EXHIBIT 10.26.1**SUBORDINATION AGREEMENT**     **THISSUBORDINATION AGREEMENT**(this “Agreement”) is made and entered into effective this29th dayof June, 2006, by and among **PRIME OFFSHORE L.L.C.**(the“Borrower”). **PRIMEENERGYCORPORATION**(the “Subordinated Party”) and**GUARANTY BANK, FSB,**a federal savings bank (the“Agent”and a “Lender”).WITNESSETH:     WHEREAS, pursuant to that certain Credit Agreement dated June 29, 2006, by and between theBorrower and the Agent and Lender (as such agreement may be amended, modified, supplemented orrestated from time to time, the “Credit Agreement”), the Lender has agreed to make Loans to or forthe benefit of the Borrower;     WHEREAS, Subordinated Party (“SP”) has advanced certain funds to the Borrower pursuant to aCredit Agreement effective August 22, 2005 between Borrower and SP, with a Convertible Note in theamount of $40,000,000 and has advanced approximately $32,000,000 as of the date of this Agreementand may advance other funds to the Borrower subsequent to the date of this Agreement (all of whichare referred to as the “Debt”):     WHEREAS, pursuant to the Credit Agreement and as an inducement to the Lender to extend creditto the Borrower under the Credit Agreement, SP and the Borrower have agreed to execute thisAgreement in favor of the Lender;     NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, theparties hereto agree as follows:**ARTICLE I****DEFINITIONS**     1.01Terms Defined Above. As used in this Agreement, each of the terms“Agreement,” “Borrower,”“Credit Agreement,” “Debt,”“Lender,” and “SP,” shall have themeaning assigned to such term hereinabove.     1.02Terms Defined in Credit Agreement. Each term defined in the Credit Agreementand used herein without definition shall have the meaning assigned to such term in the CreditAgreement.     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 referto this Agreement as a whole and not to any particular Article, Section or provision ofthis Agreement.
 

 
     (b) Section references are to such Sections of this Agreement unlessotherwisespecified.     (c) As used herein and in any certificate or other document made or deliveredpursuant hereto, accounting and financial terms not otherwise defined shall be definedaccording to GAAP.**ARTICLE II****SUBORDINATION**     2.01 Subordination of Payment. The payment of the Debt is hereby expresslysubordinated in right of payment to the prior payment in full of all Obligations and all otherindebtedness of the Borrower owed to the Lender; provided,however, so long asno Default orEvent of Default has occurred and is continuing for which the Lender has given written noticeofsuch Default or Event of Default to the Borrower (a “DefaultNotice”), and the payment ofinterest and/or principal will not result in a Default or an Event of Default, the Borrowermay payinterest and/or principal on the Debt. At any time following the occurrence and during thecontinuance of any Default or Event of Default and provided that the Lender has given aDefaultNotice, 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) suchDefaultor Event of Default shall have been cured or waived or shall have ceased to exist, or (b) suchtime as all Obligations shall have been fully paid and performed and the obligation of theLenderto make Loans under the Credit Agreement shall have terminated. Notwithstanding the above, ifwithin one hundred eighty (180) days after the giving of such Default Notice by the LendersuchDefault or Event of Default has not become the subject of (a) judicial proceedings or (b) anacceleration notice by the Lender, then the Borrower may, at its option (unless in suchintervalthe provision of this Section 2.01 have again come into effect on account of any other DefaultorEvent of Default), resume making any and all required payments in respect of the Debt in anymanner authorized under the terms governing such Debt until such time (if any) that suchjudicial proceedings are instituted, such an acceleration notice is given or a Default Noticeisgiven and a period of one hundred eighty (180) days shall not have elapsed since the giving ofsuch Default Notice as contemplated above. If any direct or indirect payment ordistribution,whether in cash or other Property, shall be received by SP in contravention of the provisionshereof, such payment or distribution shall be held in trust for, and shall be immediately paidover or delivered to, the Lender for application to the Obligations until all Obligations shallhave beenpaid 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 theBorrowerupon any voluntary or involuntary dissolution, winding up, liquidation or reorganization oftheBorrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignmentfor the benefit of creditors or otherwise):     (a) the Lender shall first be entitled to receive payment in full (or to have suchpayment duly provided for to its satisfaction) of the principal thereof and interest due onthe 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 SPagrees not to contest any proceeding which allows such payment to the Lender in full evenif SP does not receive the full payment of the Debt;     (b) any payment or distribution of assets of the Borrower of any kind orcharacter, whether in cash, property or securities, to which SP would be entitledexceptfor the provisions of this Agreement, shall be paid by the liquidating trustee or agentorother person making such payment or distribution directly to the Lender or itsrepresentative, to the extent necessary to make payment in full of all Obligationsremaining unpaid, after giving effect to any concurrent payment or distribution orprovision therefor to the Lender; and     (c) if, notwithstanding the foregoing, any payment or distribution of assets ofthe Borrower of any kind or character, whether in cash, property or securities, shallbereceived by SP on account of principal of or interest on the Debt before allObligationsare paid in full or provision made for their payment, such payment or distribution(subjectto the further provisions of this Article) shall be immediately paid over to the Lenderorits representative for application to the payment of all Obligations remaining unpaidorunprovided for until all such Obligations shall have been paid in full, after givingeffectto any concurrent payment or distribution or provision therefor to the Lender.     2.03Subordination of Remedies. So long as any Obligation remains outstanding or anyobligation of the Lender exists to make Loans under the Credit Agreement, SP shall not, without theprior written consent of the Lender, declare any Debt due or in default or foreclose upon orexercise any power of sale with respect to any security for all or any portion of the Debt orexercise any other right, power or remedy of SP provided for in any document or instrument executedin connection with the Debt or by law, individually or with any other creditor of the Borrowerinitiate or take any action in any bankruptcy, insolvency or receivership proceedings of theBorrower or seek an assignment for the benefit of creditors or the marshalling of the assets andliabilities of the Borrower. Upon any distribution of assets of the Borrower or the dissolution,winding up, liquidation or reorganization (whether in bankruptcy, insolvency or receivershipproceedings or upon an assignment for the benefit of creditors or the marshalling of the assets andliabilities of the Borrower or otherwise), any payment to which SP would otherwise be entitled withrespect 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 andthe liabilities and obligations of the Borrower and SP hereunder shall not be affected or impairedby any amendment, modification or alteration of any Loan Document, except as may be expresslyprovided in any such amendment, modification or alteration. This Agreement shall continue to beeffective or shall be reinstated, as the case may be, if at any time any payment of any of theObligations 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 beenmade.
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     2.05 Liability Not Impaired. The liabilities and obligations of theBorrower and SP hereunder shall not be affected or impaired by (a) the failure of the Lender or anyother Person to exercise diligence or reasonable care in the preservation, protection or otherhandling or treatment of all or any part of any Collateral for all or any portion of theObligations, (b) the failure of any Lien intended to be granted or created to secure all or anypart of the Obligations to be properly perfected or created or the unenforceability of any suchLien for any other reason, or (c) the subordination of any such Lien to any other Lien. The Lendermay at any time and from time to time, without the consent of or notice to SP, and withoutincurring any responsibility to SP, and without impairing or releasing or otherwise affecting anyof 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 fromexercising any rights against the Borrower or others, and (d) sell, transfer, assign or grantparticipations in the Obligations or any portion thereof.     2.06 Waivers. SP waives any right to require the Lender to (a) proceed against theBorrower or make any effort at the collection of the Obligations from the Borrower or any otherPerson liable for all or any portion of the Obligations, (b) proceed against or exhaust anyCollateral securing all or any portion of the Obligations, or (c) pursue any other remedy in thepower of the Lender. The liability and obligations of SP hereunder shall not be affected orimpaired 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 theBorrower and SP herein made shall survive the execution and delivery hereof and shall remain inforce and effect so long as any Obligation remains outstanding or any obligation of the Lenderexists to make Loans under the Credit Agreement.     3.02Parties in Interest. All covenants and agreements herein contained by or on behalfof 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 andassigns.     3.03 Rights of Third Parties. All provisions herein are imposed solely and exclusivelyfor 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 requiresatisfaction of provisions hereof in accordance with their terms; and any or all of such provisionsmay be freely waived in whole or in part by the Lender at any time if in its sole discretion itdeems it advisable to do so.     3.04Articles and Sections. This Agreement, for convenience only, has been dividedinto Articles and Sections; and it is understood and agreed that the rights and other legalrelations of the parties hereto shall be determined from this Agreement as an entirety and withoutregard
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to the aforesaid division into Articles and Sections and without regard to headingsprefixed to such Articles or Sections.     3.05 Number and Gender. Whenever the context requires, reference herein made to thesingle number shall be understood to include the plural; and likewise, the plural shall beunderstood to include the singular. Definitions of terms defined in the singular or plural shall beequally applicable to the plural or singular, as the case may be, unless otherwise indicated. Wordsdenoting sex shall be construed to include the masculine, feminine and neuter, when suchconstruction is appropriate; and specific enumeration shall not exclude the general but shall beconstrued as cumulative.     3.06No Waiver; Rights Cumulative. No course of dealing on the part of the Lender, itsofficers or employees, nor any failure or delay by the Lender with respect to exercising any of itsrights hereunder or under any Loan Document shall operate as a waiver of any of the rights of theLender hereunder or under such Loan Document. The rights of the Lender hereunder and under theLoan Documents shall be cumulative, and the exercise or partial exercise of any such right shallnot preclude the exercise of any other right.     3.07 Survival Upon Unenforceability. If any one or more of the provisions containedherein or executed in connection herewith shall, for any reason, be held to be invalid, illegal orunenforceable in any respect, such invalidity, illegality or unenforceability shall not affect anyother provision hereof or of any such other instrument.     3.08 Amendments or Modifications. Neither this Agreement nor any provision hereof maybe changed, waived, discharged or terminated orally, but only by an instrument in writing signed bythe 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 ANDSHALL 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, ARISINGDIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THISAGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN COURTS HAVINGSITUS IN DALLAS, DALLAS COUNTY, TEXAS. EACH OF THE BORROWER AND SP HEREBY SUBMIT TO THEJURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN DALLAS, DALLAS COUNTY, TEXAS, ANDHEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE****OF ANYLITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.**     3.11 **ENTIRE AGREEMENT.****THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONGTHE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT AMONGTHE 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 EVIDENCEOF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTENORAL AGREEMENTS AMONG SUCH PARTIES.**     **IN WITNESS WHEREOF,**this Agreement is deemed executed effective as of the date first abovewritten and may be executed in multiple counterparts, each deemed to be an original.      **BORROWER:**