      Title:_________________________________


                                 Address for Notices:

                                      Telecopier No.:_________________________
                                      Telephone No.:__________________________
                                      Attention:______________________________


                                 ASSIGNEE

                                      By:____________________________________
                                      Name:__________________________________
                                      Title:_________________________________


                                 Address for Notices:

                                      Telecopier No.:_________________________
                                      Telephone No.:__________________________
                                      Attention:______________________________

ACKNOWLEDGED AND CONSENTED TO:

GUARANTY BANK, FSB
as Agent


By:____________________________________
Name:__________________________________
Title:_________________________________


                                     VI-viii
<PAGE>

                                  EXHIBIT VIII

                       PERSONAL PROPERTY AND EQUIPMENT OF
                       EASTERN OILWELL SERVICE COMPANY AND
                     SOUTHWEST OILFIELD CONSTRUCTION COMPANY

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
          (EASTERN OILWELL SERVICE COMPANY - TEXAS GULF COAST DIVISION)

<TABLE>
<S>                                                                                                 <C>
Rig No. 1 - 1984 HAROLD LEE ENGINEERING Well Service Rig w/Tools                                       310,000.00

Rig No. 2 - 1975 FRANKS 1287/160 DTD-HT Well Service Rig w/Tools                                       215,000.00

Rig No. 3 - 1982 FRANKS 1058/120 Well Service Rig w/Tools                                              212,000.00

Rig No. 6 - 1968 WILSON Mogul 42 Well Service Rig w/Tools                                              129,000.00

Rig No. 7 - IDECO H35K5C Swabbing Unit w/Tools                                                          57,500.00

Trucks                                                                                                 253,500.00

Trailers                                                                                               180,700.00

Pickups                                                                                                319,500.00

Construction Equipment                                                                                 145,200.00

Well Servicing Pumps                                                                                   120,500.00

Well Service Related Equipment                                                                          60,525.00

Related Equipment                                                                                       13,100.00

Cementing Equipment                                                                                     15,750.00

                                    TOTAL TEXAS GULF COAST DIVISION:                                $2,032,275.00
</TABLE>


                                     VIII-i
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
       (EASTERN OILWELL SERVICE COMPANY - CARRIZO SPRINGS, TEXAS DIVISION)

<TABLE>
<S>                                                                                                   <C>
Compressor Packages/Instruments                                                                        138,250.00

                  TOTAL CARRIZO SPRINGS, TEXAS DIVISION:                                              $138,250.00
</TABLE>


                                     VIII-ii
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
           (EASTERN OILWELL SERVICE COMPANY - MIDLAND, TEXAS DIVISION)

<TABLE>
<S>                                                                                                 <C>
Rig No. 2 - 1980 WILSON Mogul 42-B Well Service Rig w/Tools                                            286,000.00

Rig No. 3 - 1980 WILSON Mogul 42-B Well Service Rig w/Tools                                            291,000.00

Rig No. 4 - 1968 SKYTOP 4210 Well Service Rig w/Tools                                                  385,000.00

Rig No. 5 - 1970 SKYTOP 1042 Well Service Rig w/Tools                                                  165,000.00

Trucks                                                                                                  59,000.00

Trailers                                                                                                19,200.00

Pickups                                                                                                186,500.00

Construction Equipment                                                                                  14,500.00

Related Equipment                                                                                      113,050.00

                                    TOTAL MIDLAND, TEXAS DIVISION:                                  $1,519,250.00
</TABLE>


                                    VIII-iii
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
         (EASTERN OILWELL SERVICE COMPANY - PERNELL, OKLAHOMA DIVISION)

<TABLE>
<S>                                                                                                   <C>
Rig No. 126 - FRED E. COOPER Well Service Rig w/Tools                                                   15,900.00

Rig No. 196 - FRANKS 658 Well Service Rig w/Tools                                                       64,000.00

Trucks                                                                                                  35,000.00

Trailers                                                                                                13,000.00

Pickups                                                                                                108,000.00

Related Equipment                                                                                        4,100.00

                                    TOTAL PERNELL, OKLAHOMA DIVISION:                                 $240,000.00
</TABLE>


                                     VIII-iv
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
           (EASTERN OILWELL SERVICE COMPANY - WEST VIRGINIA DIVISION)

<TABLE>
<S>                                                                                                   <C>
Rig No. 1 - 1986 SPEEDSTAR SR50T2340 Well Service Rig w/Tools                                          109,000.00

Rig No. 2 - 1982 WALKER-NEER C25A Well Service Rig w/Tools                                              91,500.00

Rig No. 6 - 1982 WALKER-NEER C25A Well Service Rig w/Tools                                              96,000.00

Rig No. 8 - WALKER-NEER P13A Swabbing Unit w/Tools                                                      33,400.00

Trucks                                                                                                  61,250.00

Trailers                                                                                                 7,500.00

Pickups                                                                                                323,000.00

Construction Equipment                                                                                  77,500.00

All-Terrain Vehicles                                                                                    34,150.00

Cable Tools                                                                                              4,500.00

Related Equipment                                                                                        5,900.00

Handling Equipment/Related                                                                              14,570.00

Shop Equipment                                                                                           5,200.00

                                    TOTAL WEST VIRGINIA DIVISION:                                     $863,470.00
</TABLE>


                                     VIII-v
<PAGE>

                                APPRAISAL SUMMARY

                                       FOR

                       PRIME ENERGY MANAGEMENT CORPORATION
        (SOUTHWEST OILFIELD CONSTRUCTION COMPANY - KINGFISHER, OKLAHOMA)

<TABLE>
<S>                                                                                                 <C>
Rig No. 127 - 1979 IDECO H35KD Well Service Rig w/Tools                                                236,000.00

Rig No. 169 - 1978 FRANKS 1287-160 DTD-HT Well Service Rig w/Tools                                     251,000.00

Rig No. 170 - 1970 FRANKS 1287/160 Well Service Rig w/Tools                                            175,750.00

Rig No. 180/8697 - CARDWELL KB200A Swabbing Unit w/Tools                                                32,000.00

Trucks                                                                                                 120,000.00

Trailers                                                                                                62,000.00

Pickups                                                                                                279,000.00

Construction Equipment                                                                                 135,500.00

Related Equipment                                                                                       30,400.00

Shop Equipment                                                                                          17,500.00

         TOTAL SOUTHWEST OILFIELD CONSTRUCTION COMPANY:                                             $1,339,150.00
</TABLE>


                                    VIII-vi

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>4
<FILENAME>d03089exv10w23.txt
<DESCRIPTION>MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT
<TEXT>
<PAGE>
                                                                   Exhibit 10.23

                  MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
                FINANCING STATEMENT AND ASSIGNMENT OF PRODUCTION

          (THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS)

            This Mortgage, Deed of Trust, Security Agreement, Financing
Statement, and Assignment of Production (this "Deed of Trust") is executed
pursuant to the Credit Agreement dated as of as of December 19, 2002, by and
among PRIMEENERGY CORPORATION, a Delaware corporation ("Prime"), PRIMEENERGY
MANAGEMENT CORPORATION, a New York corporation ("PEMC") (Prime and PEMC herein
collectively, "Mortgagor"), PRIME OPERATING COMPANY, a Texas corporation
("POC"), EASTERN OIL WELL SERVICE COMPANY, a West Virginia corporation
("Eastern"), and SOUTHWEST OILFIELD CONSTRUCTION COMPANY, an Oklahoma
corporation ("Southwest") (Prime, PEMC, POC, Eastern and Southwest herein
collectively, "Borrowers"), and GUARANTY BANK, FSB, a federal savings bank,
individually as a Lender and as Agent for the lenders signatory thereto from
time to time (the "Lenders") (as amended, restated, or supplemented from time to
time, the "Credit Agreement"). Capitalized terms used but not defined herein
shall have the meanings assigned to such terms in the Credit Agreement.

            Mortgagor, acting herein by and through its proper officers who have
heretofore been duly authorized, and with its principal office in Stamford,
Connecticut, and whose mailing address is One Landmark Square, Suite 1100,
Stamford, Connecticut 06901-2605, hereby agrees as follows:

                                   ARTICLE 1

                                      GRANT

            1.1 Lien. Mortgagor, for valuable consideration, the receipt of
which is hereby acknowledged, and in consideration of the debt and trust
hereinafter mentioned, has granted, bargained, sold, conveyed, transferred and
assigned, and by these presents does grant, bargain, sell, convey, transfer and
assign to Arthur R. Gralla, Jr., Trustee, whose address is c/o Guaranty Bank,
FSB, 333 Clay Street, Suite 4400, Houston, Texas 77002-4103, and his successors
and substitutes in trust, as hereinafter provided (the "Trustee"), for the
benefit of Guaranty Bank, FSB, as Agent for the lenders, with banking quarters
in Houston, Harris County, Texas, the mailing address for which is 333 Clay
Street, Suite 4400, Houston, Texas 77002-4103 ("Mortgagee"), the following
described Property:

            (a) all right, title, and interest, whether now owned and existing
      or hereafter acquired or arising, of Mortgagor in and to the leases,
      rights of way, easements, or other documents described in Exhibit A
      attached hereto and incorporated herein for all purposes or described or
      referred to in the documents described in Exhibit A, without regard to any
      surface acreage and/or depth limitations set forth in Exhibit A, and all
      renewals and extensions thereof and all new leases, rights of way,
      easements, or other documents (i) in which an interest is acquired by
      Mortgagor after the termination or expiration of any lease, right of way,
      easement, or other document described or referred to in Exhibit A, and
      (ii) that covers all or any

<PAGE>

      part of the Property described in and covered by such terminated or
      expired lease, right of way, easement, or other document, to the extent,
      and only to the extent, such new leases, rights of way, easements, or
      other documents may cover such Property (all of the foregoing in this
      subsection (a) being the "Leases");

            (b) all right, title, and interest, whether now owned and existing
      or hereafter acquired or arising, of Mortgagor in and to the lands subject
      to the Leases or otherwise described or referred to in Exhibit A, without
      regard to any surface acreage and/or depth limitations set forth in
      Exhibit A (the "Lands"), including, without limitation, the oil, gas,
      mineral, and leasehold estates in and to the Lands;

            (c) all right, title, and interest, whether now owned and existing
      or hereafter acquired or arising, of Mortgagor in and to any of the oil,
      gas, and minerals in, on, or under the Lands, including, without
      limitation, all contractual rights, fee interests, leasehold interests,
      overriding royalty interests, non-participating royalty interests, mineral
      interests, production payments, net profits interests, or any other
      interest measured by or payable out of production of oil, gas, or other
      minerals from the Leases and/or Lands;

            (d) all of the foregoing interests of Mortgagor as such interests
      may be enlarged by the discharge of any payments out of production or by
      the removal of any charges or encumbrances;

            (e) all right, title, and interest, whether now owned and existing
      or hereafter acquired or arising, of Mortgagor in, to, and under or
      derived from any present or future operating, farmout, bidding, pooling,
      unitization, and communitization agreements, assignments, and subleases,
      whether or not described in Exhibit A, to the extent, and only to the
      extent, that such agreements, assignments, and subleases cover or include
      any right, title, and interest, whether now owned and existing or
      hereafter acquired or arising, of Mortgagor in and to all or any portion
      of the Leases and/or the Lands, and all units created by any such pooling,
      unitization, and communitization agreements and all units formed under
      orders, regulations, rules, or other official acts of any Governmental
      Authority having jurisdiction, to the extent and only to the extent that
      such units cover or include all or any portion of the Leases and/or the
      Lands;

            (f) all right, title, and interest, whether now owned and existing
      or hereafter acquired or arising, of Mortgagor in, to, and under or
      derived from all presently existing and future advance payment agreements,
      oil, casinghead gas, and gas sales, exchange, and processing contracts and
      agreements, including, without limitation, those contracts and agreements
      that are described or referred to in Exhibit A, to the extent, and only to
      the extent, those contracts and agreements cover or include all or any
      portion of the Leases and/or the Lands; and


                                       2
<PAGE>

            (g) all right, title, and interest, whether now owned and existing
      or hereafter acquired or arising, of Mortgagor in, to, and under or
      derived from all existing and future permits, licenses, easements, and
      similar rights and privileges that relate to or are appurtenant to any of
      the Leases and/or the Lands.

            1.2 Security Interest. Mortgagor, for the same consideration, hereby
grants to Mortgagee a continuing security interest in all improvements and all
personal Property of any kind or character defined in and subject to the
provisions of the Uniform Commercial Code ("UCC"), including, but not limited
to, substitutions and replacements for, accessions to, and the proceeds and
products from any and all of such improvements and personal Property, as well as
any and all "as-extracted collateral" as such term is defined in the UCC,
whether now owned and existing or hereafter acquired or arising, and situated on
any of the Lands, including, but not limited to, pipe, casing, tubing, rods,
storage tanks, boilers, loading racks, pumps, foundations, warehouses, and all
other personal Property and equipment of every kind and character upon,
incident, appurtenant, or belonging to and used in connection with the interest
of Mortgagor, whether now owned and existing or hereafter acquired or arising,
in the Lands and/or the Leases, including all oil, gas, and other minerals
produced or to be produced to the account of Mortgagor from the Lands and all
accounts receivable, general intangibles, and contract rights of Mortgagor in
connection with the Lands and/or the Leases and all proceeds, products,
substitutions, and exchanges thereof (the Lands, the Leases, and the real and
personal Property interests described in this Section being the "Mortgaged
Property").

            1.3 Assignment of Security. Mortgagor, for the same consideration,
hereby grants to Mortgagee any and all rights of Mortgagor to Liens securing
payment of proceeds from the sale of production from the Mortgaged Property.

            1.4 After-Acquired Property. Mortgagor, for the same consideration,
hereby grants, bargains, sells, conveys, transfers, and assigns to the Trustee
or grants to Mortgagee a continuing security interest in, as the case may be,
all additional right, title, or interest which Mortgagor may hereafter acquire
or become entitled to in the interests, Properties, Lands, Leases, and premises
aforesaid, and in the oil, gas, or other minerals in and under or produced from
or attributable to any of the Lands or Leases, which additional right, title,
and interest, when acquired, shall constitute "Mortgaged Property," the same as
if expressly described and conveyed herein.

            1.5 Habendum. TO HAVE AND TO HOLD all and singular the Mortgaged
Property and all other Property which, by the terms hereof, has or may hereafter
become subject to the Liens of this Deed of Trust, together with all rights,
hereditaments, and appurtenances in anywise belonging thereto, to the Trustee or
Mortgagee, as the case may be, or the successors or assigns of either of them
forever.


                                       3
<PAGE>

                                   ARTICLE 2

                              INDEBTEDNESS SECURED

            This conveyance is made, IN TRUST, HOWEVER, to secure and enforce
the payment of the following indebtedness, obligations, and liabilities:

            2.1 Specific Obligations. The Obligations, including, without
limitation, the indebtedness evidenced by (a) the Credit Agreement, (b) the
Promissory Note dated December 19, 2002, executed by Borrowers to the order of
the Lenders pursuant to the Credit Agreement in the aggregate face amount of up
to $50,000,000, bearing interest and being payable as provided therein or as
provided in the Credit Agreement, with a final maturity of December 19, 2004,
and (c) Promissory Note dated December 19, 2002, executed by Borrowers in the
order of the Lenders pursuant to the Credit Agreement in the face amount of
$4,000,000, bearing interest and being payable as provided therein or as
provided in the Credit Agreement, with a final maturity of December 19, 2004.

            2.2 Additional Indebtedness.

            (a) Payment of and performance of any and all present or future
      obligations of Borrowers under Commodity Hedge Agreements, as defined in
      the Credit Agreement.

            (b) Payment of and performance of any and all present or future
      obligations of Borrowers under any Rate Management Transaction, as defined
      in the Credit Agreement, entered into by and between Borrowers and a
      Lender.

            (c) Payment of and performance of any and all present or future
      obligations of Borrowers under any guaranty in favor of Lenders of any of
      the Borrowers' subsidiary's obligations under Commodity Hedge Agreements
      and Rate Management Transactions and all present or future obligations of
      Borrowers or Borrowers' subsidiaries under Commodity Hedge Agreements and
      Rate Management Transactions.

            2.3 Other and Further Indebtedness. This Deed of Trust is intended
to secure a revolving credit line as set forth in the Credit Agreement. If
intermediate paydowns by Borrowers reduce the outstanding Indebtedness to zero,
it is intended that the Liens created under this Deed of Trust shall remain in
full force and effect as long as any Commitment exists. In addition, it is
contemplated that Borrowers may from time to time borrow additional sums of
money from or otherwise be or become obligated to Lenders. This Deed of Trust is
given to secure any and all indebtedness of Borrowers, present or future, either
direct or indirect, primary or secondary, fixed or contingent, which Borrowers
may now or hereafter owe, or as to which Borrowers may in any manner become
obligated to Lenders for payment, including, without limitation, indebtedness
arising by way of guaranty as to obligations of another to Lenders and
indebtedness originally owed to a party other than Lenders but which becomes
owing to Lenders as the result of Lenders having


                                       4
<PAGE>

acquired the right to payment thereof. This Deed of Trust shall likewise secure
not only the above described indebtedness, but any and all renewals for any
period, extensions, and rearrangements of all or any portion thereof; and the
Liens under this Deed of Trust shall be cumulative of all other Liens and
security of any and every other kind or character whatsoever securing the
above-described indebtedness. Notwithstanding the foregoing, it is not the
intention of the parties hereto to extend the Liens of this Deed of Trust so as
to violate, or give rise to an allegation of violation of, any provision of any
statute, regulation, rule, ordinance or order of any applicable jurisdiction, or
any agency or subdivision of any of such jurisdictions. In this connection, this
Deed of Trust shall not, solely as to the relevant indebtedness, serve as
security for any indebtedness when for it to do so would violate any provision
of any statute, regulation, rule, ordinance or order of any applicable
jurisdiction, or any agency or subdivision of any of such jurisdictions.

            2.4 Indebtedness. The word "Indebtedness" wherever used in this Deed
of Trust shall refer to all present and future debts, obligations, and
liabilities described or referred to in this Article 2, subject, however, to the
limitations provided hereinabove in this Article 2.

                                   ARTICLE 3

                                   WARRANTIES

            3.1 Warranty of Title. Mortgagor hereby binds itself, its legal
representatives, successors, and assigns, to warrant and forever defend all and
singular the Mortgaged Property to the Trustee and the successors and assigns of
the Trustee forever against every Person whomsoever lawfully claiming or to
claim the same or any part thereof. Notwithstanding that this Deed of Trust
covers all of the right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in and to the Mortgaged Property,
Mortgagor, for itself, its legal representatives, successors, and assigns,
further covenants, represents, and warrants that Mortgagor has good and
indefeasible title to the Mortgaged Property and that the interests of Mortgagor
in and to the Leases and/or Lands described in Exhibit A are not greater than
the working interest nor less than the net revenue interest, overriding royalty
interest, net profit interest, production payment interest, royalty interest, or
other interest payable out of or measured by production set forth in connection
with each oil and gas well described in Exhibit A. In the event Mortgagor owns
any other or greater interest, such additional interest is nonetheless included
in, covered by, and subject to the liens and security interests created by this
Deed of Trust.

            3.2 Additional Warranties. In consideration of the Indebtedness,
Mortgagor, for itself, its legal representatives, successors, and assigns,
covenants, represents, and warrants that:

            (a) Leases in Effect. All of the Leases specifically described or
      referred to in Exhibit A are in full force and effect. All covenants,
      express or implied, in respect of the Leases specifically described or
      referred to in Exhibit A, or of any assignment of any of such Leases,
      which may affect the validity of any of such Leases, have been performed
      insofar as such Leases pertain to the Lands.


                                       5
<PAGE>

            (b) Interests Free of Liens. The interests of Mortgagor in the
      Mortgaged Property are free and clear of all Liens except for Permitted
      Liens. All gross production taxes and all taxes as to which non-payment
      could result in a Lien against any of the Mortgaged Property have been
      paid.

            (c) Representations and Warranties. As of the date hereof, all
      representations and warranties of Mortgagor set forth in the Credit
      Agreement are true and correct in all material respects, except to the
      extent such representations and warranties relate solely to an earlier
      date, and all such representations and warranties are hereby remade by
      Mortgagor to Mortgagee.

                                   ARTICLE 4

                             COVENANTS OF MORTGAGOR

            In consideration of the Indebtedness, Mortgagor, for itself, its
legal representatives, successors, and assigns, covenants and agrees as follows:

            4.1 Maintenance of Leases. Mortgagor will keep and continue all
Leases, estates, and interests herein described and all contracts and agreements
relating thereto in full force and effect in accordance with the terms thereof
and will not permit the same to lapse or otherwise become impaired for failure
to comply with the obligations thereof, whether express or implied. In this
connection, Mortgagor shall not release any of the Leases without the prior
written consent of Mortgagee.

            4.2 Maintenance of Property. Mortgagor will keep and maintain all
improvements, personal Property, and equipment now or hereafter situated on the
Lands and constituting a portion of the Mortgaged Property and used or obtained
in connection therewith in good repair and condition, ordinary wear and tear
excepted, and will not tear down or remove the same or permit the same to be
torn down or removed without the prior consent of Mortgagee, except in the usual
course of operations as may be required for replacement when otherwise in
compliance with the provisions of this Deed of Trust and the Credit Agreement.

            4.3 Pooling or Unitization. Mortgagor will not, without the prior
written consent of Mortgagee, pool or unitize all or any part of the Mortgaged
Property where the pooling or unitization would result in the diminution of the
net revenue interest of Mortgagor in production from the pooled or unitized
lands attributable to the Mortgaged Property constituting a portion of such
pooled or unitized lands. Immediately after the formation of any pool or unit in
accordance herewith, Mortgagor will furnish to Mortgagee a conformed copy of the
pooling agreement, declaration of pooling, or other instrument creating the pool
or unit. The interest of Mortgagor included in any pool or unit attributable to
the Mortgaged Property or any part thereof shall become a part of the Mortgaged
Property and shall be subject to the Liens hereof in the same manner and with
the same effect as though the pool or unit and the interest of Mortgagor therein
were specifically described in Exhibit A. In the event any proceedings of any
Governmental Authority which could result in pooling


                                       6
<PAGE>

or unitizing all or any part of the Mortgaged Property are commenced, Mortgagor
shall give immediate written notice thereof to Mortgagee. Any pooling or
unitization of all or any part of the Mortgaged Property in violation of this
Section shall be of no force or effect against the Trustee or Mortgagee.

            4.4 Operation of Mortgaged Property. Mortgagor will operate or, to
the extent that the right of operation is vested in others, will exercise its
best efforts to require the operator to operate the Mortgaged Property and all
wells now or hereafter located thereon continuously and in a prudent and
workmanlike manner in accordance with the best usage of the field and in
accordance with all applicable Requirements of Law. Mortgagor will comply with
all terms and conditions of the Leases and each assignment or contract
obligating Mortgagor in any way with respect to the Mortgaged Property; but
nothing herein shall be construed to empower Mortgagor to bind the Trustee or
Mortgagee to any contract or obligation or render the Trustee or Mortgagee in
any way responsible or liable for bills or obligations incurred by Mortgagor.

            4.5 Compliance with Operating Agreements. Mortgagor agrees to
promptly pay all bills for labor and materials incurred in the operation of the
Mortgaged Property and will promptly pay its share of all costs and expenses
incurred under any joint operating agreement affecting the Mortgaged Property or
any portion thereof; will furnish Mortgagee, as and when requested, full
information as to the status of any joint account maintained with others under
any such operating agreement; will not take any action to incur any liability or
Lien thereunder; and will not enter into any new operating agreement or any
amendment of any existing operating agreement affecting the Mortgaged Property
without the prior written consent of Mortgagee. Furthermore, Mortgagor will not
consent or agree to participate in any proposed operation under any presently
existing operating agreement affecting the Mortgaged Property unless Mortgagor
obtains the prior written consent of Mortgagee and, if requested by Mortgagee,
deposits with the operator or Mortgagee, where Mortgagor is a non-operator, or
with Mortgagee, where Mortgagor is an operator, Mortgagor's share of the
estimated cost of the proposed operation prior to electing to participate in the
operation. To the extent that Mortgagor is unable to consent to any proposed
operation with respect to any of the Mortgaged Property, prior to electing not
to participate in the proposed operation, Mortgagor will use its best efforts,
to the extent practicable and to the extent allowed to do so under the relevant
operating agreement or other applicable contract, to farmout to others
acceptable to Mortgagee, on the best terms obtainable and acceptable to
Mortgagee, the interest or relevant portion of the interest of Mortgagor in the
proposed operation.

            4.6 Access to Mortgaged Property. Mortgagor will permit Mortgagee
and its accredited agents, representatives, attorneys and employees, at the
expense of Mortgagor, at all times to go upon, examine, inspect, conduct
environmental audits and other testing of, and remain on, the Mortgaged
Property, and to go upon the derrick floor of any well at any time drilled or
being drilled thereon, and will furnish Mortgagee, upon request, all pertinent
information regarding the development and operation of the Mortgaged Property.

            4.7 Waivers. Mortgagor hereby expressly waives, to the full extent
permitted by applicable law, any and all rights or privileges of marshalling of
assets, sale in inverse order of alienation, notices, appraisements, redemption,
and any prerequisite in the event of foreclosure of the


                                       7
<PAGE>

Liens created herein. Mortgagee at all times shall have the right to release any
part of the Mortgaged Property now or hereafter subject to the Liens of this
Deed of Trust, any part of the proceeds of production or other income herein or
hereafter assigned or pledged, or any other security it now has or may hereafter
have securing the Indebtedness, without releasing any other part of the
Mortgaged Property, proceeds, or income, and without affecting the Liens hereof
as to the part or parts of the Mortgaged Property, proceeds, or income not so
released or the right to receive future proceeds and income.

            4.8 Compliance with Laws. Mortgagor will comply with all
Requirements of Law applicable to the Mortgaged Property and the operations
conducted thereon, including, without limitation, the Natural Gas Policy Act of
1978, as amended, and Environmental Laws; and cause all employees, crew members,
agents, contractors, sub-contractors, and future lessees (pursuant to
appropriate lease provisions) of Mortgagor, while such Persons are acting within
the scope of their relationship with Mortgagor, to comply with all such
Requirements of Law as may be necessary or appropriate to enable Mortgagor to so
comply.

            4.9 Hazardous Substances Indemnification. MORTGAGOR HEREBY
INDEMNIFIES AND HOLDS MORTGAGEE AND THE LENDERS AND THEIR RESPECTIVE
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND
AFFILIATES AND THE TRUSTEE 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 MORTGAGED PROPERTY,
WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR
UNDERTAKEN ON OR OFF ANY MORTGAGED PROPERTY, WHETHER PRIOR TO OR DURING THE TERM
HEREOF, AND WHETHER BY MORTGAGOR OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF MORTGAGOR OR ANY OTHER PERSON AT ANY TIME
OCCUPYING OR PRESENT ON ANY MORTGAGED 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 MORTGAGED
PROPERTY, (D) ANY CONTAMINATION OF ANY MORTGAGED PROPERTY OR NATURAL RESOURCES
ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE,
TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE BY MORTGAGOR OR ANY
EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF MORTGAGOR WHILE SUCH PERSONS
ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH MORTGAGOR, IRRESPECTIVE
OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF THIS
DEED OF TRUST OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO THIS
DEED OF TRUST OR THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING, WITHOUT
LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, ON THE PART OF MORTGAGEE OR ANY LENDER OR ANY OF
THEIR RESPECTIVE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT, OR AFFILIATES OR THE TRUSTEE; WITH THE FOREGOING INDEMNITY
SURVIVING SATISFACTION OF THE INDEBTEDNESS, THE TERMINATION OF THE CREDIT
AGREEMENT, AND THE RELEASE OF THE LIENS CREATED HEREBY.


                                       8
<PAGE>

            4.10 Site Assessments. Mortgagee (by its officers, employees and
agents) at any time and from time to time, either prior to or after the
occurrence of an Event of Default, may contract, at the expense of Mortgagor,
for the services of Persons (the "Site Reviewers") to perform environmental site
assessments and other tests ("Site Assessments") on all or any portion of the
Mortgaged Property for the purpose of determining whether any environmental
condition exists on any Mortgaged Property which could reasonably be expected to
result in any liability, cost, or expense to Mortgagee or any owner, occupier,
or operator of such Mortgaged Property. The Site Assessments may be performed at
any time or times, upon reasonable notice, and under reasonable conditions
established by Mortgagor which do not impede the performance of the Site
Assessments. The Site Reviewers are hereby authorized to enter upon all or any
portion of the Mortgaged Property for such purposes. The Site Reviewers are
further authorized to perform both above and below the ground testing for
environmental damage or the presence of Hazardous Substances on the Mortgaged
Property and such other tests on the Mortgaged Property as may be necessary to
conduct the Site Assessments in the reasonable opinion of the Site Reviewers.
Mortgagor will supply to the Site Reviewers such historical and operational
information regarding the Mortgaged Property as may be reasonably requested by
the Site Reviewers to facilitate the Site Assessments and will make available
for meetings with the Site Reviewers appropriate personnel having knowledge of
such matters. On request, Mortgagee shall make the results of such Site
Assessments available to Mortgagor, which, prior to an Event of Default, may at
its election participate under reasonable procedures in the direction of such
Site Assessments and the description of tasks of the Site Reviewers. The cost of
performing all Site Assessments shall be paid by Mortgagor upon demand of
Mortgagee and any such obligations shall be Indebtedness secured by this Deed of
Trust.

            4.11 Uneconomic Wells. Should proceeds from the sale of production
from any oil and/or gas well constituting part of the Mortgaged Property (net of
production, severance and windfall profit taxes and royalties, overriding
royalties and other payments out of or measured by production) not exceed the
expense of operation of such well (including, but not limited to, operator's
overhead, payments to contractors and suppliers, and annual taxes assessed on
the basis of the value of the Property prorated on a monthly basis, but
expressly excluding any portion of the cost of drilling or completing the
relevant well or the cost of non-routine workover or remedial operations) for a
period in excess of three consecutive calendar months, then, upon receipt by
Mortgagor of written notification from Mortgagee, Mortgagor will (a) take all
necessary steps to abandon the relevant well, or (b) provide from sources other
than proceeds from the sale of production attributable to the Mortgaged Property
(i.e., through borrowings or contractual commitments obtained from third parties
not in violation of any provision of this Deed of Trust or any other Loan
Document) the funds required to pay the share of Mortgagor of the expenses
associated with the continuing operation of such well.

            4.12 Performance of Gas Contracts. Mortgagor will perform and
observe in all material respects all of its obligations under each contract
relating to the sale of gas produced from or attributable to the Mortgaged
Property and will not, except in good faith and as the result of arm's length
negotiations and with prior written notice to Mortgagee, change, modify, amend
or waive any of the terms or provisions of any such contract or take any other
action which would release any other party from its obligations or liabilities
under any such contract.


                                       9
<PAGE>

            4.13 Covenants Running with the Land. All covenants and agreements
herein contained shall constitute covenants running with the Land.

                                   ARTICLE 5

                            DEFEASANCE, FORECLOSURE
                               AND OTHER REMEDIES

            5.1 Defeasance. Should the Indebtedness be paid, then the conveyance
of the Mortgaged Property shall become of no further force and effect, and, at
the request and expense of Mortgagor, the Lien granted hereunder shall be
released, without recourse or warranty; otherwise, it shall remain in full force
and effect.

            5.2 Events of Default. The occurrence of any Event of Default under
the Credit Agreement shall constitute an Event of Default under this Deed of
Trust.

            5.3 Acceleration and Exercise of Power of Sale.

            (a) Upon the occurrence of an Event of Default specified in Sections
      7.1(f) or 7.1(g) of the Credit Agreement, the aggregate principal amount
      of all Indebtedness then outstanding and all interest accrued thereon
      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, all of which are hereby expressly
      waived by Mortgagor to the full extent permitted by applicable law. Upon
      the occurrence of any other Event of Default, Mortgagee may declare the
      aggregate principal amount of all Indebtedness then outstanding and all
      interest accrued thereon immediately due and payable, whereupon the same
      shall 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, all of which are hereby expressly waived by Mortgagor to the
      full extent permitted by applicable law.

            (b) Upon the occurrence of any Event of Default or at any time
      thereafter while the Indebtedness or any part thereof remains unpaid, it
      shall be the duty of the Trustee, on request of Mortgagee (which request
      is hereby presumed), to enforce this Trust and, after advertising the time
      and place of the sale for at least 21 days prior to the day of sale, by
      posting or causing to be posted a written or printed notice thereof at the
      courthouse door and by filing a copy of such notice in the office of the
      county clerk of each county in which the Mortgaged Property or any part
      thereof may be situated, and serving written notice of the proposed sale
      on each debtor obligated to pay the Indebtedness according to the records
      of Mortgagee, by postage prepaid, certified United States mail, at the
      most recent address for such debtor as shown by the records of Mortgagee,
      at least 21 days prior to the day of sale, to sell the


                                       10
<PAGE>

      Mortgaged Property, either as a whole or in parcels, as the Trustee may
      deem proper, at public venue at the courthouse of the county in which the
      Mortgaged Property or any part thereof may be situated (and being the
      county designated in the notice of sale) on the first Tuesday of any month
      between the hours of 10:00 a.m. and 4:00 p.m., to the highest bidder for
      cash, and after such sale to execute and deliver to the purchaser or
      purchasers good and sufficient deeds and assignments, conveying such
      Property so sold to the purchaser or purchasers with general warranty of
      title made on behalf of Mortgagor. The Trustee, or his successor or
      substitute, is hereby authorized and empowered to appoint any one or more
      Persons as his attorneys-in-fact or agents to act as Trustee under him and
      in his name, place and stead, such appointment to be evidenced by a
      written instrument executed by the Trustee, or his successor or
      substitute, to perform any one or more act or acts necessary or incident
      to any sale under the power of sale hereunder, including, without
      limitation, the posting and filing of any notices, the conduct of the sale
      and the execution and delivery of any instruments conveying the Mortgaged
      Property as a result of the sale, but in the name and on behalf of the
      Trustee, or his successor or substitute; and all acts done or performed by
      such attorneys-in-fact or agents shall be valid, lawful and binding as if
      done or performed by the Trustee, or his successor or substitute. No
      single sale or series of sales by the Trustee shall extinguish the Lien or
      exhaust the power of sale hereunder except with respect to the items of
      Property sold, but such Lien and power shall exist for so long as and may
      be exercised in any manner by law or as herein provided as often as the
      circumstances require to give Mortgagee full relief hereunder. The
      purchaser at any such sale shall not assume, nor shall the heirs, legal
      representatives, successors or assigns of such purchaser, be deemed to
      have assumed, by reason of the acquisition of Property or rights mortgaged
      hereunder, any liability or obligation of any lessee or operator of the
      Mortgaged Property, or any part thereof, arising by reason of any
      occurrence taking place prior to such sale. It shall not be necessary to
      have present, or to exhibit at any such sale, any of the personal Property
      subject to the Lien hereof.

            5.4 Rights as Secured Party. Upon the occurrence of any Event of
Default, Mortgagee shall be entitled to all of the rights, powers, and remedies
afforded a secured party by the UCC with respect to the personal Property and
fixtures and as-extracted collateral in which Mortgagee has been granted a
security interest hereby, or Mortgagee may proceed in accordance with the
provisions hereof as to both the real and personal Property covered hereby.

            5.5 Application of Proceeds of Sale. The Trustee is authorized to
receive the proceeds of each sale of Mortgaged Property and apply the same as
follows:

            FIRST: to the payment of all necessary costs and expenses incident
            to the execution of this Deed of Trust, including, but not limited
            to, a fee to the Trustee of 5% of the amount realized at the sale,
            if required by the Trustee;


                                       11
<PAGE>

            SECOND: to any and all Indebtedness then hereby secured, application
            to be made in such order and in such manner as Mortgagee may, in its
            discretion, elect;

            THIRD: the balance, if any, to Mortgagor or its successors or
            assigns, or other Person legally entitled thereto.

            5.6 Substitute Trustee. In the event of the death of the Trustee, or
his removal from the State of Texas, or his failure, refusal, or inability for
any reason to make any such sale or to perform any of the trusts herein
declared, or at any time, whether with or without cause, Mortgagee may appoint,
in writing, a substitute trustee who shall thereupon succeed to all the estates,
rights, powers, and trusts herein granted to and vested in the Trustee. In the
same events as first above stated, and in the same manner, successive substitute
Trustees may thereafter be appointed.

            5.7 Statements by Trustee. It is agreed that in any deed or deeds
given by any Trustee any and all statements of fact or other recitals therein
made as to the identity of the holder or holders of the Indebtedness, or as to
default in the payments thereof or any part thereof, or as to the breach of any
covenants herein contained, or as to the request to sell, notice of sale, time,
place, terms and manner of sale, and receipt, application, and distribution of
the money realized therefrom, or as to the due and proper appointment of a
substitute trustee, and, without being limited by the foregoing, as to any other
or additional act or thing having been done by Mortgagee or the Trustee, shall
be taken by all courts of law and equity as prima facie evidence that the
statements or recitals state facts and are without further question to be so
accepted. Mortgagor does hereby ratify and confirm any and all acts that the
Trustee may lawfully do in the premises by virtue of the terms and conditions of
this Deed of Trust.

            5.8 Suit to Collect and Foreclose. Mortgagee, at its election, or
the Trustee, upon written request of Mortgagee, may proceed by suit or suits, at
law or in equity, to enforce the payment of the Indebtedness in accordance with
the terms hereof and of the notes, guaranties, or other documents evidencing it,
and to foreclose the Lien of this Deed of Trust as against all or any portion of
the Mortgaged Property and to have such Property sold under the judgment or
decree of a court of competent jurisdiction.

            5.9 Mortgagee or Trustee as Purchaser. Mortgagee or the Trustee may
be a purchaser of all or any portion of the Mortgaged Property at any sale
thereof, whether such sale be under the power of sale hereinabove vested in the
Trustee, upon any other foreclosure of the Lien hereof, or otherwise. Mortgagee
or the Trustee so purchasing shall, upon any such purchase, acquire title to the
Mortgaged Property so purchased, free of the Lien of this Deed of Trust and free
of all rights of redemption in Mortgagor.

            5.10 Entry and Operation. Upon the occurrence of any Event of
Default, then in each and every such case and in addition to the other rights
and remedies hereunder, the Trustee or Mortgagee, whether or not the
Indebtedness shall have become due and payable, may, but shall not be obligated
to, enter into and upon and take possession of all or any portion of the
Mortgaged Property and may exclude Mortgagor, its agents and servants wholly
therefrom and have, hold, use, operate,


                                       12
<PAGE>

manage, and control all or any portion of the Mortgaged Property and produce the
oil, gas, and other minerals therefrom and market the same, all at the sole risk
and expense of Mortgagor and at the expense of the Mortgaged Property, applying
the net proceeds so derived, first, to the cost of maintenance and operation of
such Mortgaged Property; second, to the payment of the Indebtedness, application
to be made first to interest and then to principal; and the balance thereof, if
any, shall be paid to Mortgagor. Upon such payment of all such costs and
Indebtedness, the Mortgaged Property shall be returned to Mortgagor in its then
condition, and neither the Trustee nor Mortgagee shall be liable to Mortgagor
for any damage or injury to the Mortgaged Property except such as may be caused
through the fraud or willful misconduct of the Trustee or Mortgagee, as the case
may be.

            5.11 Power of Attorney to Mortgagee. Mortgagor does hereby designate
Mortgagee as the agent of Mortgagor to act in the name, place, and stead of
Mortgagor in the exercise of each and every remedy set forth herein and in
conducting any and all operations and taking any and all action reasonably
necessary to do so, recognizing such agency in favor of Mortgagee to be coupled
with the interests of Mortgagee under this Deed of Trust and, thus, irrevocable
so long as this Deed of Trust is in force and effect.

            5.12 Remedies Cumulative and Non-Exclusive. The rights of entry,
sale, or suit, as hereinabove or hereinafter conferred, are cumulative of all
other rights and remedies herein or by law or in equity provided, and shall not
be deemed to deprive Mortgagee or the Trustee of any such other legal or
equitable rights or remedies, by judicial proceedings or otherwise, appropriate
to enforce the conditions, covenants, and terms of this Deed of Trust and the
other Loan Documents. The employment of any remedy hereunder or otherwise shall
not prevent the concurrent or subsequent employment of any other appropriate
remedy or remedies.

                                   ARTICLE 6

                            ASSIGNMENT OF PRODUCTION

            6.1 Assignment. In addition to the conveyance to the Trustee herein
made, Mortgagor does hereby transfer, assign, deliver and convey unto Mortgagee,
its successors and assigns, all of the oil, gas, and other minerals produced,
saved, or sold from the Mortgaged Property and attributable to the interests of
Mortgagor therein subsequent to 7:00 a.m. on the first day of the month in which
this Deed of Trust is executed, together with the proceeds of any sale thereof.
Mortgagor hereby directs any purchaser now or hereafter taking any production
from the Mortgaged Property to pay to Mortgagee such proceeds derived from the
sale thereof and to continue to make payments directly to Mortgagee until
notified in writing by Mortgagee to discontinue the same. The purchaser of any
such production shall not be required to see to the application of the proceeds
thereof by Mortgagee, and payment made to Mortgagee shall be binding and
conclusive as between such purchaser and Mortgagor. Mortgagor further agrees to
perform all such acts and to execute all such further assignments, transfer and
division orders, and other instruments as may be required or desired by
Mortgagee or any other party to have such proceeds and revenues so paid to
Mortgagee.


                                       13
<PAGE>

            6.2 Postponement of Payment. For its convenience, Mortgagee has
elected not to exercise immediately its right to receive payment to it directly
of the proceeds of any sale of the oil , gas and other minerals produced or sold
from the Mortgaged Property and the purchasers may continue to make such payment
or delivery of the proceeds to Mortgagor until such time as Mortgagor and the
purchasers have received notice that an Event of Default has occurred and is
continuing, and that the purchasers are directed to make payment or delivery of
the proceeds directly to Mortgagee. Such failure by Mortgagee to exercise its
rights immediately shall not in any way waive the right of Mortgagee to receive
any of the proceeds, or to make any such demand, or to affect any such
assignment as to any proceeds not theretofore paid or delivered to Mortgagor. In
this regard, if any of the proceeds are paid or delivered directly to Mortgagee
and then, at the request of Mortgagee, the proceeds are, for a period or periods
of time, paid or delivered to Mortgagor, Mortgagee shall nevertheless have the
right, effective upon written notice, to require that future proceeds be again
paid or delivered directly to it. Mortgagee shall never be required to send any
such notice to all purchasers, and may direct such notice only to those
purchasers as it may, in its discretion, desire. It shall never be necessary for
Mortgagee to institute legal proceedings to enforce the assignment of
hydrocarbons, proceeds, or other rents, profits, or income contained in this
instrument. It shall not be necessary for Mortgagee to obtain possession of the
Mortgaged Property as a prerequisite to Mortgagee's right to collect or receive
any hydrocarbons, other minerals, proceeds, or other rents, profits, or income
assigned to Mortgagee under this instrument. Mortgagor and Mortgagee expressly
agree and it is the express intention of Mortgagor and Mortgagee that in no
event will any reduction in the obligations be measured by the fair market value
of the hydrocarbons, other minerals, proceeds, or other rents, profits, or
income assigned to Mortgagee under this instrument.

            6.3 Change of Purchaser. Should any purchaser taking the production
from the Mortgaged Property fail to make prompt payment to Mortgagee in
accordance with the provisions of Section 6.1, Mortgagee shall have the right,
at the expense of Mortgagor, to demand a change of connection and to designate
another purchaser with whom a new connection may be made, without any liability
on the part of Mortgagee in making such selection, so long as ordinary care is
used in the making thereof. Promptly upon such demand, Mortgagor shall take all
necessary and appropriate action to effect such change of connection.

            6.4 Application of Proceeds. Mortgagor authorizes and empowers
Mortgagee to receive, hold, and collect all sums of money paid to Mortgagee in
accordance with the provisions of Section 6.1, and to apply the same as
hereinafter provided, all without any liability or responsibility on the part of
Mortgagee, save and except as to good faith in so receiving and applying such
sums. Mortgagee may apply all sums received by Mortgagee pursuant to Section 6.1
to the payment of the Indebtedness, application to be made in such manner as
Mortgagee may elect, regardless of whether the application so made shall exceed
the payments of principal and interest then due as provided in the Loan
Documents. After such application has been so made by Mortgagee, the balance of
any such sums shall be paid to Mortgagor.

            6.5 No Postponement of Installments on Indebtedness. It is
understood and agreed that should such payments provided for by Section 6.1 be
less than the sum or sums then due on the Indebtedness, such sum or sums then
due shall nevertheless be paid by Mortgagor in


                                       14
<PAGE>

accordance with the provisions of the Loan Documents, and neither the assignment
made pursuant to Section 6.1 nor any other provisions hereof shall in any manner
be construed to affect the terms and provisions of the Loan Documents. Likewise,
neither the assignment made pursuant to Section 6.1 nor any other provisions
hereof shall in any manner be construed to affect the Liens, rights, title, and
remedies herein granted securing the Indebtedness or the liability of Mortgagor
therefor. The rights under this Article VI are cumulative of all other rights,
remedies, and powers granted under this Deed of Trust and are cumulative of any
other security which Mortgagee now holds or may hereafter hold to secure the
payment of the Indebtedness.

            6.6 Turnover to Mortgagee. Should Mortgagor receive any of the
proceeds of any sale of oil, gas, or other minerals produced, saved, or sold
from the Mortgaged Property, which under the terms hereof should have been
remitted to Mortgagee, Mortgagor will immediately remit same in full to
Mortgagee.

            6.7 Release of Proceeds Upon Payment of Indebtedness. Upon payment
in full of all Indebtedness and the termination of the Commitment, the remainder
of such proceeds held by Mortgagee, if any, shall be paid over to Mortgagor upon
demand, and a release of the interest hereby assigned will be made, without
recourse or warranty, by Mortgagee to Mortgagor at its request and its expense.

            6.8 Duty of Mortgagee. Mortgagee shall not be liable for any failure
to collect, or for any failure to exercise diligence in collecting, any funds
assigned hereunder. Mortgagee shall be accountable only for funds actually
received.

            6.9 Power of Attorney to Mortgagee. Mortgagor does hereby designate
Mortgagee as the agent of Mortgagor to act in the name, place, and stead of
Mortgagor for the purpose of taking any and all actions deemed by Mortgagee
necessary for the realization by Mortgagee of the benefits of the assignment of
production provided herein, recognizing such agency in favor of Mortgagee to be
coupled with the interests of Mortgagee under this Deed of Trust and, thus,
irrevocable so long as this Deed of Trust is in force and effect.

                                   ARTICLE 7

                                  MISCELLANEOUS

            7.1 Further Assurances. Upon request of Mortgagee, Mortgagor will
promptly correct any defects, errors, or omissions in the execution or
acknowledgment of this Deed of Trust or any other Loan Document, and execute,
acknowledge, and deliver such other assurances and instruments as shall, in the
opinion of Mortgagee, be necessary to fulfill the terms of this Deed of Trust.

            7.2 Interest. Any provision in any document that may be executed in
connection herewith to the contrary notwithstanding, Mortgagee shall in no event
be entitled to receive or


                                       15
<PAGE>

collect, nor shall any amounts received hereunder be credited so that Mortgagee
shall be paid, as interest a sum greater than that authorized by law. If any
possible construction of this Deed of Trust or any Loan Document seems to
indicate any possibility of a different power given to Mortgagee or any
authority to ask for, demand, or receive any larger rate of interest, this
clause shall override and control, and proper adjustments shall be made
accordingly.

            7.3 Agreement as Entirety. This Deed of Trust, for convenience only,
has been divided into Articles, Sections, and subsections. The rights, powers,
privileges, duties, and other legal relations of Mortgagor, the Trustee, and
Mortgagee shall be determined from this Deed of Trust as an entirety and without
regard to the aforesaid division into Articles, Sections, and subsections and
without regard to headings affixed to such Articles, Sections, or subsections.

            7.4 Number and Gender. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural, and
the plural shall likewise be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine, and neuter when such
construction is appropriate; and specific enumeration shall not exclude the
general, but shall be construed as cumulative.

            7.5 Rights and Remedies Cumulative. All rights, powers, immunities,
remedies, and Liens of Mortgagee existing and to exist hereunder or under any
other instruments or at law or in equity and all other or additional security
shall be cumulative and not exclusive, each of the other. Mortgagee shall, in
addition to the rights and remedies herein expressly provided, be entitled to
such other remedies as may now or hereafter exist at law or in equity for
securing and collecting the Indebtedness, for enforcing the covenants herein,
and for foreclosing the Liens hereof. Resort by Mortgagee to any right or remedy
provided for hereunder or at law or in equity shall not prevent concurrent or
subsequent resort to the same or any other right or remedy. No security
heretofore, herewith, or subsequently taken by Mortgagee shall in any manner
impair or affect the security given by this Deed of Trust or any security by
endorsement or otherwise presently or previously given; and all security shall
be taken, considered, and held as cumulative.

            7.6 Parties in Interest. This Deed of Trust shall be binding upon
the parties and their respective heirs, administrators, legal representatives,
successors, and assigns and shall inure to the benefit of the Mortgagee and its
legal representatives, successors, and assigns. The terms used to designate any
of the parties herein shall be deemed to include the heirs, administrators,
legal representatives, successors, and assigns of such parties. The term
"Mortgagee" shall also include any lawful owner, holder, or pledgee of any
Indebtedness.

            7.7 Supplements. Without in any manner limiting the effect of
Section 1.4 or any other provisions of this Deed of Trust as to the binding
effect of this Deed of Trust on after-acquired rights of Mortgagor, it is
contemplated by the parties hereto that from time to time additional interests
and properties may or will be added to the interests and properties subject to
the Liens, rights, titles, and interests created by this Deed of Trust by means
of supplemental indentures identifying this Deed of Trust and describing such
interests and properties to be so added and included. Upon the execution of any
such supplemental indenture, the Liens, rights, titles, and interests created
herein shall immediately attach to and be effective with respect to any such
interests and properties so


                                       16
<PAGE>

described, the same as if such interests and properties had been specifically
described herein, and such interests and properties being included in the term
"Mortgaged Property," as used herein.

            7.8 Invalidity. In the event that any one or more of the provisions
contained in this Deed of Trust shall for any reason be held invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of this Deed of Trust or
any other Loan Document.

            7.9 Construction. All titles or headings to Articles, Sections,
subsections, or other divisions of this Deed of Trust or the exhibits hereto are
only for the convenience of the parties and shall not be construed to have any
effect or meaning with respect to the other content of such Articles, Sections,
subsections, or other divisions, such other content being controlling as to the
agreement among the parties hereto. Article, Section, subsection, and Exhibit
references herein are to such Articles, Sections, subsections, and Exhibits of
this Deed of Trust unless otherwise specified. The words "hereby," "herein,"
"hereinabove," "hereinafter," "hereinbelow," "hereof," and "hereunder" when used
in this Deed of Trust shall refer to this Deed of Trust as a whole and not to
any particular Article, Section, subsection, or provision of this Deed of Trust.

            7.10 Fixtures, Minerals and Accounts. Without in any manner limiting
the generality of any of the foregoing hereof, some portions of the personal
Property described hereinabove are or are to become fixtures on the Lands. In
addition, the security interest created hereby under applicable provisions of
the UCC attaches to minerals, including oil and gas, and accounts resulting from
the sale thereof, at the wellhead or minehead located on the Lands.

            7.11 Financing Statement Filings. This Deed of Trust may be filed as
provided in Article 9 of the UCC to assure that the security interests granted
by this Deed of Trust are perfected. In this connection, this Deed of Trust may
be presented to a filing officer under the UCC to be filed in the real estate
records as a Financing Statement covering minerals and fixtures. Further,
Mortgagor authorizes Mortgagee to execute and file at any time and from time to
time any and all Financing Statements and amendments thereto in any UCC
jurisdiction, pursuant to Article 9 of the UCC, as Mortgagee deems necessary in
its sole discretion, in conjunction with this Deed of Trust, and Mortgagor
expressly authorizes execution and filing of such Financing Statements by
Mortgagee without need of signature or execution by Mortgagor.

            7.12 Addresses. For purposes of filing this Deed of Trust as a
financing statement, the addresses for Mortgagor, as the debtor, and Mortgagee,
as the secured party, are as set forth hereinabove.

            7.13 Counterparts. For the convenience of the parties, this Deed of
Trust may be executed in multiple counterparts, each of which for all purposes
shall be deemed, and may be enforced from time to time as, a chattel mortgage,
real estate mortgage, deed of trust, security agreement, assignment or contract,
or as one or more thereof. For recording purposes, various counterparts have
been executed, and there may be attached to each such counterpart an Exhibit A
containing only the description of the Mortgaged Property, or portions thereof,
which relates to the county or state in which the particular counterpart is to
be recorded. A complete, original


                                       17
<PAGE>

counterpart of this Deed of Trust with a complete Exhibit A may be obtained from
Mortgagee. Each of the counterparts hereof so executed shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.

            7.14 No Waiver by Mortgagee. No course of dealing on the part of
Mortgagee, its officers or employees, nor any failure or delay by Mortgagee with
respect to exercising any of its rights or remedies hereunder shall operate as a
waiver thereof nor shall the exercise or partial exercise of any such right or
remedy shall preclude the exercise of any other right or remedy.

            7.15 Amendment of Prior Security Documents This Deed of Trust is
intended, in part, as an amendment and restatement of those security documents
described on Exhibit B hereto or which relate to security documents assigned to
Mortgagee pursuant to the documents described on Exhibit B hereto (collectively,
the "Prior Security Documents"), and the liens and security interests created by
the Prior Security Documents are preserved and carried forward hereby.

            7.16 Governing Agreement. This Deed of Trust is made pursuant and
subject to the terms and provisions of the Credit Agreement. In the event of a
conflict between the terms and provisions of this Deed of Trust and those of the
Credit Agreement, the terms and provisions of the Credit Agreement shall govern
and control. The inclusion in this Deed of Trust of provisions not addressed in
the Credit Agreement shall not be deemed a conflict, and all such additional
provisions contained herein shall be given full force and effect.

            7.17 Special Provisions Applicable to Mortgaged Property in
Oklahoma. The following special provisions shall apply to that portion of the
Mortgaged Property situated in the State of Oklahoma:

            (a) The foreclosure and other remedial provisions of this Deed of
      Trust are subject to the applicable provisions of Oklahoma law.

            (b) Upon the occurrence of an Event of Default, prior to enforcing
      the trust created hereby, notice shall be properly and duly posted as
      required by the laws of the State of Oklahoma, after which the Mortgaged
      Property may be sold at public auction for cash. Accordingly, Mortgagee,
      personally or by its agents or attorneys, shall have the right and power,
      with or without first taking possession, to declare the Indebtedness due
      and payable, and to sell, to the extent permitted by law, at one or more
      sales, as an entirety or in parcels, as it may elect, the Mortgaged
      Property and all of the Mortgagor's estate, right, title and interest,
      claim and demand therein and right of redemption thereof, all at such
      place or places and otherwise in such manner and upon such notice as may
      be required by Title 46 Okla. Stat. Sections 40-48 (Oklahoma Power of Sale
      Mortgage Foreclosure Act) or other applicable law, or, in the absence of
      any such requirement, as Mortgagee may deem appropriate, and to make such
      conveyance to the purchaser or purchasers. Mortgagee may postpone the sale
      of all or any portion of such Property by public announcement at the time
      and place of such sale, and from time to time thereafter may further
      postpone such sale by public announcement made at the time of sale fixed
      by the preceding postponement. The


                                       18
<PAGE>

      right of sale hereunder shall not be exhausted by one or any sale, and
      Mortgagee may make other successive sales until all of the Mortgaged
      Property is legally sold.

            (c) In lieu of or in addition to exercising any power of sale
      hereinabove given, Mortgagee (whether or not the notice provided for in
      Title 46 Okla. Stat. Section 44 has been given by Mortgagee, but after the
      time for cure therein provided if such notice has been given) may proceed
      by a suit or suits in equity or at law, whether for a foreclosure
      hereunder, or for the sale of the Mortgaged Property, or for the specific
      performance of any covenant or agreement herein contained or in aid of the
      execution of any power herein granted, or to enforce the payment of the
      Indebtedness in accordance with the terms hereof and of the notes,
      guaranties, or other documents evidencing it, or for the enforcement of
      any other appropriate legal or equitable remedy. Should Mortgagee elect
      judicial foreclosure of this Deed of Trust in lieu of exercising the power
      of sale hereinabove granted, the Indebtedness shall, at the election of
      Mortgagee, become immediately due and payable without notice. Appraisement
      of the Mortgaged Property is hereby waived, or not waived, at the option
      of Mortgagee, such option to be exercised at or prior to the time judgment
      is rendered in any judicial foreclosure hereof. In case of any sale by
      virtue of judicial proceedings, the Mortgaged Property may be sold in one
      parcel and as an entirety or in such parcels, manner or order as Mortgagee
      in its sole discretion may elect.

            (d) To the full extent that it may be lawfully so agreed, Mortgagor
      for itself and for all who may claim under Mortgagor agrees that it will
      not at any time insist upon, plead, claim, or take the benefit or
      advantage of any stay, extension, or redemption law now or hereafter in
      force, in order to prevent or hinder the enforcement of this Deed of Trust
      or the sale of the Mortgaged Property, or any part thereof, pursuant
      thereto or the possession thereof by any purchaser at any such sale, but
      Mortgagor, for itself and all who may claim under it, insofar as it now or
      hereafter lawfully may, hereby waives the benefit of all such laws.

            (e) The Trustee herein shall be deemed to be a mortgagee acting on
      behalf of Mortgagee. The power of sale herein granted shall apply only to
      the extent permitted by the laws of the State of Oklahoma.

            (f) A POWER OF SALE HAS BEEN GRANTED IN THIS DEED OF TRUST. A POWER
      OF SALE MAY ALLOW THE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT
      WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE
      MORTGAGOR UNDER THIS DEED OF TRUST.

            7.18 Special Provisions Applicable to Mortgaged Property in
Colorado. The following special provisions shall apply to that portion of the
Mortgaged Property located in the State of Colorado:


                                       19
<PAGE>

            (a) The foreclosure and other remedy provisions of this Deed of
      Trust are subject to the provisions of Colorado law, particularly 1973
      C.R.S. 38-37-101 et seq., as same may be amended or supplemented.

            (b) Any action taken with respect to Mortgaged Property located in
      the State of Colorado shall not require the signature of the Trustee for
      its effectiveness.

            (c) All words of grant and conveyance to the Trustee hereunder shall
      be construed as words of grant and conveyance unto and in favor of
      Mortgagee and the rights and authority granted to the Trustee hereunder
      may be enforced and asserted by Mortgagee in accordance with the laws of
      the State of Colorado and the same may be foreclosed at the option of
      Mortgagee as to any or all such portions of the Mortgaged Property in any
      manner permitted by the laws of the State of Colorado.

            (d) This Deed of Trust is granted and conveyed to secure the maximum
      amount of indebtedness of Mortgagor, which, at any time outstanding, shall
      not exceed $100,000,000.

            7.19 Special Provisions Applicable to Mortgaged Property in
Mississippi. The following special provisions shall apply to that portion of the
Mortgaged Property located in the State of Mississippi:

            (a) In the event any of the provisions of this Deed of Trust are
      contrary to the provisions of the laws of Mississippi, the provisions of
      this Deed of Trust are subject to the laws of Mississippi.

            (b) The non-judicial foreclosure and sale of any part of the
      Mortgaged Property located in the State of Mississippi shall be made at
      public outcry to the highest bidder for cash. Sale shall be made after
      having advertised for three consecutive weeks preceding the sale in a
      newspaper published in the county in which the Mortgaged Property is
      situated or, if none is so published, then in some newspaper having a
      general circulation therein, and by posting a notice for the same time at
      the courthouse of the same county. The Trustee may appoint or delegate any
      one or more Persons as agent to perform any act or acts necessary or
      incident to any sale held by the Trustee, including the posting of notices
      and the conduct of the sale, but in the name of and on behalf of the
      Trustee, his substitute or successor. Mortgagor waives the provisions of
      Section 89-1-55 of the Mississippi Code of 1972, as amended, insofar as
      this section restricts the right of the Trustee to offer at sale more than
      160 acres at a time; and the Trustee may, in his discretion, offer the
      Mortgaged Property as a whole or in such part or parts as he may deem
      desirable regardless of the manner in which it may be described. Any sale
      made by the Trustee hereunder may be adjourned by announcement at the time
      and place appointed for such sale without further notice except as may be
      required by law. If the Mortgaged Property is situated in two or more
      counties, or in two judicial districts of the same county, the Trustee
      shall have full power to select in which county or judicial district


                                       20
<PAGE>

      the sale of the Property is to be made, newspaper advertisement published
      and notice of sale posted, and the Trustee's selection shall be binding
      upon Mortgagor and Mortgagee. Any corporate officer of Mortgagee may
      declare Mortgagor to be in default and may request the Trustee to sell the
      Property.

            (c) The Trustee may not be a purchaser of the Mortgaged Properties.]

            7.20 Special Provision Applicable to Mortgaged Property in Montana.
The following special provision shall apply to that portion of the Mortgaged
Property located in the State of Montana:

            This Deed of Trust is granted and conveyed to secure the maximum
      amount of indebtedness of Mortgagor, which, at any time outstanding, shall
      not be in excess of $100,000,000.

            7.21 Special Provisions Applicable to Mortgaged Property in New
Mexico. The following special provisions shall apply to that portion of the
Mortgaged Property situated in the State of New Mexico:

            (a) All words of grant to the Trustee hereunder shall be construed
      as words creating a Lien in favor of Mortgagee on the Mortgaged Property
      situated in the State of New Mexico.

            (b) The redemption period under New Mexico law is hereby
      specifically shortened to one month in lieu of nine months.

            (c) This Deed of Trust is granted and conveyed to secure the maximum
      amount of indebtedness of Mortgagor, which, at any time outstanding, shall
      not be in excess of $100,000,000.

            7.22 Special Provisions Applicable to Mortgaged Property in North
Dakota. The following special provisions shall apply to that portion of the
Mortgaged Property located in the State of North Dakota:

            (a) The federal tax identification number for Mortgagor is
      84-0637348 and 13-2929065.

            (b) MORTGAGOR AGREES THAT THIS DEED OF TRUST CONSTITUTES A
      COLLATERAL REAL ESTATE MORTGAGE PURSUANT TO NORTH DAKOTA CENTURY CODE,
      CHAPTER 35-03.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       21
<PAGE>

            IN WITNESS WHEREOF, this Deed of Trust is executed on the date of
the acknowledgment below but effective as of the 19th day of December, 2002.

                                   MORTGAGOR AND BORROWERS (DEBTOR):

                                   PRIMEENERGY CORPORATION
                                   PRIMEENERGY MANAGEMENT CORPORATION
                                   PRIME OPERATING COMPANY,
                                   EASTERN OIL WELL SERVICE COMPANY
                                   SOUTHWEST OIL FIELD CONSTRUCTION COMPANY,
                                   each company represented by


                                   _____________________________________________
                                   Beverly A. Cummings
                                   Executive Vice President, Treasurer,
                                   and Chief Financial Officer of each of the
                                   companies listed above


                                       22
<PAGE>

STATE OF TEXAS                  Section
                                Section
COUNTY OF HARRIS                Section

      BEFORE ME, the undersigned authority, on this day personally appeared
BEVERLY A. CUMMINGS, Executive Vice President, Treasurer, and Chief Financial
Officer of each of PRIMEENERGY CORPORATION, a Delaware corporation, PRIMEENERGY
MANAGEMENT CORPORATION, a New York corporation, PRIME OPERATING COMPANY, a Texas
corporation, EASTERN OIL WELL SERVICE COMPANY, a West Virginia corporation, and
SOUTHWEST OILFIELD CONSTRUCTION COMPANY, an Oklahoma corporation, on behalf of
each of said corporations, known to me to be the person whose name is subscribed
to the foregoing instrument, and acknowledged to me that she executed the same
for the purposes and consideration therein expressed, as the act and deed of
each of such corporations, and in the capacity therein stated for each of said
corporations.

      GIVEN UNDER MY HAND AND SEAL OF OFFICE this 19th day of December, 2002.


                                     ___________________________________________
                                     NOTARY PUBLIC in and for the State of Texas


                                       23
<PAGE>

                                    EXHIBIT A
                                       TO
                  MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
                FINANCING STATEMENT AND ASSIGNMENT OF PRODUCTION

            The designation "Working Interest" or "WI" when used in this Exhibit
means an interest owned in an oil, gas, and mineral lease that determines the
cost-bearing percentage of the owner of such interest. The designation "Net
Revenue Interest" or "NRI" means that portion of the production attributable to
the owner of a working interest after deduction for all royalty burdens,
overriding royalty burdens or other burdens on production, except severance,
production, and other similar taxes. The designation "Overriding Royalty
Interest" or "ORRI" means an interest in production which is free of any
obligation for the expense of exploration, development, and production, bearing
only its pro rata share of severance, production, and other similar taxes and,
in instances where the document creating the overriding royalty interest so
provides, costs associated with compression, dehydration, other treating or
processing, or transportation of production of oil, gas, or other minerals
relating to the marketing of such production. The designation "Royalty Interest"
or "RI" means an interest in production which results from an ownership in the
mineral fee estate or royalty estate in the relevant land and which is free of
any obligation for the expense of exploration, development, and production,
bearing only its pro rata share of severance, production, and other similar
taxes and, in instances where the document creating the royalty interest so
provides, costs associated with compression, dehydration, other treating or
processing or transportation of production of oil, gas, or other minerals
relating to the marketing of such production.

            Any reference in this Exhibit to wells or units is for warranty of
interest, administrative convenience, and identification and shall not limit or
restrict the right, title, interest, or properties covered by this Deed of
Trust. All right, title, and interest of Mortgagor in the properties described
herein are and shall be subject to this Deed of Trust, regardless of the
presence of any units or wells not described herein.

            The references to book or volume and page herein refer to the
recording location of each respective Mortgaged Property described herein in the
county where the land covered by the Mortgaged


                                       A-i
<PAGE>

                                    EXHIBIT A
                                       TO
                  MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
                FINANCING STATEMENT AND ASSIGNMENT OF PRODUCTION

                         OIL, GAS AND MINERAL INTERESTS


                                      A-ii
<PAGE>

                  MORTGAGE, DEED OF TRUST, SECURITY AGREEMENT,
                FINANCING STATEMENT AND ASSIGNMENT OF PRODUCTION

          (THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS)

                                      FROM

                             PRIMEENERGY CORPORATION
                   Taxpayer Identification Number: 84-0637348
                                       and
                       PRIMEENERGY MANAGEMENT CORPORATION
                   Taxpayer Identification Number: 13-2929065
                             (Mortgagor and Debtor)

                                       TO

                         Arthur R. Gralla, Jr., Trustee
                               for the benefit of

                            GUARANTY BANK, FSB, Agent
                          (Mortgagee and Secured Party)

                           Effective December 19, 2002

For purposes of filing this Deed of Trust as a financing statement, the mailing
address of Mortgagor is One Landmark Square, Suite 1100, Stamford, Connecticut
06901-2605; the mailing address of Mortgagee is 333 Clay Street, Suite 4400,
Houston, Texas 77002-4103.

                          * * * * * * * * * * * * * * *

This instrument, prepared by R. H. Walls, Jackson Walker L.L.P., 1401 McKinney,
Suite 1900, Houston, Texas 77010, 713-752-4200, contains after-acquired property
provisions and covers future advances and proceeds to the fullest extent allowed
by applicable law.

ATTENTION OF RECORDING OFFICER: This instrument is a mortgage of both real and
personal property and is, among other things, a Security Agreement and Financing
Statement under the Uniform Commercial Code. This instrument creates a lien on
rights in or relating to lands of Mortgagor which are described in Exhibit A
hereto or in documents described in Exhibit A.

RECORDED DOCUMENT SHOULD BE RETURNED TO:

                              JACKSON WALKER L.L.P.
                            1401 McKinney, Suite 1900
                              Houston, Texas 77010
                            Attn.: Ms. Lorena Nichols

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>5
<FILENAME>d03089exv10w24.txt
<DESCRIPTION>ACT OF MORTGAGE AND SECURITY AGREEMENT
<TEXT>
<PAGE>
                                                                   Exhibit 10.24

RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:

Jackson Walker L.L.P.
1401 McKinney, Suite 1900
Houston, Texas  77010
Attention: Ms. Lorena Nichols

ACT OF MORTGAGE AND                Section              UNITED STATES OF AMERICA
SECURITY AGREEMENT                 Section
                                   Section
BY: PRIMEENERGY CORPORATION        Section
                                   Section
                 and               Section                    THE STATE OF TEXAS
                                   Section
PRIMEENERGY MANAGEMENT             Section
      CORPORATION                  Section
                                   Section
TO: GUARANTY BANK, FSB, Agent      Section                      COUNTY OF HARRIS

      BE IT KNOWN, that on the date set forth hereinafter for each, but
effective December 19, 2002, before each of the undersigned Notaries Public,
duly commissioned and qualified in and for the jurisdictions hereinafter
identified, and in the presence of the undersigned competent witnesses,
personally came and appeared the parties to this act (this "Mortgage") who are
hereinafter identified and who declared that they contract as follows:

                              ARTICLE 1 -- PARTIES

1.1   Mortgagor.

      PRIMEENERGY CORPORATION, a Delaware corporation ("Prime"), the Taxpayer
Identification Number for which is 84-0637348, PRIMEENERGY MANAGEMENT
CORPORATION, a New York corporation ("PEMC"), the Taxpayer Identification Number
for which is 13-2929065, (Prime and PEMC herein collectively "Mortgagor"), the
address of Mortgagor for purposes hereof is One Landmark Square, Suite 1100,
Stamford, Connecticut 06901-2605, each represented herein by its undersigned
officer, duly authorized by resolution of its board of directors, a certified
copy of which has been annexed hereto and made a part hereof for all purposes.

1.2   Mortgagee.

      GUARANTY BANK, FSB, a federal savings bank, the address for which for
purposes hereof is 333 Clay Street, Suite 4400, Houston, Texas 77002-4103
("Mortgagee"), represented herein by its undersigned duly authorized officer,
and the Taxpayer Identification Number for which is 74-2511478, in its capacity
as Agent for the Lenders from time to time party to or bound by that certain
Credit Agreement dated December 19, 2002 (the "Lenders"), by and among
Mortgagor, Prime Operating Company, a Texas corporation ("POC"), Eastern Oil
Well Service Company, a West Virginia corporation ("Eastern"), and Southwest Oil
Field Construction Company, an

<PAGE>

Oklahoma corporation ("Southwest") (Prime, PEMC, POC, Eastern and Southwest
herein collectively, "Borrowers"), the Lenders and
Guaranty Bank, FSB, Agent for such Lenders (as amended, restated, or
supplemented from time to time, the "Credit Agreement"). Capitalized terms used
but not defined herein shall have the meanings assigned to such terms in the
Credit Agreement.

                   ARTICLE 2 -- MORTGAGE, PLEDGE, HYPOTHEC AND
                                SECURITY INTEREST

2.1   Mortgaged Property.

      This Mortgage covers the following Property of Mortgagor (such Property,
together with that described in Section 2.3, Section 8.6, and Section 12.13,
being the "Mortgaged Property"):

      A. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in and to the leases, rights of way,
easements, or other documents described in Exhibit A attached hereto and
incorporated herein for all purposes, without regard to any surface acreage
and/or depth limitations set forth in Exhibit A, and all renewals and extensions
thereof and all new leases, rights of way, easements, or other documents (i) in
which an interest is acquired by Mortgagor after the termination or expiration
of any lease, right of way, easement, or other document described in Exhibit A,
and (ii) that covers all or any part of the Property described in and covered by
such terminated or expired lease, right of way, easement, or other document, to
the extent, and only to the extent, such new leases, rights of way, easements,
or other documents may cover such Property (all of the foregoing in this
paragraph A being the "Leases");

      B. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in and to the lands subject to the
Leases or otherwise described in Exhibit A (the "Lands") including, without
limitation, the oil, gas, minerals, and leasehold estates in and to the Lands,
without regard to any surface acreage and/or depth limitations set forth in
Exhibit A.

      C. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in and to any of the oil, gas, and
minerals in, on, or under the Lands, including, without limitation, all
contractual rights, fee interests, leasehold interests, overriding royalty
interests, non-participating royalty interests, mineral interests, production
payments, net profits interests, or any other interest measured by or payable
out of production of oil, gas, or other minerals from the Leases and/or Lands;

      D. all of the foregoing interests of Mortgagor as such interests may be
enlarged by the discharge of any payments out of production or by the removal of
any charges or encumbrances;

      E. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in, to, and under or derived from
any present or future operating, farmout, bidding, pooling, unitization, and
communitization agreements, assignments, and subleases, whether or not described
in Exhibit A, to the extent, and only to the extent, that such agreements,
assignments, and subleases cover or include any right, title, and interest,
whether now owned and existing or hereafter acquired or arising, of Mortgagor in
and to all or any portion of the Leases and/or the Lands, and all units created
by any such pooling, unitization, and communitization


                                       2
<PAGE>

agreements and all units formed under orders, regulations, rules, or other
official acts of any Governmental Authority having jurisdiction, to the extent
and only to the extent that such units cover or include all or any portion of
the Leases and/or the Lands;

      F. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in, to, and under or derived from
all presently existing and future advance payment agreements, oil, casinghead
gas, and gas sales, exchange, and processing contracts and agreements,
including, without limitation, those contracts and agreements that are described
in Exhibit A, to the extent, and only to the extent, those contracts and
agreements cover or include all or any portion of the Leases and/or the Lands;

      G. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in, to, and under or derived from
all existing and future permits, licenses, easements, and similar rights and
privileges that relate to or are appurtenant to any of the Leases and/or the
Lands; and

      H. all right, title, and interest, whether now owned and existing or
hereafter acquired or arising, of Mortgagor in and to all improvements and all
moveable Property of any kind or character defined in and subject to the
provisions of La.R.S. 10:9-101 et seq. (the "UCC") (including, but not limited
to, substitutions and replacements for, accessions to, and the proceeds and
products from any and all of such improvements and moveable Property), whether
now owned and existing or hereafter acquired or arising, and situated on any of
the Lands, including, but not limited to, pipe, casing, tubing, rods, storage
tanks, boilers, loading racks, pumps, foundations, warehouses, and all other
personal Property and equipment of every kind and character upon, incident,
appurtenant, or belonging to and used in connection with the interest of
Mortgagor, whether now owned and existing or hereafter acquired or arising, in
the Lands and/or the Leases, including, but not limited to, goods that are or
are to become fixtures related to such Property and all oil, gas, and other
minerals produced or to be produced to the account of Mortgagor from the Lands
and all accounts receivable, general intangibles, and contract rights of
Mortgagor in connection with the Lands and/or the Leases, including, but not
limited to, oil, gas and other minerals and accounts resulting from the sale
thereof arising at any wellhead or minehead located on the Lands and/or the
Leases.

2.2   Security Granted.

      Mortgagor specially grants to Mortgagee, as security for the Secured
Indebtedness described in Article 3, the following rights in or over the
Mortgaged Property:

      A. a mortgage, hypothec and pledge of the Mortgaged Property described in
clauses A and B of Section 2.1 and such other portions of the Mortgaged Property
as may be susceptible of being so encumbered; and

      B. a security interest in all of the goods, including, without limitation,
all equipment, inventory and fixtures, "as-extracted collateral," and all
intangibles, including, without limitation, all accounts and general
intangibles, now or hereafter comprising a part of the Mortgaged Property and
such other portions of the Mortgaged Property as may be susceptible to being
subjected to a security interest pursuant to the U.C.C.


                                       3
<PAGE>

2.3   After-Acquired Property.

      Mortgagor, for the same consideration, hereby grants to Mortgagee, as
security for the Secured Indebtedness described in Article 3, a mortgage,
hypothec and pledge of or a continuing security interest in, as the case may be,
all additional right, title, or interest which Mortgagor may hereafter acquire
or become entitled to in the interests, Properties, Lands, Leases, and premises
aforesaid, and in the oil, gas, or other minerals in and under or produced from
or attributable to any of the Lands or Leases, which additional right, title,
and interest, when acquired, shall constitute "Mortgaged Property," the same as
if expressly described and conveyed herein.

                        ARTICLE 3 -- SECURED INDEBTEDNESS

3.1   Secured Indebtedness Defined.

      The security described in Article 2 (and the other rights of Mortgagee
herein stipulated) are given to secure the full and punctual payment and
performance of the following (collectively, the "Secured Indebtedness"):

      A. The Obligations, including, without limitation, (i) the indebtedness
evidenced by the Credit Agreement, (ii) the Promissory Note executed by
Borrowers to the order of the Lenders pursuant to the Credit Agreement in the
aggregate face amount of up to $50,000,000, bearing interest and payable as
therein provided or as provided in the Credit Agreement, with a final maturity
date of December 19, 2004, and (iii) the Promissory Note executed by Borrower to
the order of the Lenders pursuant to the Credit Agreement in the aggregate face
amount of up to $4,000,000 bearing interest and being payable as therein
provided or as provided in the Credit Agreement, with a final maturity date of
December 19, 2004..

      B. It is contemplated that Borrower may from time to time borrow
additional sums of money from or otherwise be or become obligated to the
Lenders. This Mortgage is given to secure any and all indebtedness of Borrower,
present or future, either direct or indirect, primary or secondary, fixed or
contingent, which Borrower may now or hereafter owe, or as to which Borrower may
in any manner become obligated to the Lenders for payment, including, without
limitation, indebtedness arising by way of guaranty as to obligations of another
to the Lenders and indebtedness originally owed to a party other than the
Lenders but which becomes owing to the Lenders as the result of the Lenders
having acquired the right to payment thereof. This Mortgage shall likewise
secure not only the indebtedness described above in paragraph A or this
paragraph B, but any and all renewals for any period, extensions, and
rearrangements of all or any portion thereof; and the lien, security interest,
pledge and assignment under this Mortgage shall be cumulative of all other liens
and security of any and every other kind or character whatsoever securing the
above described indebtedness, including, without limitation, the following:

            (a) Payment of and performance of any and all present or future
      obligations of Borrower under Commodity Hedge Agreements, as defined in
      the Credit Agreement.

            (b) Payment of and performance of any and all present or future
      obligations of Borrower under any Rate Management Transaction, as defined
      in the Credit Agreement.


                                       4
<PAGE>

            (c) Payment of and performance of any and all present or future
      obligations of Borrower under any guaranty in favor of Lenders of any of
      the Borrower's subsidiary's obligations under Commodity Hedge Agreements
      and Rate Management Transactions and all present or future obligations of
      Borrower or Borrower's subsidiaries under Commodity Hedge Agreements and
      Rate Management Transactions.

3.2   Limitations Upon Extent of Certain Security

      The obligations described in Section 3.1 are each secured by this Mortgage
to the extent they do not exceed, at any one time, an aggregate amount equal to
ONE HUNDRED MILLION DOLLARS ($100,000,000).

3.3   Security Not Limited.

      Except as provided by Section 3.2 (and then only to the extent such
limitations are required by law), the entire amount of the Secured Indebtedness
is secured hereby without limitation or reduction.

3.4   Continuation in Event of Novation.

      The security granted by and the provisions of this Mortgage shall continue
with respect to any new obligation arising from any novation (subjective or
objective) of the Secured Indebtedness as permitted by Louisiana Civil Code Art.
1884 as well as to any other renewals, modifications, amendments, revisions or
extensions of the Secured Indebtedness.

3.5   Confession of Judgment for Mortgage.

      Mortgagor confesses judgment upon the entire Secured Indebtedness if any
part of the same is not paid at maturity, consenting that executory process
issue thereon to enforce the same.

              ARTICLE 4 -- SECURED INDEBTEDNESS AND CERTAIN OTHER
                                   OBLIGATIONS

4.1   Mortgagor acknowledges that it is indebted to the Lenders in the amount of
      the Secured Indebtedness.

4.2   Transfers and Assignments.

      A. The Lenders may freely transfer all or any part of the Secured
Indebtedness or rights under the terms of this Mortgage.

      B. If less than all of the Secured Indebtedness is transferred, unless the
transferor and transferee otherwise agree in writing, each part of such
indebtedness shall continue to share pro rata in the security and the transferor
shall not be deemed to have warranted or agreed to have subordinated any
remaining or future indebtedness to that transferred.


                                       5
<PAGE>

      C. If the Lenders transfer all of the Secured Indebtedness and all rights
under this Mortgage to any one or more Persons, they may deliver to any such
Person any evidence of the Secured Indebtedness, and shall forthwith be relieved
of any obligation to return or restore the same to Mortgagor, grant releases
hereunder or otherwise have any responsibility to Mortgagor for obligations
accruing or acts or events occurring thereafter.

4.3   Future Holders of Secured Indebtedness as Mortgagees.

      The Mortgage is executed for the benefit of any Person to whom any Lender
assigns any of the evidence of the Secured Indebtedness.

                     ARTICLE 5 -- ADDITIONAL DOCUMENTS AND
                                   ASSURANCES

      Mortgagor, upon request of Mortgagee, shall execute in proper and
customary form, adequate for their purposes, and file or deliver to Mortgagee
for filing or for such other purposes as may be appropriate, any additional acts
or instruments, and shall take any other action that may be required, in
Mortgagee's opinion, to assure or confirm the rights granted Mortgagee
hereunder, to fully perfect Mortgagee's security as between the parties or as to
third persons as required by law and in the manner contemplated and intended to
be created by this Mortgage, and to fully vest Mortgagee with the rights given
by this Mortgage or to fulfill Mortgagor's obligations hereunder. The entire
cost and expense of such actions shall be paid by Mortgagee.

                  ARTICLE 6 -- WARRANTY AND LIMITATION THEREON

6.1   Express Warranty.

      Mortgagor expressly warrants to Mortgagee, subject to, but only to, such
limitations as are expressly mentioned in this Mortgage or as are expressly
described in Exhibit A, that Mortgagor has good and indefeasible title to all of
the material (individually or in the aggregate) Mortgaged Property free and
clear of all Liens, except for Permitted Liens, by, through or under Mortgagor,
but not otherwise.

6.2   Defense and Indemnity.

      A. Mortgagor shall defend and indemnify Mortgagee against any claim or
demand made or asserted by any Person contrary to the warranty made in this or
any other article of this Mortgage, or inconsistent with Mortgagor's obligations
thereunder, and these obligations shall continue, notwithstanding the payment,
release, extinction or termination of the Secured Indebtedness or the security
given herein, or the surrender by any Lender of any evidence of the Secured
Indebtedness and its transfer to another.

      B. Except for Permitted Liens, if any claim, charge, lien or other
encumbrance contrary to the terms hereof exists or arises against Mortgagor on
all or any portion of the Mortgaged Property, whether such claim or encumbrance
is inferior or superior to those created by this Mortgage, Mortgagor shall
promptly satisfy such claim and remove such encumbrance from such Mortgaged
Property.


                                       6
<PAGE>

      C. Mortgagor further represents and warrants that all of the Leases
specifically described in Exhibit A are in full force and effect and all
covenants, express or implied, in respect of the Leases specifically described
in Exhibit A, or of any assignment of any of such Leases, which may affect the
validity of any of such Leases, have been performed insofar as such Leases
pertain to the Land.

                             ARTICLE 7 -- COVENANTS

      In consideration of the Secured Indebtedness, Mortgagor, for itself, its
legal representatives, successors, and assigns, covenants and agrees as follows:

7.1   Maintenance of Leases.

      Mortgagor will use all reasonable efforts to keep and continue all Leases,
estates, and interests herein described and all contracts and agreements
relating thereto in full force and effect in accordance with the terms thereof
and will not permit the same to lapse or otherwise become impaired for failure
to comply with the obligations thereof, whether express or implied. In this
connection, Mortgagor shall not release any of the Leases without the prior
written consent of Mortgagee.

7.2   Maintenance of Property.

      Mortgagor will use all reasonable efforts to keep and maintain all
improvements, personal Property, and equipment now or hereafter situated on the
Lands and constituting a portion of the Mortgaged Property and used or obtained
in connection therewith in good repair and condition, ordinary wear and tear
excepted, and will not tear down or remove the same or permit the same to be
torn down or removed without the prior consent of Mortgagee, except in the usual
course of operations as may be required for replacement when otherwise in
compliance with the provisions of this Mortgage and the Credit Agreement.

7.3   Pooling or Unitization.

      Mortgagor will not, without the prior written consent of Mortgagee, pool
or unitize all or any part of the Mortgaged Property where the pooling or
unitization would result in the diminution of the net revenue interest of
Mortgagor in production from the pooled or unitized lands attributable to the
Mortgaged Property constituting a portion of such pooled or unitized lands.
Immediately after the formation of any pool or unit in accordance herewith,
Mortgagor will furnish to Mortgagee a conformed copy of the pooling agreement,
declaration of pooling, or other instrument creating the pool or unit. The
interest of Mortgagor included in any pool or unit attributable to the Mortgaged
Property or any part thereof shall become a part of the Mortgaged Property and
shall be subject to the Liens hereof in the same manner and with the same effect
as though the pool or unit and the interest of Mortgagor therein were
specifically described in Exhibit A, In the event any proceedings of any
Governmental Authority which could result in pooling or unitizing all or any
part of the Mortgaged Property are commenced, Mortgagor shall give immediate
written notice thereof to Mortgagee. Any pooling or unitization of all or any
part of the Mortgaged Property in violation of this Section shall be of no force
or effect against the Trustee or Mortgagee.


                                       7
<PAGE>

7.4   Operation of Mortgaged Property.

      Mortgagor will operate or, to the extent that the right of operation is
vested in others, will exercise its best efforts to require the operator to
operate the Mortgaged Property and all wells now or hereafter located thereon
continuously and in a prudent and workmanlike manner in accordance with the best
usage of the field and in accordance with all applicable Requirements of Law.
Mortgagor will comply with all material terms and conditions of the Leases and
each assignment or contract obligating Mortgagor in any way with respect to the
Mortgaged Property; but nothing herein shall be construed to empower Mortgagor
to bind Mortgagee to any contract or obligation or render Mortgagee in any way
responsible or liable for bills or obligations incurred by Mortgagor.

7.5   Compliance with Operating Agreements.

      Mortgagor agrees to pay promptly all bills for labor and materials
incurred in the operation of the Mortgaged Property and will promptly pay its
share of all costs and expenses incurred under any joint operating agreement
affecting the Mortgaged Property or any portion thereof; will furnish Mortgagee,
as and when requested, full information as to the status of any joint account
maintained with others under any such operating agreement; will not take any
action to incur any liability or Lien (other than Permitted Liens) thereunder.
and will not enter into any new operating agreement or any amendment of any
existing operating agreement affecting the Mortgaged Property without the prior
written consent of Mortgagee. Furthermore, Mortgagor will not consent or agree
to participate in any proposed operation under any presently existing operating
agreement affecting the Mortgaged Property unless Mortgagor obtains the prior
written consent of Mortgagee and, if requested by Mortgagee, deposits with the
operator or Mortgagee, where Mortgagor is a non-operator, or with Mortgagee,
where Mortgagor is an operator, Mortgagor's share of the estimated cost of the
proposed operation prior to electing to participate in the operation. To the
extent that Mortgagor is unable to consent to any proposed operation with
respect to any of the Mortgaged Property, prior to electing not to participate
in the proposed operation, Mortgagor will use its best efforts, to the extent
practicable and to the extent allowed to do so under the relevant operating
agreement or other applicable contract, to farmout to others acceptable to
Mortgagee, on the best terms obtainable and acceptable to Mortgagee, the
interest or relevant portion of the interest of Mortgagor in the proposed
operation.


                                       8
<PAGE>

7.6   Access to Mortgaged Property.

      Mortgagor will permit Mortgagee and its accredited agents,
representatives, attorneys and employees, at the expense of Mortgagor, at all
reasonable times, to go upon, examine, inspect, conduct environmental audits and
other testing of, and remain on, the Mortgaged Property, and to go upon the
derrick floor of any well at any time drilled or being drilled thereon at
Mortgagee's own risk and subject to safety standards applicable in the industry,
and will furnish Mortgagee, upon request, all pertinent information regarding
the development and operation of the Mortgaged Property.

7.7   Waivers.

      Mortgagor hereby expressly waives, to the full extent permitted by
applicable law, any and all rights or privileges of marshaling of assets, sale
in inverse order of alienation, notices, appraisements, redemption, and any
prerequisite in the event of foreclosure of the Liens created herein. Mortgagee
at all times shall have the right to release any part of the Mortgaged Property
now or hereafter subject to the Liens of this Mortgage, any part of the proceeds
of production or other income herein or hereafter assigned or pledged, or any
other security it now has or may hereafter have securing the Indebtedness,
without releasing any other part of the Mortgaged Property, proceeds, or income,
and without affecting the Liens hereof as to the part or parts of the Mortgaged
Property, proceeds, or income not so released or the right to receive future
proceeds and income.

7.8   Compliance with Laws.

      Mortgagor will comply with all Requirements of Law applicable to the
Mortgaged Property and the operations conducted thereon, including, without
limitation, the Natural Gas Policy Act of 1978, as amended, and Environmental
Laws; and cause all employees, crew members, agents, contractors,
sub-contractors, and future lessees (pursuant to appropriate lease provisions)
of Mortgagor, while such Persons are acting within the scope of their
relationship with Mortgagor, to comply with all such Requirements of Law as may
be necessary or appropriate to enable Mortgagor to so comply.

7.9   Hazardous Substances Indemnification.

      MORTGAGOR HEREBY INDEMNIFIES AND HOLDS MORTGAGEE AND THE LENDERS AND THEIR
RESPECTIVE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT, AND AFFILIATES 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 MORTGAGED PROPERTY,
WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR
UNDERTAKEN ON OR OFF ANY MORTGAGED PROPERTY, WHETHER PRIOR TO OR DURING THE TERM
HEREOF, AND WHETHER BY MORTGAGOR OR ANY PREDECESSOR IN TITLE, EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF MORTGAGOR OR ANY


                                       9
<PAGE>

OTHER PERSON AT ANY TIME OCCUPYING OR PRESENT ON ANY MORTGAGED 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 MORTGAGED PROPERTY, (D) ANY CONTAMINATION OF ANY MORTGAGED PROPERTY
OR NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING,
STORAGE, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE BY MORTGAGOR OR
ANY EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF MORTGAGOR WHILE SUCH
PERSONS ARE ACTING WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH MORTGAGOR,
IRRESPECTIVE OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN
ACCORDANCE WITH APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND
ENFORCEMENT OF THIS MORTGAGE OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR
RELATED TO THIS MORTGAGE OR THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING,
WITHOUT LIMITATION, ANY OF THE FOREGOING IN THIS SECTION ARISING FROM
NEGLIGENCE, WHETHER SOLE OR CONCURRENT, ON THE PART OF MORTGAGEE OR ANY LENDER
OR ANY OF THEIR RESPECTIVE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT, OR AFFILIATES OR THE TRUSTEE; WITH THE FOREGOING INDEMNITY
SURVIVING SATISFACTION OF THE INDEBTEDNESS, THE TERMINATION OF THE CREDIT
AGREEMENT, AND THE RELEASE OF THE LIENS CREATED HEREBY.

7.10  Site Assessments.

      Mortgagee (by its officers, employees and agents) at any time and from
time to time, either prior to or after the occurrence of an Event of Default,
may contract for the services of Persons (the "Site Reviewers") to perform
environmental site assessments and other tests ("Site Assessments") on all or
any portion of the Mortgaged Property for the purpose of determining whether any
environmental condition exists on any Mortgaged Property which could reasonably
be expected to result in any liability, cost, or expense to Mortgagee or any
owner, occupier, or operator of such Mortgaged Property. The Site Assessments
may be performed at any time or times, upon reasonable notice, and under
reasonable conditions established by Mortgagor which do not impede the
performance of the Site Assessments. The Site Reviewers are hereby authorized to
enter upon all or any portion of the Mortgaged Property for such purposes. The
Site Reviewers are further authorized to perform both above and below the ground
testing for environmental damage or the presence of Hazardous Substances on the
Mortgaged Property and such other tests on the Mortgaged Property as may be
necessary to conduct the Site Assessments in the reasonable opinion of the Site
Reviewers. Mortgagor will supply to the Site Reviewers such historical and
operational information regarding the Mortgaged Property as may be reasonably
requested by the Site Reviewers to facilitate the Site Assessments and will make
available for meetings with the Site Reviewers appropriate personnel having
knowledge of such matters. On request, Mortgagee shall make the results of such
Site Assessments available to Mortgagor, which prior to an event of default, may
at its election participate under reasonable procedures in the direction of such
Site Assessments and the description of tasks of the Site Reviewers. The cost of
performing all Site Assessments shall be paid by Mortgagor upon demand of
Mortgagee and any such obligation shall be Indebtedness secured by this
Mortgage.


                                       10
<PAGE>

7.11  Performance of Gas Contracts.

      Mortgagor will perform and observe in all material respects all of its
obligations under each contract relating to the sale of gas produced from or
attributable to the Mortgaged Property and will not, except in good faith and as
the result of arm's length negotiations and with prior written notice to
Mortgagee, change, modify, amend or waive any of the terms or provisions of any
such contract or take any other action which would release any other party from
its obligations or liabilities under any such contract.

7.12  Covenants Running with Land.

      All covenants and agreements herein contained shall constitute covenants
running with the Land.

                      ARTICLE 8 -- SALE OF PRODUCTION AND
                 COLLECTION OF ASSIGNED ACCOUNTS AND OTHER FUNDS

8.1   Right to Proceeds.

      Mortgagee may collect in its own name or that of Mortgagor all amounts due
to Mortgagor arising from or payable with respect to the Mortgaged Property,
including all amounts derived from or payable after the Effective Date, as
defined in Section 12.12 of this Mortgage, with respect to:

      A. Oil, gas or other minerals produced from the Wells and amounts payable
with respect thereto under oil or gas sales contracts, processing contracts or
other contracts relating to such minerals;

      B. Rents, royalties, overriding royalties and other amounts accruing to
the Wells or receivable by Mortgagor as a consequence thereof;

      C. Amounts due Mortgagor under operating agreements, service contracts or
other contracts for the operation of the Leases; and

      D. Proceeds and any other amount or benefit accruing to Mortgagor by,
under or by virtue of the ownership, use, enjoyment or disposition of the
Mortgaged Property.

      Notwithstanding the foregoing, Mortgagee shall not exercise the rights
herein granted unless Mortgagor is in default.

8.2   Transfer and Division Orders and Other Documents.

      Upon request of Mortgagee, Mortgagor shall execute and deliver to
Mortgagee or such persons as Mortgagee may direct, written transfer or division
orders, notices of assignment, directions to pay Mortgagee, or any other
document and shall take such other steps as may in Mortgagee's judgment be
necessary to cause or permit Mortgagee to receive or enforce payment of any
amounts it is entitled to receive hereunder.


                                       11
<PAGE>

8.3   Representation to Payor.

      To induce the person owing such amounts to make payment directly to
Mortgagee, Mortgagor relieves the payor of any responsibility for seeing to the
proper application thereof or determining Mortgagee's right to receive or to
continue to receive such sums. Mortgagor shall confirm these representations
directly to any person Mortgagee requests.

8.4   Application of Funds.

      All amounts received by Mortgagee under the provisions of this Mortgage
from the Mortgaged Property shall be applied to the Secured Indebtedness, to the
extent the same is due and payable, and any excess shall be released to
Mortgagor promptly.

8.5   Use of Proceeds.

      During periods when Mortgagee does not elect to receive any proceeds or
other amount accruing to the Mortgaged Property, Mortgagor may use such funds
for any purpose that is not inconsistent with this Mortgage.

8.6   Additional Security.

      All deposits or funds from any source or held for any reason from time to
time by Mortgagee and belonging or owed to Mortgagor shall be part of the
Encumbered Property.

8.7   Duty of Mortgagee.

      Mortgagee shall not be required to collect or exercise diligence in
collecting any funds or other amounts which it is entitled to collect, hold or
receive hereunder, nor for improperly applying or crediting the same, whether or
not the obligor of such funds has been notified to pay Mortgagee and shall be
accountable only for such amounts as may actually and finally be paid into
Mortgagee's hands.

8.8   Authority to Act in Name of Mortgagor.

      Mortgagee may act in the name and place of Mortgagor to take any action
necessary or appropriate in Mortgagee's judgment to collect, enforce or
otherwise realize any amounts it is entitled to receive under the provisions of
this Mortgage or to enjoy the benefits of any right or privilege given Mortgagee
hereunder or by law.

                    ARTICLE 9 -- MORTGAGEE'S RIGHT TO REMEDY
                      FAILURE TO COMPLY WITH OBLIGATIONS OR
                               BREACH OF WARRANTY

9.1   Right to Remedy.

      If Mortgagor for any reason fails to promptly make any payment or perform
any obligation required to be paid or performed in accordance with the terms of
this Mortgage, the Credit


                                       12
<PAGE>

Agreement or any other Loan Document, or if Mortgagor performs any act
inconsistent with or contrary to such obligations; or if any representation or
warranty of Mortgagor made hereunder or in the Credit Agreement or any other
Loan Document or in connection herewith is materially incorrect or false,
Mortgagee may pay or perform the same or take such steps as are, in Mortgagee's
judgment necessary or appropriate to remedy the actions of Mortgagor, discharge
such claims of encumbrances, or cause the matter that is the subject of the
representation or warranty to conform to the terms of this Mortgage.

9.2   Rights as to Amount Advanced.

      Any amounts expended by Mortgagee and all costs and expenses incurred by
Mortgagee in exercising the rights granted by Paragraph A immediately above, or
by any other provision of this Mortgage, resulting from the failure of Mortgagor
to perform its obligations hereunder in a timely manner shall be immediately due
and payable by Mortgagor to Mortgagee; become a part of the Secured
Indebtedness; be secured by the security created by this Mortgage as previously
provided and bear interest on such amounts as are accrued or expended by
Mortgagee until they are repaid by Mortgagor at the highest rate permitted by
law, or if no maximum rate is authorized in such cases, at the highest rate of
interest provided in the Credit Agreement. If Mortgagor fails to pay such
amounts when due, Mortgagee shall also recover all costs, expenses and
attorneys' fees incurred by Mortgagee in enforcing the same.

                  ARTICLE 10 -- PREPARATION OF ACT AND USE OF
                                  CERTAIN TERMS

10.1  Drafting of Act.

      Mortgagor and Mortgagee declare that each of them has contributed to the
drafting of this Mortgage and has had it reviewed by its counsel before signing
it. Each agrees that it has been purposefully drawn and correctly reflects its
understanding of the transaction that it contemplates.

10.2  Use of Defined Terms and Other Expressions.

      Mortgagor and Mortgagee particularly agree that those terms that are given
defined meanings in this article and elsewhere in this Mortgage are
intentionally utilized in those places where they are employed and are to be
understood in their defined sense unless such meaning is expressly limited or
qualified.

10.3  Headings and Construction of Agreement as a Whole.

      A. This Mortgage has been divided into articles, subarticles and
paragraphs for convenience only and such subdivisions have been given titles for
ease of reference. The titles to such subdivisions (and to the Exhibits) form no
part of the contract and resort is not to be had to them to aid in the
interpretation of this Mortgage or to limit, modify or restrict its provisions.
The scope and nature of the obligations of the parties is to be determined from
the provisions of this Mortgage as a whole and without regard to its divisions.


                                       13
<PAGE>

      B. "Exhibit A" constitutes a part of this Mortgage, and all modifications,
limitations or waivers of the warranties, covenants and other general provisions
hereof that are contained in Exhibit A and described as pertaining to the
property particularly described therein modify such general provisions to the
extent such Exhibit expressly so provides.

                 ARTICLE 11 -- REMEDIES IN THE EVENT OF DEFAULT
                     OR UPON THE HAPPENING OF CERTAIN EVENTS

11.1  Right to Accelerate Maturity.

      Mortgagee may declare the Secured Indebtedness immediately due and payable
if:

      A. Mortgagor fails to pay when due or defaults in the payment or
performance of any part of the Secured Indebtedness or other amount due under
the terms of this Mortgage or any other obligation owed by Mortgagor to
Mortgagee, or if Mortgagor fails to make any other payment or perform any other
obligation required to be paid or performed by Mortgagor to Mortgagee or any
other person under the terms of the Secured Indebtedness or this Mortgage.

      B. Mortgagor fails to perform or defaults in the performance of any
material covenant, agreement, stipulation or condition or other provision
contained in this Mortgage or required to be kept, observed or performed by
Mortgagor in any Governing Agreement or other document relating to the Secured
Indebtedness;

      C. Mortgagor becomes insolvent, is unable to pay its debts as they mature,
makes an assignment for the benefit of creditors, applies for a respite or to be
adjudicated a bankrupt, or applies for relief under any state or federal statute
for the relief of debtors;

      D. any of the Wells or the Leases are levied upon or seized in execution
of a writ of executory process, attachment or fieri facias or of any other writ
or legal process of court to the extent the same materially impairs the value of
the Mortgagor's Property;

      E. a petition for voluntary or involuntary receivership, bankruptcy,
arrangement or reorganization is filed against Mortgagor under any state or
federal statute; or a trustee, receiver or syndic is appointed for Mortgagor or
its property;

      F. any of the warranties, representations or covenants hereof is not
entirely true and correct in any material respect; or

      G. Mortgagor sells, leases, transfers or otherwise disposes of all or
substantially all of its properties or assets.

Any of the foregoing shall constitute an "Event of Default."


                                       14
<PAGE>

11.2  Additional Rights Upon Default.

      Upon the occurrence of any one or more of an Event of Default described in
Article 11.1, and in addition to any other right or privilege granted to it by
this Mortgage, by law or otherwise, and without prejudice thereto:

      A. Mortgagee may, at its option, without demand, notice of intention to
accelerate, notice of acceleration, notice of nonpayment, presentment, protest,
notice of dishonor, or any other notice to Mortgagor whatsoever, all of which
are hereby waived by Mortgagor to the full extent permitted by applicable law,
declare all Secured Indebtedness immediately due and payable.

      B. Mortgagee may cause the Mortgaged Property to be seized and sold under
executory or other legal process issued by any competent court, without
appraisement (the benefit of all laws relative to appraisement being hereby
expressly waived), as an entirety or in lots or parcels as Mortgagee may
determine, to the highest bidder for cash, or on such terms as the plaintiff in
such proceedings may direct.

      C. In addition to the other rights granted herein to Mortgagee, Mortgagee
as Secured Party shall have and may exercise all of the rights, remedies and
powers of a secured party under La. R.S. 10:9-101 et seq. (the "UCC"),
including, without limitation, the right and power to sell, at one or more
public or private sales, or otherwise dispose of or utilize the Mortgaged
Property or any part thereof in any manner authorized or permitted under the UCC
after a default by a debtor, and to apply the proceeds thereof toward payment of
any reasonable costs and expenses and attorney's fees and legal expenses thereby
incurred by Mortgagee as Secured Party and toward payment of the Secured
Indebtedness in such order or manner as Mortgagee may elect.

      D. Mortgagor hereby expressly waives:

            (1) The benefit of appraisement, as provided in Article 2332, 2723
      and 2724, Louisiana Code of Civil Procedure, and all other laws conferring
      the same;

            (2) The demand and three days' delay afforded by Articles 2639 and
      2721, Louisiana Code of Civil Procedure;

            (3) The three days' delay provided by Article 2331 and 2722,
      Louisiana Code of Civil Procedure; and

            (4) The benefit of the other provisions of Article 2331, 2722 and
      2723, Louisiana Code of Civil Procedure, and any other notices or
      conditions prescribed by law as a prerequisite to the institution of a
      suit or sale of the Mortgaged Property. Mortgagor expressly agrees to the
      immediate seizure of the Mortgaged Property.

      E. Mortgagee may purchase all or any portion of the Mortgaged Property at
any sale made hereunder.

      F. Mortgagee may cause a receiver or keeper to be appointed to take
possession of the Wells, the Leases and the other Mortgaged Property to manage,
administer, operate and conserve the value thereof and collect the rents,
issues, revenues, proceeds and profits thereof. The receiver or


                                       15
<PAGE>

keeper may also take possession of, and for these purposes use any and all
movable property contained in or on the premises and used by Mortgagor in the
operation thereof or any part thereof, whether or not the same is covered by
this Mortgage. After paying costs of collection and any other expenses incurred,
the proceeds shall be applied to the payment of the Secured Indebtedness in such
order as Mortgagee shall elect, and Mortgagee shall not be liable to account to
Mortgagor for any loss, damage or neglect suffered to or by the Wells, the
Leases, the other Mortgaged Property, or Mortgagor as a consequence thereof,
except such as are caused by the willful misconduct or gross negligence of
Mortgagee's own employees or agents.

      G. Mortgagee may designate any Person to be the receiver or keeper of the
Mortgaged Property as provided by La. R.S. 9:5132 and similar statutes.

      H. All rights to the marshaling of assets are expressly waived. Neither
Mortgagor nor any party claiming or asserting any interest in or right over the
Mortgaged Property shall have the right to require their sale in any special
order or a marshaling of assets, appraisement, redemption, stay or extension of
proceedings, or a moratorium on indebtedness with respect thereto or to the
Secured Indebtedness.

      I. Mortgagor shall be fully liable for all costs of retaking, holding,
preparing for sale, lease or other use or disposition, selling, leasing or
otherwise using or disposing of the Mortgaged Property which are incurred or
paid by Mortgagee as authorized or permitted hereunder, including also all
reasonable attorney's fees, legal expenses and costs, all of which expenses and
costs shall constitute a part of the Secured Indebtedness. MORTGAGOR SHALL AND
DOES HEREBY AGREE TO INDEMNIFY MORTGAGEE, THE LENDERS AND THEIR RESPECTIVE
OFFICERS, DIRECTORS, PARTNERS, SHAREHOLDERS, EMPLOYEES AND REPRESENTATIVES, AND
THEIR SUCCESSORS AND ASSIGNS, FOR, AND TO HOLD EACH OF THEM HARMLESS FROM, ANY
AND ALL LIABILITY, LOSS OR DAMAGE WHICH MAY OR MIGHT BE INCURRED BY ANY OF THEM
BY REASON OF THIS MORTGAGE OR THE EXERCISE OF RIGHTS OR REMEDIES HEREUNDER;
SHOULD MORTGAGEE INCUR ANY SUCH LIABILITY, LOSS OR DAMAGE THE AMOUNT THEREOF,
INCLUDING COSTS, EXPENSES AND REASONABLE ATTORNEYS' FEES, SHALL BE A DEMAND
OBLIGATION OWING BY MORTGAGOR TO MORTGAGEE AND SHALL BEAR INTEREST FROM THE DATE
INCURRED UNTIL PAID AT THE RATE PROVIDED FOR IN ARTICLE 9 HEREOF AND SHALL BE A
PART OF THE SECURED INDEBTEDNESS AND SHALL BE SECURED BY THIS MORTGAGE AND ANY
OTHER INSTRUMENT SECURING THE SECURED INDEBTEDNESS. THE INDEMNITY PROVIDED
HEREIN SHALL TERMINATE FIVE YEARS AFTER THE REPAYMENT OF THE SECURED
INDEBTEDNESS. NO PERSON SHALL BE ENTITLED UNDER THIS ARTICLE 11 I. TO RECEIVE
INDEMNIFICATION FOR THAT PORTION, IF ANY, OF ANY LIABILITIES AND COSTS WHICH ARE
CAUSED BY ITS OWN INDIVIDUAL FRAUD, NEGLIGENCE OR WILLFUL MISCONDUCT, AS
DETERMINED IN A FINAL JUDGMENT. Mortgagor hereby assents to, ratifies and
confirms any and all actions of Mortgagee taken with respect to the Mortgaged
Property pursuant to this Section 11.2.


                                       16
<PAGE>

11.3  Rights and Remedies Cumulative.

      All rights, powers, immunities, remedies and liens of Mortgagee existing
and to exist hereunder or under any other instruments or at law or in equity and
all other or additional security shall be cumulative and not exclusive, each of
the other. Mortgagee shall, in addition to the rights and remedies herein
expressly provided, be entitled to such other remedies as may now or hereafter
exist at law or in equity for securing and collecting the Secured Indebtedness,
for enforcing the covenants herein, and for foreclosing the liens hereof. Resort
by Mortgagee to any right or remedy provided for hereunder or at law or in
equity shall not prevent concurrent or subsequent resort to the same or any
other right or remedy. No security heretofore, herewith or subsequently taken by
Mortgagee shall in any manner impair or affect the security given by this
instrument or any security by endorsement or otherwise presently or previously
given; and all security shall be taken, considered and held as cumulative.

                          ARTICLE 12 -- MISCELLANEOUS

12.1  Instrument Filed as Financing Statement.

      Any copy of this Mortgage which is signed by Mortgagor or any carbon,
photographic, facsimile or other reproduction of this Mortgage may also serve as
a financing statement under the UCC by Mortgagor in favor of Mortgagee.

12.2  Fixtures.

      Certain of the Mortgaged Property is or may become "fixtures" (as that
term is defined in the UCC) on the real or immovable property described in
Exhibit A hereto and this instrument shall operate also as a financing statement
upon such of the Mortgaged Property which is or may become fixtures. Mortgagor
has an interest of record in the real estate

12.3  Addresses.

      For purposes of filing this instrument as a financing statement, the
addresses for Mortgagor, as debtor, and Mortgagee, as secured party, are as set
forth in Article 1 of this Mortgage.

12.4  Financing Statement.

      Mortgagee is authorized to file, in jurisdictions where this authorization
will be given effect, a financing statement signed only by Mortgagee covering
the Mortgaged Property. At the request of Mortgagee, Mortgagor will join
Mortgagee in executing one or more financing statements covering the Mortgaged
Property pursuant to the UCC in form satisfactory to Mortgagee. Mortgagee shall
pay the cost of filing or refiling any such financing statement and of filing or
refiling or recording or re-recording this Mortgage, as a financing statement,
in all public offices at any time and from time to time whenever filing or
recording of any financing statement or this Mortgage is deemed by Mortgagee to
be necessary or desirable. Further, Mortgagor authorizes Mortgagee to execute
and file any and all Financing Statements in both the real estate records and
the office of the Secretary of State of Delaware and New York, pursuant to
Article 9 of the Uniform Commercial Code, as Mortgagee deems necessary in its
sole discretion, in conjunction with this Mortgage, and Mortgagor


                                       17
<PAGE>

expressly authorizes execution and filing of such Financing Statements by
Mortgagee without need of signature or execution by Mortgagor.

12.5  Releases.

      In accordance with the provisions of Louisiana Civil Code article 3298, as
amended from time to time, if Mortgagor shall pay in full when due the Secured
Indebtedness and shall duly and timely perform and observe all of the terms,
provisions, covenants and agreements herein and in the Credit Agreement and
other Loan Documents provided to be performed and observed by Mortgagor, and if
neither Mortgagor nor Mortgagee is bound to the other or to any third person to
permit any further obligation to be incurred then or thereafter, then Mortgagor
may give notice to Mortgagee of its intent to terminate this Mortgage and may
request that Mortgagee execute a release of this Mortgage at the expense of
Mortgagor. Such termination shall not become effective, and Mortgagee shall not
be obligated to execute such a release, until thirty (30) days after Mortgagee
has actually received such notice at its address set forth in Section 1.2 of
this Mortgage and until Mortgagee has determined, in good faith, that Mortgagor
is entitled to terminate this Mortgage and obtain such release under the terms
of this Section 12.5.

12.6  Notices.

      All notices, requests, consents, demands and other communications required
or permitted under this Mortgage shall be in writing, unless otherwise
specifically provided herein, and shall be deemed sufficiently given or
furnished if delivered by personal delivery, by telecopy, by delivery service
with proof of delivery, or by registered or certified United States mail,
postage prepaid, to Mortgagor or Mortgagee, as the case may be, at the address
of such party specified in Article 1 of this Mortgage (unless changed by similar
notice in writing given by the particular person whose address is to be
changed).

12.7  Severability.

      A determination that any provision of this Mortgage is unenforceable or
invalid shall not affect the enforceability or validity of any other provision,
and any determination that the application of any provision of this Mortgage to
any Person or circumstance is illegal or unenforceable shall not affect the
enforceability or validity of such provision as it may apply to other Persons or
circumstances.

12.8  Recording.

      Mortgagee, or Mortgagor at the request of Mortgagee, will cause this
Mortgage and all amendments and supplements thereto and substitutions therefor
and all financing statements, fixture filings and continuation statements
relating thereto to be recorded, filed, re-recorded and re-filed in such manner
and in such places as Mortgagee shall reasonably request and Mortgagee pay or
reimburse Mortgagor for all such recording, filing, re-recording and re-filing
taxes, fees and other charges.


                                       18
<PAGE>

12.9  Execution in Counterparts.

      This Mortgage is executed in multiple counterparts. For recording
purposes, Exhibit A attached to various counterparts of this Mortgage may
contain a description of the Wells, the Leases, the Lands and other Mortgaged
Property relating only to the jurisdiction in which the relevant counterpart is
to be filed for registry or recordation. Each counterpart shall for all purposes
be deemed to be an original and all such counterparts shall together constitute
but one and the same instrument and juridical act. Complete copies of this
Mortgage containing descriptions of all the Wells, the Leases, the Lands and
other Mortgaged Property have been retained by Mortgagor and Mortgagee.

12.10 Governing Law.

      THE TERMS AND PROVISIONS OF THIS MORTGAGE RELATING TO THE CREATION,
PERFECTION AND ENFORCEMENT OF THE ENCUMBRANCES AND SECURITY INTERESTS CREATED BY
THIS MORTGAGE AND THE REALIZATION BY MORTGAGEE OF ITS RIGHTS AND REMEDIES UNDER
THIS MORTGAGE OR WITH RESPECT TO THE MORTGAGED PROPERTY LOCATED IN OR OFFSHORE
THE STATE OF LOUISIANA, SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF LOUISIANA (WITHOUT GIVING EFFECT TO
THE CONFLICTS-OF-LAW RULES AND PRINCIPLES OF SUCH STATE) AND APPLICABLE LAWS OF
THE UNITED STATES. ALL OTHER TERMS AND PROVISIONS OF THIS MORTGAGE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS
AND APPLICABLE FEDERAL LAW.

12.11 Jurisdiction.

      MORTGAGOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NONEXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATES OF TEXAS, LOUISIANA
AND EACH OTHER STATE WHERE THE MORTGAGED PROPERTY IS LOCATED AND AGREES AND
CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING
RELATING TO THIS MORTGAGE, THE GOVERNING AGREEMENTS OR THE SECURED INDEBTEDNESS
BY SERVING THE SECRETARY OF STATE OF SUCH STATE IN ACCORDANCE WITH ANY PROVISION
OF SUCH STATE'S LAWS GOVERNING SERVICE OF PROCESS UPON FOREIGN CORPORATIONS OR
ENTITIES

12.12 Amendment of Prior Security Documents This Mortgage is intended, in part,
as an amendment and restatement of those security documents described on Exhibit
B hereto or which relate to security documents assigned to Mortgagee pursuant to
the documents described on Exhibit B hereto (collectively, the "Prior Security
Documents"), and the liens and security interests created by the Prior Security
Documents are preserved and carried forward hereby.


                                       19
<PAGE>

12.13 Effective Date.

      This Mortgage is made to be effective as of 7:00 o'clock a.m. local time
on December 19, 2002, in Houston, Harris County, Texas (the "Effective Date").

12.14 Supplements.

      Without in any manner limiting the effect of Section 2.3 or any other
provisions of this Mortgage as to the binding effect of this Mortgage on
after-acquired rights of Mortgagor, it is contemplated by the parties hereto
that from time to time additional interests and properties may or will be added
to the interests and properties subject to the Liens, rights, titles, and
interests created by this Mortgage by means of supplemental indentures
identifying this Mortgage and describing such interests and properties to be so
added and included. Upon the execution of any such supplemental indenture, the
Liens, rights, titles, and interests created herein shall immediately attach to
and be effective with respect to any such interests and properties so described,
the same as if such interests and properties had been specifically described
herein, and such interests and properties being included in the term "Mortgaged
Property," as used herein.

      THUS SIGNED in multiple originals in my office in Houston, Harris County,
Texas, by the person who appears above my signature below in the presence of the
undersigned competent witnesses who have signed their names hereto and me,
Notary, on the _______ day of December, 2002, but effective as above set forth,
after due reading of the whole.

WITNESSES TO ALL SIGNATURES
OF MORTGAGOR AND BORROWER:           MORTGAGOR AND BORROWERS:

                                     PRIMEENERGY CORPORATION
______________________________       PRIMEENERGY MANAGEMENT CORPORATION
(Signature of Witness)               PRIME OPERATING COMPANY
                                     EASTERN OIL WELL SERVICE COMPANY
                                     SOUTHWEST OIL FIELD CONSTRUCTION
______________________________       COMPANY,
(Printed Name of Witness)            EACH COMPANY REPRESENTED BY


______________________________       ___________________________________________
(Signature of Witness)               Beverly A. Cummings
                                     Executive Vice President, Treasurer,
______________________________       and Chief Financial Officer of each of the
(Printed Name of Witness)            companies listed above


                   ___________________________________________
                   Notary Public in and for the State of Texas


                                       20
<PAGE>

      THUS SIGNED in multiple originals in my office in Houston, Harris County,
Texas, by the person who appears above my signature below in the presence of the
undersigned competent witnesses who have signed their names hereto and me,
Notary, on the _______ day of December, 2002, but effective as above set forth,
after due reading of the whole.

                                        MORTGAGEE:

WITNESSES TO SIGNATURE
OF MORTGAGEE:                           GUARANTY BANK, FSB, Agent


________________________________        By: ____________________________________
(Signature of Witness)                      Richard Menchaca
                                            Vice President
________________________________
(Printed Name of Witness)

________________________________
(Signature of Witness)

________________________________
(Printed Name of Witness)


                   ___________________________________________
                   Notary Public in and for the State of Texas


                                       21
<PAGE>

                                    EXHIBIT A
                                       TO
                     ACT OF MORTGAGE AND SECURITY AGREEMENT

      The designation "Working Interest" or "WI" when used in this Exhibit means
an interest owned in an oil, gas, and mineral lease that determines the
cost-bearing percentage of the owner of such interest. The designation "Net
Revenue Interest" or "NRI" means that portion of the production attributable to
the owner of a working interest after deduction for all royalty burdens,
overriding royalty burdens or other burdens on production, except severance,
production, and other similar taxes. The designation "Overriding Royalty
Interest" or "ORRI" means an interest in production which is free of any
obligation for the expense of exploration, development, and production, bearing
only its pro rata share of severance, production, and other similar taxes and,
in instances where the document creating the overriding royalty interest so
provides, costs associated with compression, dehydration, other treating or
processing, or transportation of production of oil, gas, or other minerals
relating to the marketing of such production. The designation "Royalty Interest"
or "RI" means an interest in production which results from an ownership in the
mineral fee estate or royalty estate in the relevant land and which is free of
any obligation for the expense of exploration, development, and production,
bearing only its pro rata share of severance, production, and other similar
taxes and, in instances where the document creating the royalty interest so
provides, costs associated with compression, dehydration, other treating or
processing or transportation of production of oil, gas, or other minerals
relating to the marketing of such production.

      Any reference in this Exhibit to wells or units is for warranty of
interest, administrative convenience, and identification and shall not limit or
restrict the right, title, interest, or properties covered by this Act of
Mortgage. All right, title, and interest of Mortgagor in the properties
described herein are and shall be subject to this Act of Mortgage, regardless of
the presence of any units or wells not described herein.

      The references to book and folio or page herein refer to the recording
location of each respective Mortgaged Property described herein in the parish
where the land covered by the Mortgaged Property is located.

                    [Descriptions of the relevant Leases and
                       the relevant Land are found on the
                        following pages of this Exhibit]


                                       A-i
<PAGE>

                              CORPORATE RESOLUTIONS
                            (PRIMEENERGY CORPORATION)

      I, the undersigned, hereby certify to the below named bank that I am
Secretary of PRIMEENERGY CORPORATION ("Company"), a Delaware corporation; that
the following is an extract of the minutes of a meeting of the Board of
Directors of the Company wherein the following resolutions were adopted by the
Board of Directors of said Company, and that such resolutions have not been
rescinded or modified and are in full force and effect:

      "1. RESOLVED, that the officer of this Company as listed below be and the
      same is hereby authorized and empowered on behalf of the Company, to
      borrow money from Guaranty Bank, FSB, and the other lenders from time to
      time party to or bound by that certain Credit Agreement dated December 19,
      2002, by and among the Company, such lenders, and Guaranty Bank, FSB, in
      its capacity as Agent for such lenders (the "Agent"), and to guarantee
      indebtedness of any party to such lenders and to make, execute and deliver
      promissory notes, guaranty agreements, or other written obligations of the
      Company, in such form, date and maturity and at such rate of interest, all
      as such officer of this Company may approve, and the Secretary or any
      Assistant Secretary is authorized, but not required, to affix the
      corporate seal to any such instrument whenever necessary or required, and
      the execution and delivery by such officer of such instrument or
      instruments shall be conclusive evidence that such officer approves the
      terms of such instruments:

<TABLE>
<CAPTION>
      NAME                         TITLE                                                    SIGNATURE
      ----                         -----                                                    ---------
<S>                                <C>                                        <C>
      Beverly A. Cummings          Executive Vice President,
                                   Treasurer, and
                                   Chief Financial Officer                    _______________________
</TABLE>

      "2. IT IS FURTHER RESOLVED, that all documents authorized to be signed by
      this resolution shall be in such form and contain such terms and
      conditions as the foregoing officer or officers deem necessary or
      appropriate, including, without limitation, confessions of judgment, pacts
      de non alienando, waivers of appraisement, and waivers of notice and
      delay.

      "3. IT IS FURTHER RESOLVED, that the foregoing resolutions shall remain in
      full force and effect until written notice of their amendment or
      rescission shall have been received by the Agent, and that receipt of said
      notice shall not affect any action taken by the Agent prior thereto."

      I, the undersigned, further certify that the officer listed above has been
duly elected to the office set opposite her name, that she continues to hold
such office at the present time, and that the signature appearing hereon is the
genuine original signature of such officer.


                                       - i -
<PAGE>

      IN WITNESS HEREOF, I have hereunto set my hand and seal of this Company
this _______ day of December, 2002.


                                         _______________________________________
                                         Printed Name:__________________________
                                         Secretary


                                     - ii -
<PAGE>

                              CORPORATE RESOLUTIONS
                      (PRIMEENERGY MANAGEMENT CORPORATION)

      I, the undersigned, hereby certify to the below named bank that I am
Secretary of PRIMEENERGY MANAGEMENT CORPORATION ("Company"), a New York
corporation; that the following is an extract of the minutes of a meeting of the
Board of Directors of the Company wherein the following resolutions were adopted
by the Board of Directors of said Company, and that such resolutions have not
been rescinded or modified and are in full force and effect: "

      "1. RESOLVED, that the officer of this Company as listed below be and the
      same is hereby authorized and empowered on behalf of the Company, to
      borrow money from Guaranty Bank, FSB, and the other lenders from time to
      time party to or bound by that certain Credit Agreement dated December 19,
      2002, by and among the Company, such lenders, and Guaranty Bank, FSB in
      its capacity as Agent for such lenders (the "Agent"), and to guarantee
      indebtedness of any party to such lenders and to make, execute and deliver
      promissory notes, guaranty agreements, or other written obligations of the
      Company, in such form, date and maturity and at such rate of interest, all
      as such officer of this Company may approve, and the Secretary or any
      Assistant Secretary is authorized, but not required, to affix the
      corporate seal to any such instrument whenever necessary or required, and
      the execution and delivery by such officer of such instrument or
      instruments shall be conclusive evidence that such officer approves the
      terms of such instruments:

<TABLE>
<CAPTION>
      NAME                         TITLE                                                    SIGNATURE
      ----                         -----                                                    ---------
<S>                                <C>                                        <C>
      Beverly A. Cummings          Executive Vice President,
                                   Treasurer, and
                                   Chief Financial Officer                    _______________________
</TABLE>

      "2. IT IS FURTHER RESOLVED, that all documents authorized to be signed by
      this resolution shall be in such form and contain such terms and
      conditions as the foregoing officer or officers deem necessary or
      appropriate, including, without limitation, confessions of judgment, pacts
      de non alienando, waivers of appraisement, and waivers of notice and
      delay.

      "3. IT IS FURTHER RESOLVED, that the foregoing resolutions shall remain in
      full force and effect until written notice of their amendment or
      rescission shall have been received by the Agent, and that receipt of said
      notice shall not affect any action taken by the Agent prior thereto."

      I, the undersigned, further certify that the officer listed above has been
duly elected to the office set opposite her name, that she continues to hold
such office at the present time, and that the signature appearing hereon is the
genuine original signature of such officer.


                                      - i -
<PAGE>

      IN WITNESS HEREOF, I have hereunto set my hand and seal of this Company
this ______ day of December, 2002.


                                         _______________________________________
                                         Printed Name:__________________________
                                         Secretary


                                     - ii -

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>d03089exv21.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
<PAGE>
                                                                      EXHIBIT 21

                                  Subsidiaries

PrimeEnergy Management Corporation, a New York corporation 100% owned by
Corporation


Prime Operating Company, a Texas corporation 100% owned by
PrimeEnergy Corporation

Eastern Oil Well service Company, a West Virginia corporation 100% owned by
PrimeEnergy Corporation

Southwest Oilfield Construction Company, an Oklahoma corporation, 100% owned by
PrimeEnergy Corporation

E O W S Midland Company, a Texas corporation, 100% owned by PrimeEnergy
Corporation

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>d03089exv23.txt
<DESCRIPTION>CONSENT OF RYDER SCOTT & COMPANY L.P.
<TEXT>
<PAGE>
                                                                               .
                                                                               .
                                                                               .
                                                                    EXHIBIT 23

(RS LOGO) RYDER SCOTT COMPANY                                FAX (303) 623-4258
          ---------------------
          PETROLEUM CONSULTANTS

<Table>
<S>                       <C>
600 SEVENTEENTH STREET    SUITE 161ON    DENVER, COLORADO 80202-5416    TELEPHONE (303) 623-9147
</Table>





                      CONSENT OF RYDER SCOTT COMPANY, L.P.


         We consent to the use on the Form 10-K of PrimeEnergy Corporation of
our reserve report and all schedules, exhibits, and attachments thereto
incorporated by reference of Form 10-K and to any reference made to us on Form
10-K as a result of such incorporation.

                                          Very truly yours,


                                          /s/ RYDER SCOTT COMPANY, L.P.

                                          RYDER SCOTT COMPANY, L.P.



Denver, Colorado
March 28, 2003




<Table>
<S>                               <C>
1100 LOUISIANA, SUITE 3800        HOUSTON, TEXAS 77002-5218        TEL (713) 651-9191        FAX (713) 651-0849
3700, 700-2ND STREET, S.W.        CALGARY, ALBERTA T2P 2W2         TEL (403) 262-2799        FAX (403) 262-2790
</Table>


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>8
<FILENAME>d03089exv99w1.txt
<DESCRIPTION>CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
<TEXT>
<PAGE>
                                                                    EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of PrimeEnergy Corporation (the "Company")
on Form 10-K for the period ending December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Charles
E. Drimal Jr., Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

         (1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.



/s/ Charles E. Drimal Jr.
- -------------------------
Chief Executive Officer
March 31, 2002


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>9
<FILENAME>d03089exv99w2.txt
<DESCRIPTION>CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
<TEXT>
<PAGE>
                                                                    EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of PrimeEnergy Corporation (the "Company")
on Form 10-K for the period ending December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Beverly
A. Cummings, Chief Financial Officer of the Company certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

         (1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.




/s/ Beverly A. Cummings
- -----------------------
Chief Financial Officer
March 31, 2003

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
