Bridge Loan

LOAN AGREEMENT


by and among


ABRAXAS PETROLEUM CORPORATION,


as Borrower,


THE SUBSIDIARIES OF BORROWER
THAT ARE SIGNATORIES HERETO,


as Guarantors,


THE LENDERS THAT ARE SIGNATORIES HERETO,


as the Lenders,


and


GUGGENHEIM CORPORATE FUNDING, LLC,


as the Arranger and Administrative Agent


Dated as of October 28, 2004


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LOAN AGREEMENT


LOAN AGREEMENT, dated as of October 28, 2004 (this "Agreement"), by and among (i) on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders") and GUGGENHEIM CORPORATE FUNDING, LLC, a Delaware limited liability company, as the arranger and administrative agent for the Lenders ("Agent"), and (ii) on the other hand, ABRAXAS PETROLEUM CORPORATION, a Nevada corporation ("Borrower"), and the subsidiaries of Borrower that are signatories hereto ("Guarantors").


RECITALS


WHEREAS, Borrower has requested that the Lenders make available to it, and, subject to and upon the terms and conditions hereinafter set forth, the Lenders are willing to make available to Borrower, the credit facility provided for herein;


NOW, THEREFORE, the parties hereto agree as follows:


1. DEFINITIONS AND CONSTRUCTION.


1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions:


"Acceptable Commodity Hedging Agreement" means a Commodity Hedging Agreement (i) with a counterparty rated A3 or better by Moody's and A- or better by Standard & Poor's, or the equivalent by a rating agency acceptable to Agent, (ii) pursuant to an agreement the terms of which are acceptable to Agent and (iii) the arrangements of which are otherwise reasonably acceptable to Agent.


"Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper or a General Intangible.


"Accounts" means all of Borrower's or any Guarantor's now owned or hereafter acquired right, title and interest with respect to "accounts" (as that term is defined in the Code) and any and all supporting obligations in respect thereof.


"Additional Documents" has the meaning set forth in Section 4.4(a).


"Advances" has the meaning set forth in Section 2.1.


"Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract or otherwise; provided, however, that, for the purposes of Section 7.14: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership


interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture (other than joint ventures permitted under clause (d) of the definition of Permitted Investments) in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person.


"Agent" means GCF, solely in its capacity as agent for the Lenders hereunder, and any successor thereto.


"Agent Directed Asset Sale" has the meaning set forth in Section 6.19(a).


"Agent's Account" means an account identified on Schedule A-1.


"Agent's Liens" means the Liens granted by any Loan Party to Agent for the benefit of the Lender Group pursuant to the Collateral Documents.


"Agent-Related Persons" means Agent, its Affiliates and the officers, directors, employees and agents of Agent and such Affiliates.


"Agreement" has the meaning set forth in the preamble hereto.


"Assignee" has the meaning set forth in Section 14.1.


"Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1.


"Authorized Person" means, with respect to any Person, the President, the Chief Executive Officer, the Chief Financial Officer, any Vice President or the Treasurer of such Person.


"Bank Product Obligation" has the meaning given to such term in the Revolving Credit Facility.


"Bankruptcy Code" means (i) (A) the United States Bankruptcy Code, (B) the Bankruptcy and Insolvency Act (Canada) or (C) the Companies' Creditors Arrangement Act (Canada), as applicable, or (ii) any similar legislation in a relevant jurisdiction, in each case as in effect from time to time.


"Base Rate" means (i) during the period from (and including) the Closing Date to (but excluding) the first anniversary of the Closing Date, 12.00 percentage points, and (ii) on the first anniversary of the Closing Date and every day thereafter, 15.00 percentage points; provided, that, if there is a Grey Wolf Stock Sale during the period of either clause (i) or (ii) and the aggregate amount of outstanding Advances under this Agreement exceeds $17,500,000 at the end of the day upon which such Grey Wolf Stock Sale is completed, then the applicable "Base Rate" from and after such day shall be 2.00 percentage points greater than would otherwise be applicable hereunder.


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"Basis Differential" means, in the case of any Oil and Gas Property, the difference between the NYMEX futures contract prices and the sales prices at the delivery point where the oil or gas, as the case may be, produced by such Oil and Gas Property, is sold.


"Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) or a benefit plan under Canadian Employee Benefit Laws for which Borrower or any Subsidiary or ERISA Affiliate of Borrower has been an "employer" (as defined in Section 3(5) of ERISA) or has held equivalent status under Canadian Employee Benefit Laws within the past six years.


"Board of Directors" means the board of directors (or comparable managers) of a Person.


"Books" means Borrower's and each Guarantor's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing or evidencing its assets (including the Collateral) or liabilities, all of Borrower's and each Guarantor's Records relating to its or their business operations or financial condition).


"Borrower" has the meaning set forth in the preamble to this Agreement.


"Borrower Parties" means Borrower and its Subsidiaries collectively.


"Borrowing" means a borrowing hereunder consisting of Advances made on the same day by any of the Lenders (or Agent on behalf thereof).


"Bridge Loan Disposition" means (a) a Grey Wolf Stock Sale or (b) an Agent Directed Asset Sale.


"Business Day" means any day that is not a Saturday, Sunday or day on which national banks are authorized or required to close in New York City.


"Canadian Employee Benefits Laws" means the Canadian pension Plan Act (Canada), the Pension Benefit Act (Ontario), the Health Insurance Act (Ontario), the Employment Standard Act (Ontario) and any other applicable federal, provincial or local counterparts or equivalents, to the extent same may be applicable to Borrower or any of the Guarantors.


"Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.


"Capitalized Lease Obligation" means any Indebtedness represented by obligations under a Capital Lease.


"Capital Restructuring" means (i) the repayment in full of all of the obligations of Borrower under, and the termination of, the Existing Credit Agreement, (ii) the Existing Note Redemption, (iii) the issuance of $125,000,000 aggregate principal amount of the New Notes pursuant to the New Notes Documents, (iv) the satisfaction (or waiver) of all conditions precedent
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to the making of advances under the Revolving Credit Facility and (v) the consummation of the transactions contemplated by the Grey Wolf Credit Facility Documents.


"Capital Restructuring Documents" means collectively the New Notes Documents, the Revolving Credit Facility Documents, the Grey Wolf Credit Facility Documents and the agreements, documents and instruments relating to the Existing Note Redemption.


"Cash Equivalents" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 270 days from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation and (e) to the extent not otherwise included in clauses (a) through (d) above, "Cash Equivalents" as such term is defined in the New Notes Indenture as in effect on the Closing Date.


"Change of Control" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35%, or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors of Borrower, or (b) majority of the members of the Board of Directors of Borrower do not constitute Continuing Directors, (c) a "Change of Control" (as defined in the New Notes Indenture) shall have occurred or (d) except in connection with a transaction described in clauses (k) or (l) of the definition of Permitted Disposition, Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Restricted Subsidiaries extant as of the Closing Date.


"Closing Date" means the date of the making of the Loan hereunder.


"Code" means the New York Uniform Commercial Code.


"Collateral" means, at the time of any determination, collectively, the Stock of Grey Wolf beneficially owned, directly or indirectly, by Borrower and the Shared Collateral.


"Collateral Agent" means U.S. Bank National Association, as collateral agent under the Intercreditor Agreement, and any successor thereto as may be appointed pursuant to the terms of the Intercreditor Agreement.


"Collateral Agent's Liens" means the Liens granted by Borrower or any Guarantor to the Collateral Agent for the benefit of the Lender Group under or pursuant to the Intercreditor Agreement and the other Collateral Documents.


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"Collateral Documents" means the security agreements, the pledge agreements, mortgages, UCC financing statements and each other agreement, document and instrument described on Schedule 1.1, duly executed or authorized from time to time by each applicable Loan Party, the form and substance of which is satisfactory to Agent.


"Collections" means all cash, checks, notes, instruments and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds and tax refunds) of Borrower or any Guarantor.


"Commitment" means, with respect to each Lender, its Commitment and, with respect to all Lenders, all of their Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1.


"Commodity Hedging Agreement" means a commodity hedging or purchase agreement or similar arrangement entered into with the intent of protecting against fluctuations in commodity prices or the exchange of notional commodity obligations, either generally or under specific contingencies.


"Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent.


"Consolidated Net Interest Expense" means, with respect to Borrower and its Restricted Subsidiaries for any period, gross cash interest expense of Borrower and its Restricted Subsidiaries for such period determined on a consolidated basis and in accordance with GAAP (including, without limitation, interest expense paid to Affiliates of Borrower and its Restricted Subsidiaries), less (i) the sum of (A) cash interest income for such period and (B) cash gains for such period on Interest Rate Protection Agreements (to the extent not included in cash interest income above and to the extent not deducted in the calculation of gross cash interest expense), plus (ii) the sum of (A) cash losses for such period on Interest Rate Protection Agreements (to the extent not included in gross cash interest expense) and (B) the upfront cash costs or fees for such period associated with Interest Rate Protection Agreements (to the extent not included in gross cash interest expense), in each case, determined on a consolidated basis and in accordance with GAAP.


"Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date and (b) any individual who becomes a member of the Board of Directors of Borrower after the Closing Date if such individual was recommended, appointed or nominated for election to the Board of Directors of Borrower by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof.


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"Contribution Agreement" means the Contribution Agreement made by the Guarantors in favor of the Lender Group.


"Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower, the Collateral Agent and the applicable securities intermediary with respect to a Securities Account or bank.


"Control Party" has the meaning given to such term in the Intercreditor Agreement.


"Currency Protection Agreement" means a currency swap, cap or collar agreement or similar arrangement entered into with the intent of protecting against fluctuations in currency values, either generally or under specific contingencies.


"Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day.


"DDA" means any checking or other demand deposit account maintained by Borrower.


"Default" means an event, condition or default that, with the giving of notice, the passage of time or both, would be an Event of Default.


"Defaulting Lender" means any Lender that fails to make any Advance (or other extension of credit (if any)) that it is required to make hereunder on the date that it is required to do so hereunder.


"Designated Account" means that certain DDA of Borrower identified on Schedule D-1.


"Designated Account Bank" has the meaning set forth on Schedule D-1.


"Dollars" or "$" means United States dollars.


"EBITDA" means, with respect to any fiscal period, Borrower's and its Restricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains (including any gains related to the extinguishment or retirement of the Existing Notes), plus interest expense, income taxes, non-cash expenses incurred in connection with the payment of Stock compensation, non-cash expenses incurred in connection with the issuance of warrants or options to purchase the Stock of Borrower, and depletion depreciation and amortization for such period, as determined in accordance with GAAP.


"Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $50,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $50,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans or


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securities in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $50,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date, including, without limitation, a fund or account managed by such Lender or an Affiliate of such Lender or its investment manager (a "Related Fund"), (e) so long as no Event of Default or an Unmatured Default has occurred and is continuing, any other Person approved by Agent and Borrower (which approval by Borrower shall not be unreasonably withheld or delayed) and (f) during the continuation of an Event of Default or an Unmatured Default, any other Person approved by Agent.


"Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or Releases of Hazardous Materials from (a) any assets, properties, or businesses of any Loan Party or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by any Loan Party or any predecessor in interest.


"Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on any Loan Party, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC ss. 1251 et seq.; the Toxic Substances Control Act, 15 USC ss. 2601 et seq.; the Clean Air Act, 42 USC ss. 7401 et seq.; the Safe Drinking Water Act, 42 USC ss. 3803 et seq.; the Oil Pollution Act of 1990, 33 USC ss. 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC ss. 11001 et seq.; the Hazardous Material Transportation Act, 49 USC ss. 1801 et seq.; the Occupational Safety and Health Act, 29 USC ss. 651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); the Canadian Environmental Protection Act (Canada); the Fisheries Act (Canada); the Environmental Protection Act (Ontario); the Water Resource Act (Ontario); the Environmental Protection and Enhancement Act (Alberta); the Waste Management Act (British Columbia); and any state, provincial and local or foreign counterparts or equivalents, in each case as amended from time to time.


"Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any Governmental Authority or any third party and which relate to any Environmental Action.


"Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs.


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"Equipment" means all of Borrower's and any Guarantor's now owned or hereafter acquired right, title and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions and improvements to any of the foregoing.


"ERISA" means the Employee Retirement Income Security Act of 1974.


"ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m) or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o).


"ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Loan Party, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of a Loan Party, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, (g) providing any security to any Plan under Section 401(a)(29) of the IRC by a Loan Party or its Subsidiaries or any of their ERISA Affiliates or (h) any equivalent event, action, condition, proceeding or otherwise under Canadian Employee Benefit Laws.


"Event of Default" has the meaning set forth in Section 8.


"Excess Proceeds" has the meaning given to such term in the New Notes Indenture.


"Exchange Act" means the Securities Exchange Act of 1934.


"Existing Credit Agreement" means Loan and Security Agreement, dated as of January 22, 2003, among Borrower, the subsidiaries of Borrower party thereto, the lenders thereunder, the Existing Credit Agreement Agent and GCF, as the specified appointee thereunder.


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"Existing Credit Agreement Agent" means Wells Fargo Foothill, Inc., as agent for the lenders under the Existing Credit Agreement, and any successor thereto as may be appointed pursuant to the terms of the Existing Credit Agreement.


"Existing Note Redemption" has the meaning set forth in Section 3.1(dd).


"Existing Notes" means Borrower's 11 1/2% Secured Notes due 2007 issued by Borrower pursuant to the Existing Notes Indenture.


"Existing Notes Indenture" means the Indenture, dated as of January 23, 2003, among Borrower, each guarantor of the Existing Notes and the Existing Notes Indenture Trustee.


"Existing Notes Indenture Trustee" means U.S. Bank, N.A., as trustee to the holders of the Existing Notes, and any successor thereto as may be appointed pursuant to the terms of the Existing Notes Indenture.


"Farmout" means an arrangement whereby the owner(s) of one or more oil, gas and/or mineral lease or other oil and natural gas working interest with respect to Farmout Property (referred to as the "farmor") agrees to transfer or assign an interest in such Farmout Property to one or more other Persons (referred to as the "farmee") in exchange for the farmee (1) drilling, or participating in the cost of the drilling ...