**Exhibit 10.12**

 

SUPPLEMENT NO. 1  dated asof April 28, 2006 (the “Supplement”), to the Security Agreementdated as of November 29, 2005 (as amended, supplemented or otherwisemodified from time to time, the “Security Agreement”), by and among CANOPETROLEUM, INC., a Delaware corporation (“Borrower”), eachsubsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”and individually, a “Grantor”) and Union Bank of California, N.A. asCollateral Trustee under the Collateral Trust Agreement (as hereinafterdefined) for the benefit of itself and the Secured Parties (as hereinafterdefined).

 

A.            Reference is made tothe following documents related to extension of credit to the Borrower:

 

(i)            thatcertain Credit Agreement dated as of November 29, 2005 (as heretofore andhereafter amended, restated or otherwise modified from time to time, the “SeniorCredit Agreement”) by and among the Borrower, the lenders party theretofrom time to time (the “Senior Lenders”), and Union Bank of California, N.A.,as administrative agent for such Senior Lenders (the “Senior Agent”);

 

(ii)           thatcertain Subordinated Credit Agreement dates as of even date herewith (asheretofore and hereafter amended, restated or otherwise modified from time totime, the “Subordinated Credit Agreement”, and together with the SeniorCredit Agreement, the “Master Debt Agreements”), among the Borrower, thelenders party thereto from time to time (the “Subordinated Lenders”),and Energy Components SPC EEP Energy Exploration and Production SegregatedPortfolio as administrative agent for such Subordinated Lenders (in suchcapacity, the “Subordinated Agent”); and

 

(iii)          those Hedge Contracts(as defined in the Senior Credit Agreement) that the Borrower, the Guarantors(as defined in the Senior Credit Agreement), or any of their Subsidiaries may fromtime to time enter into one or more with a Senior Lender or one of theirAffiliates (a “Swap Counterparty”, and together with the CollateralTrustee, the Senior Agent, the Issuing Lender, the Senior Lenders, theSubordinated Agent, the Subordinated Lenders, the “Secured Parties”).

 

B.            In connection with theMaster Debt Agreements, the Senior Agent, the Senior Lenders, the SubordinatedAgent, the Subordinated Lenders, the Collateral Trustee, the Borrower, andother parties thereto, have entered into that certain Collateral Trust andIntercreditor Agreement dated as of even date herewith (as it may beamended, restated, or otherwise modified from time to time, the “CollateralTrust Agreement”), to among other things, appoint the Collateral Trustee ascollateral trustee for all of the Secured Parties under the security documentsexecuted in connection with the Master Debt Agreements, including the SecurityAgreement, and set forth the rights and remedies of the Secured Parties withrespect thereto.

 

C.            Capitalized terms usedherein and not otherwise defined herein shall have the meanings assigned tosuch terms in the Security Agreement and the Collateral Trust Agreement.

 

D.            The Grantors haveentered into the Security Agreement in order to induce the Senior Lenders andthe Subordinated Lenders to make loans and the Issuing Lender to issue lettersof credit under the Master Debt Agreements. Pursuant to Section 6.15 ofthe respective

 

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MasterDebt Agreements, each Subsidiary of the Borrower that was not in existence onthe date of the Senior Credit Agreement is required to enter into the SecurityAgreement as a Grantor upon becoming a Subsidiary. Section 17(j) of theSecurity Agreement provides that additional Subsidiaries of the Borrower may becomeGrantors under the Security Agreement by execution and delivery of aninstrument in the form of this Supplement. The undersigned Subsidiary ofthe Borrower (the “New Grantor”) is executing this Supplement inaccordance with the requirements of the Master Debt Agreements to become aGrantor under the Security Agreement in order to induce the Senior Lenders tomake additional loans and the Issuing Lender to issue additional letters ofcredit and as consideration for loans previously made and letters of creditpreviously issued.

 

Accordingly, the Collateral Trustee and the New Grantor agree asfollows:

 

SECTION 1.           In accordance with Section 17(j)of the Security Agreement, the New Grantor by its signature below becomes aGrantor under the Security Agreement with the same force and effect as iforiginally named therein as a Grantor and the New Grantor hereby agrees (a) toall the terms and provisions of the Security Agreement applicable to it as aGrantor thereunder and (b) represents and warrants that therepresentations and warranties made by it as a Grantor thereunder are true andcorrect on and as of the date hereof in all material respects. In furtheranceof the foregoing, the New Grantor, as security for the payment and performancein full of the Secured Obligations (as defined in the Security Agreement), doeshereby create and grant to the Collateral Trustee, its successors and assigns,for the benefit of the Secured Parties, their successors and assigns, acontinuing security interest in and lien on all of the New Grantor’s right,title and interest in and to the Collateral (as defined in the SecurityAgreement) of the New Grantor. Each reference to a “Grantor” in the SecurityAgreement shall be deemed to include the New Grantor. The Security Agreement ishereby incorporated herein by reference.

 

SECTION 2.           The New Grantorrepresents and warrants to the Collateral Trustee and the other Secured Partiesthat this Supplement has been duly authorized, executed and delivered by it andconstitutes its legal, valid and binding obligation, enforceable against it inaccordance with its terms (subject to applicable bankruptcy, reorganization,insolvency, moratorium or similar laws affecting creditors’ rights generallyand subject, as to enforceability, to equitable principles of generalapplication (regardless of whether enforcement is sought in a proceeding inequity or at law)).

 

SECTION 3.           This Supplement may beexecuted in counterparts, each of which shall constitute an original, but allof which when taken together shall constitute a single contract. ThisSupplement shall become effective when the Collateral Trustee shall havereceived counterparts of this Supplement that, when taken together, bear thesignatures of the New Grantor and the Collateral Trustee. Delivery of anexecuted signature page to this Supplement by facsimile transmission shallbe as effective as delivery of a manually signed counterpart of thisSupplement.

 

SECTION 4.           The New Grantor herebyrepresents and warrants that set forth on Schedule 1 attachedhereto are (a) its sole jurisdiction of formation and type oforganization, (b) the location of all records concerning its Accounts,General Intangibles, or any other Collateral, (c) its federal taxidentification number and the organizational number, and (d) all namesused by it during the last five years prior to the date of this Supplement.

 

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SECTION 5.           Except as expresslysupplemented hereby, the Security Agreement shall remain in full force andeffect.

 

SECTION 6.           THIS SUPPLEMENT SHALLBE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THESTATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THESECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANYPARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHERTHAN THE STATE OF TEXAS.

 

SECTION 7.           In case any one or moreof the provisions contained in this Supplement should be held invalid, illegalor unenforceable in any respect, neither party hereto shall be required tocomply with such provision for so long as such provision is held to be invalid,illegal or unenforceable, but the validity, legality and enforceability of theremaining provisions contained herein and in the Security Agreement shall notin any way be affected or impaired. The parties hereto shall endeavor ingood-faith negotiations to replace the invalid, illegal or unenforceableprovisions with valid provisions the economic effect of which comes as close aspossible to that of the invalid, illegal or unenforceable provisions.

 

SECTION 8.           All communications andnotices hereunder shall be in writing and given as provided in the SecurityAgreement. All communications and notices hereunder to the New Grantor shall begiven to it at the address set forth under its signature hereto.

 

SECTION 9.           The New Grantor agreesto reimburse the Collateral Trustee for its reasonable out-of-pocket expensesin connection with this Supplement, including the reasonable fees, othercharges and disbursements of counsel for the Collateral Trustee.

 

**THIS SUPPLEMENT, THE SECURITY AGREEMENT, THECOLLATERAL TRUST AGREEMENT AND THE OTHER MASTER DEBT DOCUMENTS, REPRESENT THEFINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCEOF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONGTHE PARTIES HERETO.**

 

**[SIGNATURESBEGIN ON NEXT PAGE]**

 

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IN WITNESS WHEREOF, the New Grantor and the Collateral Trustee haveduly executed this Supplement to the Security Agreement as of the day and yearfirst above written.

 
|   | **NEW  GRANTOR:**                                         |
|--------|-----------------------------------------------------------|
|   |                                                      |
|   | PANTWIST,  LLC                                            |
|   |                                                      |
|   | By:                                                       |  /s/ S.  Jeffrey Johnson |   |
|   |                                                      |  S.  Jeffrey Johnson |
|   |                                                      |  President |
|   |                                                      |
|   |                                                      |
|   |  Address of New Guarantor:                           |
|   | 309 West 7th  Street, Suite 1600                     |
|   | Fort Worth,  Texas 76102                                  |
|   |                                                      |
|   |                                                      |
|   | **COLLATERAL  TRUSTEE:**                                  |
|   |                                                      |
|   | UNION BANK  OF CALIFORNIA, N.A., as  Administrative Agent |
|   |                                                      |
|   |                                                      |
|   | By:                                                       |  /s/  Kimberly Coil |   |
|   |                                                      | Kimberly Coil |   |
|   |                                                      | Vice President |   |
|        |                                                           |  |  |  |

 

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Schedule 1

Supplement No. 1

to the Security Agreement

 
| **New Grantor:**                        |   | Pantwist, LLC                         |
|-----------------------------------------|--------|---------------------------------------|
|                                    |   |                                  |
| **Jurisdiction of Formation / Filing:** |   | Texas                                 |
|                                    |   |                                  |
| **Type of Organization:**               |   | limited liability company             |
|                                    |   |                                  |
| **Address where records for**           |   |                                  |
| **Collateral are kept:**                |   | 309 West 7th  Street, Suite 1600 |
|                                    |   |  Fort  Worth, Texas 76102        |
|                                    |   |                                  |
| **Organizational Number:**              |   | TX 800646872                          |
|                                    |   |                                  |
| **Federal Tax Identification Number:**  |   | 20-4766962                            |
|                                    |   |                                  |
| **Prior Names:**                        |   | None.                                 |

 

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