EXHIBIT 10.26.1
SUBORDINATION AGREEMENT
     THIS SUBORDINATION AGREEMENT (this “Agreement”) is made and entered into
effective this 29th day of June, 2006, by and among PRIME OFFSHORE L.L.C. (the
“Borrower”). PRIMEENERGY CORPORATION (the “Subordinated Party”) and GUARANTY
BANK, FSB, a federal savings bank (the “Agent” and a “Lender”).
W I T N E S S E T H:
     WHEREAS, pursuant to that certain Credit Agreement dated June 29, 2006, by
and between the Borrower and the Agent and Lender (as such agreement may be
amended, modified, supplemented or restated from time to time, the “Credit
Agreement”), the Lender has agreed to make Loans to or for the benefit of the
Borrower;
     WHEREAS, Subordinated Party (“SP”) has advanced certain funds to the
Borrower pursuant to a Credit Agreement effective August 22, 2005 between
Borrower and SP, with a Convertible Note in the amount of $40,000,000 and has
advanced approximately $32,000,000 as of the date of this Agreement and may
advance other funds to the Borrower subsequent to the date of this Agreement
(all of which are referred to as the “Debt”):
     WHEREAS, pursuant to the Credit Agreement and as an inducement to the
Lender to extend credit to the Borrower under the Credit Agreement, SP and the
Borrower have agreed to execute this Agreement in favor of the Lender;
     NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
     1.01 Terms Defined Above. As used in this Agreement, each of the terms
“Agreement,” “Borrower,” “Credit Agreement,” “Debt,” “Lender,” and “SP,” shall
have the meaning assigned to such term hereinabove.
     1.02 Terms Defined in Credit Agreement. Each term defined in the Credit
Agreement and used herein without definition shall have the meaning assigned to
such term in the Credit Agreement.
     1.03 Other Definitional Provisions.
     (a) The words “hereby,” “herein,” “hereinafter,” “hereinabove,”
“hereinbelow,” “hereof,” “hereunder,” and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not to any
particular Article, Section or provision of this Agreement.

 

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     (b) Section references are to such Sections of this Agreement unless
otherwise specified.
     (c) As used herein and in any certificate or other document made or
delivered pursuant hereto, accounting and financial terms not otherwise defined
shall be defined according to GAAP.
ARTICLE II
SUBORDINATION
     2.01 Subordination of Payment. The payment of the Debt is hereby expressly
subordinated in right of payment to the prior payment in full of all Obligations
and all other indebtedness of the Borrower owed to the Lender; provided,
however, so long as no Default or Event of Default has occurred and is
continuing for which the Lender has given written notice of such Default or
Event of Default to the Borrower (a “Default Notice”), and the payment of
interest and/or principal will not result in a Default or an Event of Default,
the Borrower may pay interest and/or principal on the Debt. At any time
following the occurrence and during the continuance of any Default or Event of
Default and provided that the Lender has given a Default Notice, SP will not
request, accept or receive, and the Borrower will not make, any payments,
whether in cash or other Property, on or with respect to the Debt unless and
until (a) such Default or Event of Default shall have been cured or waived or
shall have ceased to exist, or (b) such time as all Obligations shall have been
fully paid and performed and the obligation of the Lender to make Loans under
the Credit Agreement shall have terminated. Notwithstanding the above, if within
one hundred eighty (180) days after the giving of such Default Notice by the
Lender such Default or Event of Default has not become the subject of
(a) judicial proceedings or (b) an acceleration notice by the Lender, then the
Borrower may, at its option (unless in such interval the provision of this
Section 2.01 have again come into effect on account of any other Default or
Event of Default), resume making any and all required payments in respect of the
Debt in any manner authorized under the terms governing such Debt until such
time (if any) that such judicial proceedings are instituted, such an
acceleration notice is given or a Default Notice is given and a period of one
hundred eighty (180) days shall not have elapsed since the giving of such
Default Notice as contemplated above. If any direct or indirect payment or
distribution, whether in cash or other Property, shall be received by SP in
contravention of the provisions hereof, such payment or distribution shall be
held in trust for, and shall be immediately paid over or delivered to, the
Lender for application to the Obligations until all Obligations shall have been
paid in full.
     2.02 SP Debt Subordinated to Prior Payment of Obligations on Dissolution,
Liquidation or Reorganization of the Borrower. Upon any distribution of assets
of the Borrower upon any voluntary or involuntary dissolution, winding up,
liquidation or reorganization of the Borrower (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or otherwise):
     (a) the Lender shall first be entitled to receive payment in full (or to
have such payment duly provided for to its satisfaction) of the principal
thereof and interest due on the Obligations and other amounts due in connection
therewith before SP is entitled to

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receive any payment on account of the principal of or interest on the Debt and
SP agrees not to contest any proceeding which allows such payment to the Lender
in full even if SP does not receive the full payment of the Debt;
     (b) any payment or distribution of assets of the Borrower of any kind or
character, whether in cash, property or securities, to which SP would be
entitled except for the provisions of this Agreement, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the Lender or its representative, to the extent necessary to make
payment in full of all Obligations remaining unpaid, after giving effect to any
concurrent payment or distribution or provision therefor to the Lender; and
     (c) if, notwithstanding the foregoing, any payment or distribution of
assets of the Borrower of any kind or character, whether in cash, property or
securities, shall be received by SP on account of principal of or interest on
the Debt before all Obligations are paid in full or provision made for their
payment, such payment or distribution (subject to the further provisions of this
Article) shall be immediately paid over to the Lender or its representative for
application to the payment of all Obligations remaining unpaid or unprovided for
until all such Obligations shall have been paid in full, after giving effect to
any concurrent payment or distribution or provision therefor to the Lender.
     2.03 Subordination of Remedies. So long as any Obligation remains
outstanding or any obligation of the Lender exists to make Loans under the
Credit Agreement, SP shall not, without the prior written consent of the Lender,
declare any Debt due or in default or foreclose upon or exercise any power of
sale with respect to any security for all or any portion of the Debt or exercise
any other right, power or remedy of SP provided for in any document or
instrument executed in connection with the Debt or by law, individually or with
any other creditor of the Borrower initiate or take any action in any
bankruptcy, insolvency or receivership proceedings of the Borrower or seek an
assignment for the benefit of creditors or the marshalling of the assets and
liabilities of the Borrower. Upon any distribution of assets of the Borrower or
the dissolution, winding up, liquidation or reorganization (whether in
bankruptcy, insolvency or receivership proceedings or upon an assignment for the
benefit of creditors or the marshalling of the assets and liabilities of the
Borrower or otherwise), any payment to which SP would otherwise be entitled with
respect to the Debt shall be held in trust for, and shall be immediately paid
over or delivered to, the Lender for application to the Obligations until all
Obligations shall have been paid in full.
     2.04 Continuing Agreement. This Agreement shall continue in full force and
effect and the liabilities and obligations of the Borrower and SP hereunder
shall not be affected or impaired by any amendment, modification or alteration
of any Loan Document, except as may be expressly provided in any such amendment,
modification or alteration. This Agreement shall continue to be effective or
shall be reinstated, as the case may be, if at any time any payment of any of
the Obligations is rescinded or must otherwise be returned by the Lender upon
the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all
as though such payment had not been made.

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     2.05 Liability Not Impaired. The liabilities and obligations of the
Borrower and SP hereunder shall not be affected or impaired by (a) the failure
of the Lender or any other Person to exercise diligence or reasonable care in
the preservation, protection or other handling or treatment of all or any part
of any Collateral for all or any portion of the Obligations, (b) the failure of
any Lien intended to be granted or created to secure all or any part of the
Obligations to be properly perfected or created or the unenforceability of any
such Lien for any other reason, or (c) the subordination of any such Lien to any
other Lien. The Lender may at any time and from time to time, without the
consent of or notice to SP, and without incurring any responsibility to SP, and
without impairing or releasing or otherwise affecting any of the obligations or
agreements of SP hereunder, (a) change the manner, place or terms of payment, or
change or extend the time of payment of, renew, or alter all or any portion of
the Obligations, (b) exchange, release, surrender, realize upon or otherwise
deal with, in any manner and any order, any Property at any time subject to any
Lien in favor of the Lender, (c) exercise or refrain from exercising any rights
against the Borrower or others, and (d) sell, transfer, assign or grant
participations in the Obligations or any portion thereof.
     2.06 Waivers. SP waives any right to require the Lender to (a) proceed
against the Borrower or make any effort at the collection of the Obligations
from the Borrower or any other Person liable for all or any portion of the
Obligations, (b) proceed against or exhaust any Collateral securing all or any
portion of the Obligations, or (c) pursue any other remedy in the power of the
Lender. The liability and obligations of SP hereunder shall not be affected or
impaired by any action or inaction by the Lender in regard to any matter waived
herein.
ARTICLE III
MISCELLANEOUS
     3.01 Survival of Covenants and Agreements. All covenants and agreements of
the Borrower and SP herein made shall survive the execution and delivery hereof
and shall remain in force and effect so long as any Obligation remains
outstanding or any obligation of the Lender exists to make Loans under the
Credit Agreement.
     3.02 Parties in Interest. All covenants and agreements herein contained by
or on behalf of the Borrower, SP or the Lender shall be binding upon and inure
to the benefit of the Borrower, SP, or the Lender, as the case may be, and their
respective legal representatives, successors and assigns.
     3.03 Rights of Third Parties. All provisions herein are imposed solely and
exclusively for the benefit of the Borrower, SP, and the Lender. No other Person
shall have any right, benefit, priority or interest hereunder or as a result
hereof or have standing to require satisfaction of provisions hereof in
accordance with their terms; and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.
     3.04 Articles and Sections. This Agreement, for convenience only, has been
divided into Articles and Sections; and it is understood and agreed that the
rights and other legal relations of the parties hereto shall be determined from
this Agreement as an entirety and without regard

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to the aforesaid division into Articles and Sections and without regard to
headings prefixed to such Articles or Sections.
     3.05 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.
     3.06 No Waiver; Rights Cumulative. No course of dealing on the part of the
Lender, its officers or employees, nor any failure or delay by the Lender with
respect to exercising any of its rights hereunder or under any Loan Document
shall operate as a waiver of any of the rights of the Lender hereunder or under
such Loan Document. The rights of the Lender hereunder and 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.
     3.07 Survival Upon Unenforceability. If any one or more of the provisions
contained herein or executed in connection herewith 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 hereof or of
any such other instrument.
     3.08 Amendments or Modifications. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
     3.09 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE
UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF TEXAS.
     3.10 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM
THIS AGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE
LENDER, IN COURTS HAVING SITUS IN DALLAS, DALLAS COUNTY, TEXAS. EACH OF THE
BORROWER AND SP HEREBY SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL
COURT LOCATED IN DALLAS, DALLAS 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.
     3.11 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT
AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE
ANY PRIOR AGREEMENT AMONG THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING
TO THE

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SUBJECT HEREOF. 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.
     IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the
date first above written and may be executed in multiple counterparts, each
deemed to be an original.

            BORROWER:

PRIME OFFSHORE L.L.C.
      By:   /s/ Jim R. Brock         Jim R. Brock        President and Chief
Financial Officer   

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            LENDER:

GUARANTY BANK, FSB , AS AGENT
      By:   /s/ Kelly L. Elmore, III         Kelly L. Elmore, III        Senior
Vice President   

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            SUBORDINATED PARTY:

PRIMEENERGY CORPORATION
      By:   /s/ Beverly A. Cummings         Beverly A. Cummings        Executive
Vice President,
Treasurer and Chief Financial Officer     

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