Exhibit 10.12


 


SUPPLEMENT NO. 1  dated as
of April 28, 2006 (the “Supplement”), to the Security Agreement
dated as of November 29, 2005 (as amended, supplemented or otherwise
modified from time to time, the “Security Agreement”), by and among CANO
PETROLEUM, INC., a Delaware corporation (“Borrower”), each
subsidiary of Borrower signatory thereto (together with the Borrower, the “Grantors”
and individually, a “Grantor”) and Union Bank of California, N.A. as
Collateral Trustee under the Collateral Trust Agreement (as hereinafter
defined) for the benefit of itself and the Secured Parties (as hereinafter
defined).


 


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


 


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


 


(ii)           that
certain Subordinated Credit Agreement dates as of even date herewith (as
heretofore and hereafter amended, restated or otherwise modified from time to
time, the “Subordinated Credit Agreement”, and together with the Senior
Credit Agreement, the “Master Debt Agreements”), among the Borrower, the
lenders party thereto from time to time (the “Subordinated Lenders”),
and Energy Components SPC EEP Energy Exploration and Production Segregated
Portfolio as administrative agent for such Subordinated Lenders (in such
capacity, 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 from
time to time enter into one or more with a Senior Lender or one of their
Affiliates (a “Swap Counterparty”, and together with the Collateral
Trustee, the Senior Agent, the Issuing Lender, the Senior Lenders, the
Subordinated Agent, the Subordinated Lenders, the “Secured Parties”).


 


B.            In connection with the
Master Debt Agreements, the Senior Agent, the Senior Lenders, the Subordinated
Agent, the Subordinated Lenders, the Collateral Trustee, the Borrower, and
other parties thereto, have entered into that certain Collateral Trust and
Intercreditor Agreement dated as of even date herewith (as it may be
amended, restated, or otherwise modified from time to time, the “Collateral
Trust Agreement”), to among other things, appoint the Collateral Trustee as
collateral trustee for all of the Secured Parties under the security documents
executed in connection with the Master Debt Agreements, including the Security
Agreement, and set forth the rights and remedies of the Secured Parties with
respect thereto.


 


C.            Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned to
such terms in the Security Agreement and the Collateral Trust Agreement.


 


D.            The Grantors have
entered into the Security Agreement in order to induce the Senior Lenders and
the Subordinated Lenders to make loans and the Issuing Lender to issue letters
of credit under the Master Debt Agreements. Pursuant to Section 6.15 of
the respective


 


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Master
Debt Agreements, each Subsidiary of the Borrower that was not in existence on
the date of the Senior Credit Agreement is required to enter into the Security
Agreement as a Grantor upon becoming a Subsidiary. Section 17(j) of the
Security Agreement provides that additional Subsidiaries of the Borrower may become
Grantors under the Security Agreement by execution and delivery of an
instrument in the form of this Supplement. The undersigned Subsidiary of
the Borrower (the “New Grantor”) is executing this Supplement in
accordance with the requirements of the Master Debt Agreements to become a
Grantor under the Security Agreement in order to induce the Senior Lenders to
make additional loans and the Issuing Lender to issue additional letters of
credit and as consideration for loans previously made and letters of credit
previously issued.


 


Accordingly, the Collateral Trustee and the New Grantor agree as
follows:


 


SECTION 1.           In accordance with Section 17(j)
of the Security Agreement, the New Grantor by its signature below becomes a
Grantor under the Security Agreement with the same force and effect as if
originally named therein as a Grantor and the New Grantor hereby agrees (a) to
all the terms and provisions of the Security Agreement applicable to it as a
Grantor thereunder and (b) represents and warrants that the
representations and warranties made by it as a Grantor thereunder are true and
correct on and as of the date hereof in all material respects. In furtherance
of the foregoing, the New Grantor, as security for the payment and performance
in full of the Secured Obligations (as defined in the Security Agreement), does
hereby create and grant to the Collateral Trustee, its successors and assigns,
for the benefit of the Secured Parties, their successors and assigns, a
continuing 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 Security
Agreement) of the New Grantor. Each reference to a “Grantor” in the Security
Agreement shall be deemed to include the New Grantor. The Security Agreement is
hereby incorporated herein by reference.


 


SECTION 2.           The New Grantor
represents and warrants to the Collateral Trustee and the other Secured Parties
that this Supplement has been duly authorized, executed and delivered by it and
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors’ rights generally
and subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).


 


SECTION 3.           This Supplement may be
executed in counterparts, each of which shall constitute an original, but all
of which when taken together shall constitute a single contract. This
Supplement shall become effective when the Collateral Trustee shall have
received counterparts of this Supplement that, when taken together, bear the
signatures of the New Grantor and the Collateral Trustee. Delivery of an
executed signature page to this Supplement by facsimile transmission shall
be as effective as delivery of a manually signed counterpart of this
Supplement.


 


SECTION 4.           The New Grantor hereby
represents and warrants that set forth on Schedule 1 attached
hereto are (a) its sole jurisdiction of formation and type of
organization, (b) the location of all records concerning its Accounts,
General Intangibles, or any other Collateral, (c) its federal tax
identification number and the organizational number, and (d) all names
used by it during the last five years prior to the date of this Supplement.


 


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SECTION 5.           Except as expressly
supplemented hereby, the Security Agreement shall remain in full force and
effect.


 


SECTION 6.           THIS SUPPLEMENT SHALL
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF TEXAS.


 


SECTION 7.           In case any one or more
of the provisions contained in this Supplement should be held invalid, illegal
or unenforceable in any respect, neither party hereto shall be required to
comply with such provision for so long as such provision is held to be invalid,
illegal or unenforceable, but the validity, legality and enforceability of the
remaining provisions contained herein and in the Security Agreement shall not
in any way be affected or impaired. The parties hereto shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.


 


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


 


SECTION 9.           The New Grantor agrees
to reimburse the Collateral Trustee for its reasonable out-of-pocket expenses
in connection with this Supplement, including the reasonable fees, other
charges and disbursements of counsel for the Collateral Trustee.


 


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


 


THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES HERETO.


 


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IN WITNESS WHEREOF, the New Grantor and the Collateral Trustee have
duly executed this Supplement to the Security Agreement as of the day and year
first 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.