Warrant Durham Capital

WARRANT
to Purchase 100,000 shares
of Common Stock of


ABRAXAS PETROLEUM CORPORATION


Original Issue Date:
October 28, 2004


NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE
SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAW. NO TRANSFER OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE OR OF THE SECURITIES ISSUABLE UPON EXERCISE THEREOF SHALL
BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (B) THE HOLDER OF
THE SECURITIES PROPOSED TO BE TRANSFERRED SHALL HAVE DELIVERED TO THE
COMPANY EITHER A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION OR AN OPINION OF COUNSEL (WHO MAY BE AN EMPLOYEE OF SUCH
HOLDER) EXPERIENCED IN SECURITIES MATTERS TO THE EFFECT THAT SUCH
PROPOSED TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
ACT OR (C) SUCH TRANSFER IS PURSUANT TO RULE 144 OR RULE 144A UNDER
THE ACT AND SUCH HOLDER(S) SHALL HAVE DELIVERED TO THE COMPANY A
CERTIFICATE SETTING FORTH THE BASIS FOR APPLYING SUCH RULE TO THE
PROPOSED TRANSFER.


WARRANT


ABRAXAS PETROLEUM CORPORATION


THIS IS TO CERTIFY THAT DURHAM CAPITAL CORPORATION, or registered assigns, is entitled, at any time prior to the Expiration Date (such term, and certain other capitalized terms used herein being hereinafter defined), to purchase from ABRAXAS PETROLEUM CORPORATION, a Nevada corporation (the "Company"), ONE HUNDRED THOUSAND (100,000) shares of the Common Stock of the Company (such number of shares being subject to adjustment from time to time as provided herein), at an initial purchase price of $0.01 per share (such initial purchase price being subject to adjustment from time to time as provided herein and as so adjusted, the "Exercise Price"), all on the terms and conditions and pursuant to the provisions hereinafter set forth.


1. DEFINITIONS


As used in this Warrant, the following terms have the respective meanings set forth below.


"Affiliate" of any Person means a Person (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with such Person, (b) which beneficially owns or holds more than five percent (5.0%) of the outstanding shares of any class of voting stock of such Person or (c) more than five percent (5.0%) of the outstanding shares of any class of voting stock (or, in the case of a Person which is not a corporation, more than five percent (5.0%) of the equity interest) of which is beneficially owned or held by such Person. The term "control" as used with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.


"After-Tax Basis" when referring to a payment that is required hereunder (the "target amount"), shall mean a total payment (the "total amount") that, after deduction of all federal, state and local taxes that are required to be paid by the recipient in respect of the receipt or accrual of such total amount, is equal to the target amount.


"Agreed Rate" shall mean 10% per annum.


"Appraised Value" per share of Common Stock as of a date specified herein shall mean the value of such a share as of such date as determined by an investment bank of nationally recognized standing selected by the Majority Warrant Holders and reasonably acceptable to the Company. If the investment bank selected by the Majority Warrant Holders is not reasonably acceptable to the Company, and the Company and the Majority Warrant Holders cannot agree on a mutually acceptable investment bank, then the Company and the Majority Warrant Holders shall each choose one such investment bank and the respective chosen firms shall jointly select a third investment bank, which shall make the determination. The Company shall pay the costs and fees of each such investment bank (including any such investment bank selected by the Majority Warrant Holders), and the decision of the investment bank making such determination of Appraised Value shall be final and binding on the Company and all affected holders of Warrants or Warrant Stock. Such Appraised Value shall be determined as a pro rata portion of the value of the Company taken as a whole, based on the higher of (A) the value derived from a hypothetical sale of the entire Company as a going concern by a willing seller to a willing buyer (neither acting under any compulsion) and (B) the liquidation value of the entire Company. No discount shall be applied on account of (i) any Warrants or Warrant Stock representing a minority interest, (ii) any lack of liquidity of the Common Stock or the Warrants, (iii) the fact that the Warrants or Warrant Stock may constitute "restricted securities" for securities law purposes or (iv) the existence of any call option.


"Bank Holding Company Act" shall mean the Bank Holding Company Act of 1956, as amended.


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"Book Value" per share of Common Stock as of a date specified herein shall mean the consolidated book value of the Company and its Subsidiaries as of such date divided by the number of shares of Common Stock Outstanding on such date. Such book value shall be determined in accordance with GAAP, except that there shall be no reduction in such book value by reason of any amount that may be required either as an offset to or reserve against retained earnings or as a deduction from book value as a result of the issuance, existence, anticipated exercise of, or anticipated cost to the Company of the repurchase of, any of the Warrants.


"Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York.


"Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws.


"Common Stock" shall mean (except where the context otherwise indicates) the Common Stock of the Company, par value $0.01 per share, as constituted on the Original Issue Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of any Common Stock upon any reclassification thereof which is also not preferred as to dividends or liquidation over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.3 hereof) received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.3 hereof.


"Company" means Abraxas Petroleum Corporation, a Nevada corporation, and any successor corporation.


"Company Default" means (a) the breach of any warranty or the inaccuracy at the time when made of any representation made by the Company herein or (b) the failure by the Company to comply with any covenant of the Company contained herein.


"Continuously Effective", with respect to a specified registration statement, shall mean that it shall not cease to be effective and available for Transfers of Warrant Stock thereunder for longer than either (i) any ten (10) consecutive business days, or (ii) an aggregate of fifteen (15) business days during the period specified in the relevant provision of Section 9 hereof.


"Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for, with or without payment of additional consideration in cash or property, shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event.


"Current Market Price" shall mean as of any specified date the average of the daily market prices of the Common Stock of the Company for the shorter of (x) the twenty (20) consecutive Business Days immediately preceding such date or (y) the period commencing on the Business Day next following the first public announcement of any event giving rise to an adjustment of the Exercise Price


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pursuant to Section 4 below. The "daily market price" for each such Business Day shall be: (i) if the Common Stock is then listed on a national securities exchange or is listed on NASDAQ and is designated as a National Market System security, the last sale price, regular way, on such day on the principal stock exchange or market system on which such Common Stock is then listed or admitted to trading, or, if no such sale takes place on such day, the average of the closing bid and asked prices for the Common Stock on such day as reported on such stock exchange or market system or (ii) if the Common Stock is not then listed or admitted to trading on any national securities exchange or designated as a National Market System security on NASDAQ but is traded over-the-counter, the average of the closing bid and asked prices for the Common Stock as reported on NASDAQ or the Electronic Bulletin Board or in the National Daily Quotation Sheets, as applicable.


"Demand Registration" shall have the meaning set forth in Section 9.2(a) hereof.


"Demanding Holders" shall have the meaning set forth in Section 9.2(a) hereof.


"Designated Office" shall have the meaning set forth in Section 11 hereof.


"Dilution Fee" shall have the meaning set forth in Section 12 hereof.


"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time.


"Exercise Date" shall have the meaning set forth in Section 2.1 hereof.


"Exercise Notice" shall have the meaning set forth in Section 2.1 hereof.


"Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1 hereof.


"Exercise Price" shall mean, in respect of a share of Common Stock at any date herein specified, the initial Exercise Price set forth in the preamble of this Warrant as adjusted from time to time pursuant to Section 4 hereof.


"Expiration Date" shall mean the tenth anniversary of the Original Issue Date.


"Fair Value" per share of Common Stock as of any specified date shall mean the higher of (i) the Book Value per share of Common Stock as of such date and (ii) (A) if the Common Stock is publicly traded on such date, the Current Market Price per share or (B) if the Common Stock is not publicly traded on such date, (1) the fair market value per share of Common Stock as determined in good faith by the Board of Directors of the Company and set forth in a written notice to each Holder or (2) if any such Holder objects in writing to such price as determined by the Board of Directors within thirty (30) days after receiving notice of same, the Appraised Value per share as of such date.


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"Financial Holding Company" shall mean a bank holding company that meets the requirements of Section 4(l)(1) of the Bank Holding Company Act.


"Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding on such date and all shares of Common Stock issuable in respect of (x) the Warrants outstanding on such date, (y) any Convertible Securities outstanding on such date and (z) any other Stock Purchase Rights outstanding on such date, in each case regardless of whether or not the conversion, exchange, subscription or purchase rights associated with such Convertible Securities or Stock Purchase Rights are presently exercisable.


"GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect.


"Glass-Steagall Act" shall mean Section 24 (Seventh) and Section 378 of Title 12 (12 U.S.C. ss.ss. 24 (Seventh) 378), or any similar federal legislation.


"Holder" shall mean (a) with respect to this Warrant, the Person in whose name the Warrant set forth herein is registered on the books of the Company maintained for such purpose and (b) with respect to any other Warrant or shares of Warrant Stock, the Person in whose name such Warrant or Warrant Stock is registered on the books of the Company maintained for such purpose.


"Insolvency Event" shall mean any proceeding being instituted by or against the Company seeking a declaration or order for relief, or entailing a finding, that the Company is insolvent or bankrupt, or seeking reorganization, liquidation, dissolution, winding-up, charter revocation or other similar relief with respect to the Company or any of its properties, assets or debts, or seeking the appointment of a receiver, trustee, custodian, liquidator, sequestrator or similar official for the Company or any of its properties or assets, or the Company becoming insolvent or bankrupt or generally unable to pay its debts as they become due, or the Company voluntarily suspending its business or making a general assignment for the benefit of creditors; provided that an Insolvency Event shall not be deemed to have occurred on account of any such proceeding which is involuntary on the part of the Company unless same shall not have been dismissed or stayed within 60 days.


"Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction).


"Majority Warrant Holders", with respect to a given determination, shall mean the Holders of Warrants and/or Warrant Stock representing more than fifty percent (50%) of all Warrants and/or Warrant Stock (with any such Warrants


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being deemed to represent, for the purposes of such calculation, the shares of Warrant Stock then issuable upon exercise thereof) directly affected by such determination.


"Majority Selling Holders" shall mean those Selling Holders whose Warrants and/or Warrant Stock included in a registration under Section 9 hereof represents a majority of the Warrants and/or Warrant Stock (with any such Warrants being deemed to represent, for the purposes of such calculation, the shares of Warrant Stock then issuable upon exercise thereof) included therein by all Selling Holders.


"NASD" shall mean the National Association of Securities Dealers, Inc., or any successor corporation thereto.


"NASDAQ" shall mean the NASDAQ quotation system, or any successor reporting system.


"Opinion of Counsel" means a written opinion of counsel (who may be an employee of a Holder) experienced in Securities Act or bank regulatory matters, as the case may be, chosen by the Holder of this Warrant or Warrant Stock issued upon the exercise hereof and reasonably acceptable to the Company.


"Original Issue Date" shall mean the date on which the Original Warrants were issued, as set forth on the cover page of this Warrant.


"Original Warrants" shall mean the Warrants originally issued by the Company on the Original Issue Date to the Lenders.


"Other Property" shall have the meaning set forth in Section 4.3 hereof.


"Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any Subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Outstanding", when used with respect to Warrant Stock for the purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(d) hereof.


"Person" shall mean any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof).


"Piggyback Registration" shall have the meaning set forth in Section 9.3(a) hereof.


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"Register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering by the Commission of effectiveness of such registration statement or document.


"Registration Expenses" shall have the meaning set forth in Section 9.6(a) hereof.


"Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 8.2(a) hereof.


"Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.


"Selling Holders" shall mean, with respect to a specified registration under Section 9 hereof, WS Holders whose Registrable Securities are included in such registration.


"Share Withholding Option" has the meaning set forth in Section 2.1 hereof.


"Shelf Registration" shall have the meaning set forth in Section 9.2(a) hereof.


"Stock Purchase Rights" shall mean any options, warrants or other securities or rights to subscribe to or exercisable for the purchase of shares of Common Stock or Convertible Securities, whether or not immediately exercisable.


"Subsidiary" means any corporation or association (a) more than fifty percent (50%) (by number of votes) of the voting stock of which is at the time owned by the Company or by one or more Subsidiaries or by the Company and one or more Subsidiaries, or any other business entity in which the Company or one or more Subsidiaries or the Company and one or more Subsidiaries own more than a fifty percent (50%) interest either in the profits or capital of such business entity or (b) whose net earnings, or portions thereof, are consolidated with the net earnings of the Company and are recorded on the books of the Company for financial reporting purposes in accordance with GAAP.


"Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a "sale" thereof within the meaning of the Securities Act.


"Violation" has the meaning set forth in Section 9.7(a) hereof.


"Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1 hereof, multiplied by (ii) the Exercise Price as of the date of such exercise.


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"Warrants" shall mean the Original Warrants and all warrants issued upon transfer, division or combination of, or in substitution for, such Original Warrants or any other such Warrant. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised.


"Warrant Stock" generally shall mean the shares of Common Stock issued, issuable or both (as the context may require) upon the exercise of Warrants until such time as such shares of Common Stock have either been (i) Transferred in a public offering pursuant to a registration statement filed under the Securities Act or (ii) Transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof with all transfer restrictions and restrictive legends with respect to such Common Stock being removed in connection with such transaction. "Warrant Stock" for the purposes of Section 9 hereof shall have the meaning set forth in Section 9.1(b) hereof.


"WS Holder" shall have the meaning set forth in Section 9.1(a) hereof.


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2. EXERCISE OF WARRANT


2.1. Manner of Exercise.


(a) From and after the Original Issue Date and until 5:00 P.M., New York time, on the Expiration Date, the Holder of this Warrant may from time to time exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder (as determined pursuant to Section 4.2 hereof). In order to exercise this Warrant, in whole or in part, the Holder shall (i) deliver to the Company at the Designated Office (x) a written notice of the Holder's election to exercise this Warrant (an "Exercise Notice"), which Exercise Notice shall be irrevocable and specify the number of shares of Common Stock to be purchased and (y) this Warrant, and (ii) pay to the Company the Warrant Price (the date on which both such delivery and payment shall have first taken place being hereinafter sometimes referred to as the "Exercise Date"). Such Exercise Notice shall be in the form of Annex A hereto and shall be duly executed by the Holder or its duly authorized agent or attorney.


(b) Upon receipt of such Exercise Notice, Warrant and payment, the Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute (or cause to be executed) and deliver (or cause to be delivered) to the Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as the exercising Holder shall reasonably request in the Exercise Notice and shall be registered in the name of the Holder or (upon payment by the Holder of any applicable transfer taxes then due and owing) such other name as shall be designated in the Exercise Notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the Exercise Date.


(c) Payment of the Warrant Price shall be made by, at the option of the Holder, one or more of the following methods: (i) by delivery of a certified or official bank check in the amount of such Warrant Price; (ii) by instructing the Company to withhold a number of shares of Warrant Stock then issuable upon exercise of this Warrant with an aggregate Fair Value equal to such Warrant Price (the "Share Withholding Option"); or (iii) by surrendering to the Company shares of Common Stock previously acquired by the Holder with an aggregate Fair Value equal to such Warrant Price. In the event of any withholding of Warrant Stock or surrender of Common Stock pursuant to clause (ii) or (iii) above where the number of shares whose Fair Value is equal to the Warrant Price is not a whole number, the number of shares withheld by or surrendered to the Company shall be rounded up to the nearest whole share and the Company shall make a cash payment to the Holder based on the incremental fraction of a share being so withheld by or surrendered to the Company in an amount determined in accordance with Section 2.3 hereof.


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(d) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing the shares of Common Stock being issued, deliver to the Holder a new Warrant in the name of Holder evidencing the rights of the Holder to purchase the unpurchased shares of Common Stock called for by this Warrant. Such new Warrant shall in all other respects be identical with this Warrant.


2.2. Payment of Taxes. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable, issued without violation of any preemptive rights and free and clear of all Liens (other than any created by actions of the Holder). The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof, unless such tax or charge is imposed by law upon the Holder, in which case such taxes or charges shall be paid by the Holder and the Company shall reimburse the Holder therefor on an After-Tax Basis.


2.3. Fractional Shares. The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share that the Holder of one or more Warrants, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of (i) the Current Market Price of one share of Common Stock on the Exercise Date, if the Common Stock is then publicly traded or (ii) the Book Value per share of Common Stock based on the most recent available consolidated balance sheet of the Company, if the Common Stock is not then publicly traded.


2.4. Continued Validity and Application. A Holder of shares of Warrant Stock issued upon the exercise of this Warrant, in whole or in part, including any transferee of such shares (other than a transferee in whose hands such shares no longer constitute Warrant Stock as defined herein), shall continue, with respect to such shares, to be entitled to all rights and to be subject to all obligations that are applicable to such Holder by the terms of this Warrant. The Company shall, at the time of any exercise of this Warrant or any transfer of Warrant Stock, upon the request of the Holder of the shares of Warrant Stock issued in connection with such exercise or ...