PrimeEnergy Resources Corporation (PNRG, NASDAQ)
Industry: Oil & Gas E&P
Annual report, fiscal year 2016


# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ___ to ___.

is Commission File Number 0-7406

## PrimeEnergy Corporation

(Exact name of registrant as specified in its charter)

Delaware
(state or other jurisdiction of incorporation or organization)

9821 Katy Freeway, Houston, Texas
(Address of principal executive offices)

Registrant's telephone number, including area code: (713) 735-0000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share
(Title of Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X

Indicate whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( \( §232.405 \)  of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Non-Accelerated Filer

□

□

Accelerated Filer ☐
Smaller Reporting Company X
Emerging growth company ☐



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X

The aggregate market value of the voting stock of the Registrant held by non-affiliates, computed by reference to the average bid and asked price of such common equity as of the last business day of the Registrant’s most recently completed second fiscal quarter, was $62,702,983.

The number of shares outstanding of each class of the Registrant’s Common Stock as of March 31, 2017 was 2,283,011 shares, Common Stock, $0.10 par value.

## DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s proxy statement to be furnished to stockholders in connection with its Annual Meeting of Stockholders to be held in June 2017, are incorporated by reference in Part III hereof.



## TABLE OF CONTENTS

PART I
Item 1. Business 4
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 26
Item 2. Properties 26
Item 3. Legal Proceedings 32
Item 4. Mine Safety Disclosures 32
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 40
Item 9A. Controls and Procedures 40
Item 9B. Other Information 42
PART III
Item 10. Directors, Executive Officers and Corporate Governance 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 43
Item 13. Certain Relationships and Related Transactions, and Director Independence 43
Item 14. Principal Accountant Fees and Services 43
PART IV
Item 15. Exhibits and Financial Statement Schedules 44
SIGNATURES 46
FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements F-1



## Table of Contents

This Report may contain statements relating to the future results of the Company that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the PSLRA. Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company. Words such as “expects”, “believes”, “should”, “plans”, “anticipates”, “will”, “potential”, “could”, “intend”, “may”, “outlook”, “predict”, “project”, “would”, “estimates”, “assumes”, “likely” and variations of such similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove inaccurate and, therefore, there can be no assurance that they will prove to be accurate. Actual results and outcomes may vary materially from what is expressed or forecast in such statements due to various risks and uncertainties. These risks and uncertainties include, among other things, the possibility of drilling cost overruns and technical difficulties, volatility of oil and gas prices, competition, risks inherent in the Company’s oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, and the Company’s ability to replace and expand oil and gas reserves. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected. The forward looking statements are made as of the date of this Report and other than as required by the federal securities laws, the Company assumes no obligation to update the forward-looking statement or to update the reasons why actual results could differ from those projected in the forward-looking statements.



# PrimeEnergy Corporation
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended
December 31, 2016

## PART I

## Item 1. BUSINESS.

## General

PrimeEnergy Corporation (the “Company”) was organized in March, 1973, under the laws of the State of Delaware.

We are an independent oil and natural gas company engaged in acquiring, developing and producing oil and natural gas. We presently own producing and non-producing properties located primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado and Louisiana. All of our oil and gas properties and interests are located in the United States. Through our subsidiaries Prime Operating Company, Eastern Oil Well Service Company and EOWS Midland Company, we act as operator and provide well servicing support operations for many of the onshore oil and gas wells in which we have an interest, as well as for third parties. We have owned and operated properties in the Gulf of Mexico through our subsidiary Prime Offshore L.L.C. We are also active in the acquisition of producing oil and gas properties through joint ventures with industry partners. Our subsidiary, PrimeEnergy Management Corporation (“PEMC”), acts as the managing general partner of seven oil and gas limited partnerships (the “Partnerships”), and acts as the managing trustee of two asset and income business trusts (“the Trusts”).

## Exploration, Development and Recent Activities

The Company’s activities include development and exploratory drilling. Our strategy is to develop a balanced portfolio of drilling prospects that includes lower risk wells with a high probability of success and higher risk wells with greater economic potential. Based upon the results of horizontal wells drilled by us and other offsetting operators and historical vertical well performance, we decided in 2016 to reduce the number of vertical wells in our drilling program and drill more horizontal wells. We believe horizontal development of our resource base will provide the opportunity to improve returns relative to vertical drilling by accessing a larger base of reserves in target zones with a lateral wellbore.

Maintaining a strong balance sheet and ample liquidity are key components of our business strategy. For 2017, we will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry. Our 2017 capital budget is reflective of decreased commodity prices and has been established based on an expectation of available cash flows, with any cash flow deficiencies expected to be funded by borrowings under our revolving credit facility. As we have done historically to preserve or enhance liquidity we may adjust our capital program throughout the year, divest non-strategic assets, or enter into strategic joint ventures. We are actively in discussions with financial partners for funding to develop our asset base and, if required, pay down our revolving credit facility should our borrowing base become limited due to the deterioration of commodity prices.

In accordance with SEC rules governing the scheduling of the drilling of PUD reserves we have only included in our year-end reserve report, the 18 PUD locations for which we have an Authorization for Expenditure (AFE) and a definitive plan to drill.

Our West Texas horizontal drilling program began in 2015 with the drilling of two wells. Through December 31, 2016 we have drilled and completed eight wells. Development is continuing and we are currently participating in an additional 19 horizontal wells in this program. As of March 31, 2017, these wells are in



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various stages of being drilled, completed, have been placed on production, or are waiting on hydraulic fracture stimulation. We anticipate the drilling of an additional 13 wells in 2017, although AFEs and specific plans for drilling have not been received. Although the actual count may vary, this additional activity brings the anticipated total to 32 horizontal wells drilled in 2017 in our West Texas horizontal drilling program. In addition, the Company is participating for less than 1% interest in 13 other horizontal wells.

In Upton County, Texas, we are developing a contiguous 3,900 acre block with our joint venture partner, Apache Corporation, where the Company holds approximately 48% interest in 2,606 gross acres. Through year-end 2016 six wells had been drilled and completed. In the first quarter of 2017 an additional eight wells have been spud and are in various stages of being drilled or completed. Apache Corporation has indicated their plans to PAD drill the acreage and that future phases of the development will result in approximately 60 horizontal wells being drilled at a cost of about $470 million. We own various interests ranging from 14% to 49% in the lands to be developed in this project and expect our share of these capital expenditures to be approximately $120 million. The actual number of wells to be drilled and the timing of the drilling may vary based on commodity market conditions. Apache drilling plans indicate an additional nine wells will be drilled later this year at a cost of $60 million, of which our share is approximately $19 million. These wells meet the definition of proved undeveloped reserves, however, they were not included in our year-end reserve report because we had not yet received AFEs and formal drilling plans. Also in Upton County, the Company is participating for 4% interest with Apache in the development of a 640 acre block where six wells, that were spud in 2016, have been completed and are on production as of March 31, 2017. These wells were included in our year end reserve report as Proved Undeveloped Reserves.

In 2016 we commenced our Martin County, Texas horizontal drilling program with the drilling of two wells that began production in July, 2016. These wells were drilled on a 960 acre block that the Company is developing with RSP Permian. An additional two wells were spud in the fourth quarter of 2016 and as of March 31, 2017, they are both producing. These two wells were included as PUDs in our year-end reserve report with the Company owning 35% to 38% interest. RSP Permian drilling plans indicate an additional two wells will be drilled in 2017, however, these were not included in the reserves report, as AFEs for these have not yet been received.

The Company maintains an acreage position of 21,166 gross (13,021 net) acres in the Permian Basin in West Texas, primarily in Reagan, Upton, Midland and Martin counties. We believe this acreage has significant resource potential in multiple Spraberry and Wolfcamp intervals that support the potential drilling of as many as 250 additional wells.

Our Oklahoma horizontal development program, which began in 2012, has participated in 24 horizontal wells for approximately $23 million through the first quarter of 2017. Over this same time period the Company chose to retain an over-riding royalty interest in 21 other horizontal wells. Presently the Company is participating with 17.6% interest in a horizontal well in Canadian County operated by Devon Energy and with 11.8% interest in a horizontal well in Kingfisher County operated by Marathon Oil Company. Our share of these two wells will be approximately $2.2 Million. We have also elected to retain an ORRI in two additional horizontal wells currently being drilled in Garfield and Canadian counties. In addition, we are currently participating for 50% interest in a vertical well in Garvin County with an expected cost, net to PrimeEnergy, of $1.3 Million. As of March 31, 2017, five wells have been spud and are either drilling, in the process of being completed and production tested, or are waiting on hydraulic fracture stimulation. The horizontal activity on Company acreage is primarily focused in Canadian, Grady Kingfisher and Garvin counties where we have approximately 2,295 net acres. We believe our acreage has significant additional resource potential that could support the drilling of 78 new horizontal wells based on an estimate of only two wells per section with our share of the capital expenditure being about $42 million at an average 10.5% ownership level.

In 2016, the limited partners of the Company’s managed drilling funds, located in West Virginia, voted to terminate the partnerships, sell the wells to the Company and retain their proportionate share of the leases previously held by those partnerships. These leases may potentially see future development should the horizontal shale plays of the Appalachian Basin expand into these areas.



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## Significant 2016 Activity

As of December 31, 2016, we had net capitalized costs related to proved oil and gas properties of $187.5 million. Total expenditures for the acquisition, exploration and development of our properties during 2016 were $17.1 million. Proved reserves as of December 31, 2016, were 7.7 MBOE which consisted of 99% proved developed reserves.

During 2016, we participated in drilling a total of 27 gross (3.6 net) wells; all of these wells are currently producing. This included 22 wells in our West Texas drilling program and 4 wells in our Mid-Continent region and one well in our Gulf Coast district.

We believe that our diversified portfolio approach to our drilling activities results in more consistent and predictable economic results than might be experienced with a less diversified or higher risk drilling program profile.

We attempt to assume the position of operator in all acquisitions of producing properties. We will continue to evaluate prospects for leasehold acquisitions and for exploration and development operations in areas in which we own interests and are actively pursuing the acquisition of producing properties. In order to diversify and broaden our asset base, we will consider acquiring the assets or stock in other entities and companies in the oil and gas business. Our main objective in making any such acquisitions will be to acquire income producing assets so as to increase our net worth and increase our oil and gas reserve base.

We presently own producing and non-producing properties located primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado and Louisiana, and we own a substantial amount of well servicing equipment.

We do not own any refinery or marketing facilities, and do not currently own or lease any bulk storage facilities or pipelines other than adjacent to and used in connection with producing wells and the interests in certain gas gathering systems. All of our oil and gas properties and interests are located in the United States.

In the past, the supply of gas has exceeded demand on a cyclical basis, and we are subject to a combination of shut-in and/or reduced taxes of gas production during summer months. Prolonged shut-ins could result in reduced field operating income from properties in which we act as operator.

Exploration for oil and gas requires substantial expenditures particularly in exploratory drilling in undeveloped areas, or “wildcat drilling.” As is customary in the oil and gas industry, substantially all of our exploration and development activities are conducted through joint drilling and operating agreements with others engaged in the oil and gas business.

Summaries of our oil and gas drilling activities, oil and gas production, and undeveloped leasehold, mineral and royalty interests are set forth under Item 2., “Properties,” below. Summaries of our oil and gas reserves, future net revenue and present value of future net revenue are also set forth under Item 2., “Properties—Reserves”, below.

## Well Operations

Our operations are conducted through our principal offices in Houston, Texas, and district offices in Houston and Midland, Texas, Oklahoma City, Oklahoma, and Charleston, West Virginia. We currently operate 1,513 wells, 311 through the Houston office, 366 through the Midland office, 359 through the Oklahoma City office and 477 through the Charleston, West Virginia office. Substantially all of the wells we operate are wells in which we have an interest.

We operate wells pursuant to operating agreements which govern the relationship between us, as operator, and the other owners of working interests in the properties, including the Partnerships, Trusts and joint venture participants. For each operated well, we receive monthly fees that are competitive in the areas of operations and we also are reimbursed for expenses incurred in connection with well operations.



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## The Partnerships, Trusts and Joint Ventures

Since 1975, PEMC has acted as managing general partner of various partnerships, trusts and joint ventures.

PEMC, as managing general partner of the Partnerships and managing trustee of the Trusts, is responsible for all Partnership and Trust activities, the drilling of development wells and the production and sale of oil and gas from productive wells. PEMC also provides administration, accounting and tax preparation for the Partnerships and Trusts from our offices in Houston, Texas. PEMC is liable for all debts and liabilities of the Partnerships and Trusts, to the extent that the assets of a given limited partnership or trust are not sufficient to satisfy its obligations. We stopped sponsoring partnerships and trusts in 1992. In 2016, we liquidated 11 of those partnerships, and today there are only 7 partnerships and 2 trusts remaining. The aggregate number of limited partners in the Partnerships and beneficial owners of the Trusts now administered by PEMC is approximately 660.

## Regulation

## Regulation of Oil and Natural Gas Exploration and Production:

Exploration and production operations of oil and natural gas are subject to various types of regulations under a wide range of local, state and federal statutes, rules, orders and regulations. These regulations include requiring permits to drill wells, maintaining bonding requirements to drill or operate wells, and govern the location of wells, the method of drilling and casing wells, the surface use and restoration of properties on which wells are drilled, and the plugging and abandoning of wells. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units, the density of wells that may be drilled in a given field and the unitization or pooling of oil and natural gas properties. Some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibiting the venting or flaring of natural gas and imposing certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and natural gas we can produce from our wells, and to limit the number of wells or the locations where we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. Because these statutes, rules and regulations undergo constant review and often are amended, expanded and reinterpreted, we are unable to predict the future cost or impact of regulatory compliance. The failure to comply with these rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the cost of doing business and, consequently, affects profitability. Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions affecting operations.

## Regulation of Transportation and Sale of Natural Gas:

Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, as amended (“NGA”), the Natural Gas Policy Act of 1978, as amended (“NGPA”), and regulations promulgated thereunder by the Federal Energy Regulatory Commission (“FERC”) and its predecessors. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead natural gas sales began with the enactment of the NGPA. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, as amended (the “Decontrol Act”). Effective January 1, 1993, the Decontrol Act removed all NGA and NGPA price and non-price controls affecting wellhead sales of natural gas and deregulated natural gas prices for all “first sales” of natural gas, which definition covers all sales of our own production. In addition, as part of the broad industry restructuring initiatives described below, the FERC has granted to all producers such as us a “blanket certificate of public convenience and necessity” authorizing the sale of gas for resale without further FERC approvals. As a result, all of our produced natural gas may now be sold at market prices, subject to the terms of any private contracts that



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may be in effect. In addition, under the provisions of the Energy Policy Act of 2005, as amended (the "2005 Act"), the NGA has been amended to prohibit any forms of market manipulation in connection with the purchase or sale of natural gas. Pursuant to the 2005 Act, the FERC established new regulations that are intended to increase natural gas pricing transparency through, among other things, requiring market participants to report their gas sales transactions annually to the FERC, and new regulations that require certain non-interestable pipelines to post daily scheduled volume information and design capacity for certain points on their systems. The 2005 Act also significantly increased the penalties for violations of the NGA and the FERC's regulations. In 2010, the FERC issued Penalty Guidelines for the determination of civil penalties in an effort to add greater fairness, consistency and transparency to its enforcement program.

Our natural gas sales prices continue to be affected by intrastate and interstate gas transportation regulation, because the prices we receive for our production are affected by the cost of transporting the gas to the consuming market. Through a series of comprehensive rulemakings, beginning with Order No. 436 in 1985 and continuing through Order No. 636 in 1992 and Order No. 637 in 2000, the FERC has adopted regulatory changes that have significantly altered the transportation and marketing of natural gas. These changes were intended by the FERC to foster competition by, among other things, transforming the role of interstate pipeline companies from wholesale marketers of gas to the primary role of gas transporters, and by increasing the transparency of pricing for pipeline services. The FERC has also established regulations governing the relationship of pipelines with their marketing affiliates, which essentially require that designated employees function independently of each other, and that certain information not be shared. The FERC has also implemented standards relating to the use of electronic data exchange by the pipelines to make transportation information available on a timely basis and to enable transactions to occur on a purely electronic basis.

In light of these statutory and regulatory changes, most pipelines have divested their gas sales functions to marketing affiliates, which operate separately from the transporter and in direct competition with all other merchants, and most pipelines have also implemented the large-scale divestiture of their gas gathering facilities to affiliated or non-affiliated companies. Interstate pipelines thus now generally provide unbundled, open and nondisciplinary transportation and transportation-related services to producers, gas marketing companies, local distribution companies, industrial end users and other customers seeking such services. Sellers and buyers of gas have gained direct access to the particular pipeline services they need, and are better able to conduct business with a larger number of counterparties. We believe these changes generally have improved our access to markets while, at the same time, substantially increasing competition in the natural gas marketplace. We cannot predict what new or different regulations the FERC and other regulatory agencies may adopt, or what effect subsequent regulations may have on our activities. Similarly, we cannot predict what proposals, if any, that affect the oil and natural gas industry might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on us. Further, we cannot predict whether the recent trend toward federal deregulation of the natural gas industry will continue or what effect future policies will have on our sale of gas.

In December 2007, the FERC issued rules (Order No. 704) requiring that any market participant that engages in wholesale sales or purchases of natural gas that equal or exceed 2.2 million British thermal units ("MMBtu") during a calendar year must annually report, starting May 1, 2009, such sales and purchases to the FERC. These rules are intended to increase transparency of the wholesale natural gas markets and assist the FERC in monitoring such markets and in detecting market manipulation.

Additional proposals and proceedings that might affect the natural gas industry are pending before FERC and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers.

Intrastate natural gas transportation is subject to regulation by state regulatory agencies. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to



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intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is materially different from the effect of such regulation on competitors.

## Regulation of Transportation and Sale of Oil:

Our sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. The price received from the sale of these products is affected by the cost of transporting the products to market. Much of that transportation is through interstate common carrier pipelines, which are regulated by FERC under the Interstate Commerce Act ("ICA"). FERC requires that pipelines regulated under the ICA file tariffs setting forth the rates and terms and conditions of service, and that such service not be unduly discriminatory or preferential.

Effective January 1, 1995, the FERC implemented regulations generally grandfathering all previously approved interstate transportation rates and establishing an indexing system for those rates by which adjustments are made annually based on the rate of inflation, subject to certain conditions and limitations. These regulations may tend to increase the cost of transporting oil and natural gas liquids by interstate pipeline, although the annual adjustments may result in decreased rates in a given year. Every five years, the FERC must examine the relationship between the annual change in the applicable index and the actual cost changes experienced in the oil pipeline industry. In December 2015, to implement this required five-year re-determination, the FERC established an upward adjustment in the index to track oil pipeline cost changes and determined that the Producer Price Index for Finished Goods plus 1.23% should be the oil pricing index for the five-year period beginning July 1, 2016. The result of indexing is a "ceiling rate" for each rate, which is the maximum which the pipeline may set its interstate transportation rates. A pipeline may also file cost-of-service based rates if rate indexing will be insufficient to allow the pipeline to recover its costs. Rates are subject to challenge by protest when they are filed or changed. For indexed rates, complaints alleging that the rates are unjust and unreasonable may only be pursued if the complainant can show that a substantial change has occurred since the enactment of the Energy Policy Act of 1992 in either the economic circumstances of the pipeline or in the nature of the services provided, that were a basis for the rate. There is no such limitation on complaints alleging that the pipeline's rates or term and conditions of service are unduly discriminatory or preferential.

Another FERC matter that may impact our transportation costs relates to a policy that allows a pipeline structured as a master limited partnership or similar non-corporate entity to include in its rates a tax allowance which respect to income for which there is an “actual or potential income tax liability,” to be determined on a case by case basis. Generally speaking, where the holder of a partnership unit interest is required to file a tax return that includes partnership income or loss, such unit-holder is presumed to have an actual or potential income tax liability sufficient to support a tax allowance on that partnership income. We currently do not transport any of our oil or natural gas liquids on a pipeline structured as a master limited partnership.

Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe the regulation of oil transportation rates will not affect our operations in any way that is materially different from the effect of such regulation on competitors.

Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe access to oil pipeline transportation services generally will be available to us to the same extent as to competitors.



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In November 2009, the Federal Trade Commission (the "FTC") issued regulations pursuant to the Energy Independence and Security Act of 2007 intended to prohibit market manipulation in the petroleum industry. Violators of the regulations face civil penalties of up to $1.0 million per violation per day. In July 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which incorporated an expansion of the authority of the Commodity Futures Trading Commission (the "CFTC") to prohibit market manipulation in the markets regulated by the CFTC. This authority, with respect to oil swaps and futures contracts, is similar to the anti-manipulation authority granted to the FERC with respect to anti-manipulation in the gas industry and the FTC with respect to oil purchases and sales, as described above. In July 2011, the CFTC issued final rules to implement their new anti-manipulation authority. The rules subject violators to a civil penalty of up to the greater of $1.0 million or triple the monetary gain to the person for each violation.

## Transportation of Hazardous Materials:

The federal Department of Transportation has adopted regulations requiring that certain entities transporting designated hazardous materials develop plans to address security risks related to the transportation of hazardous materials. The Company does not believe that these requirements will have an adverse effect on the Company or its operations. The Company cannot provide any assurance that the security plans required under these regulations would protect against all security risks and prevent an attack or other incident related to the Company’s transportation of hazardous materials.

## Environmental Regulations:

General. Our operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Various federal, state and local laws and regulations governing the protection of the environment, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), the Federal Oil Pollution Act of 1990, as amended (“OPA”), the Federal Water Pollution Control Act of 1972, as amended (the “Clean Water Act”), the Safe Drinking Water Act of 1974, as amended (the “Safe Drinking Water Act”), and the Federal Clean Air Act, as amended (the “Clean Air Act”) affect our operations and costs. In particular, exploration, development and production operations, activities in connection with storage and transportation of oil and other hydrocarbons and use of facilities for treating, processing or otherwise handling hydrocarbons and related wastes may be subject to regulation under these and similar state legislation. These laws and regulations:

• restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities;

• limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and

• impose substantial liabilities for pollution resulting from operations.

Permits are required for the operation of our various facilities. These permits can be revoked, modified or renewed by issuing authorities. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties or the imposition of injunctive relief. Changes in environmental laws and regulations occur regularly, and any changes that result in more stringent and costly waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as those in the oil and natural gas industry in general. Although we believe that compliance with environmental regulations will not have a material adverse effect on us, risks of substantial costs and liabilities related to environmental compliance issues are part of oil and gas production operations. No assurance can be given that significant costs and liabilities will not be incurred. Also, it is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from oil and gas production could result in substantial costs and liabilities to us.



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The transition zone and shallow-water areas of the U.S. Gulf Coast are ecologically sensitive. Environmental issues have led to higher drilling costs and a more difficult and lengthy well permitting process. U.S. laws and regulations applicable to our operations include those controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment, requiring consistency with applicable coastal zone management plans, or otherwise relating to the protection of the environment.

As with the industry generally, compliance with existing regulations increases the overall cost of business. The areas affected include:

• unit production expenses primarily related to the control and limitation of air emissions and the disposal of produced water;

• capital costs to drill exploration and development wells primarily related to the management and disposal of drilling fluids and other oil and natural gas exploration wastes; and

• capital costs to construct, maintain and upgrade equipment and facilities.

Superfund. The CERCLA, also known as the “Superfund” law, and comparable state laws and regulations imposes liability, without regard to fault or the legality of the original conduct, on certain parties with respect to the release of hazardous substances into the environment. These parties include the current and past owners and operators of a site where the release occurred and any party that treated or disposed of or arranged for the treatment or disposal of hazardous substances found at a site. Under CERCLA, such parties may be subject to joint and several strict liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. CERCLA also authorizes the Environmental Protection Agency (“EPA”), and in some cases, private parties, to undertake actions to clean up such hazardous substances, or to recover the costs of such actions from the responsible parties. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substance released into the environment. In the course of ordinary operations, we have used materials and generated wastes and will continue to use materials and generate wastes that may fall within CERCLA’s definition of hazardous substances. We may also be an owner or operator of sites on which hazardous substances have been released. As a result, we may be responsible under CERCLA for all or part of the costs to clean up sites where such substances have been released.

We currently own or lease properties that for many years have been used for the exploration and production of oil and natural gas. Although we and our predecessors have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed or released on, under or from the properties currently owned or leased by us or on, under or from other locations where these wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose actions with respect to the treatment and disposal or release of hydrocarbons or other wastes were not under our control. State and federal laws applicable to oil and gas wastes and properties have become stricter over time. Under these increasingly stringent requirements, these properties and wastes disposed on these properties may be subject to CERCLA and analogous state laws. Under these laws, we could be required:

• to remove or remediate previously disposed wastes, including wastes disposed or released by prior owners or operators;

• to clean up contaminated property, including contaminated groundwater; or

• to perform remedial operations to prevent future contamination.

At this time, we do not believe that we are associated with any Superfund site and have not been notified of any claim, liability or damages under CERCLA.



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Oil Pollution Act of 1990. The OPA and regulations thereunder impose liability on responsible parties for damages resulting from oil spills into or upon navigable waters, and adjoining shorelines or in the exclusive economic zone of the United States. Liability under OPA is strict, and under certain circumstances joint and several, and potentially unlimited. A "responsible party" includes the owner or operator of an onshore facility and the lessee or permittee of the area in which an offshore facility is located. A failure to comply with OPA's requirements or inadequate cooperation during a spill response action may subject a responsible party to civil or criminal enforcement actions. We are not aware of any action or event that would subject us to liability under OPA and believe that compliance with OPA's operating requirements will not have a material adverse effect on our operations.

U.S. Environmental Protection Agency. The U.S. Environmental Protection Agency regulations address the disposal of oil and natural gas operational wastes under three federal acts more fully discussed in the paragraphs that follow. The Resource Conservation and Recovery Act of 1976, as amended (“RCRA”), provides a framework for the safe disposal of discarded materials and the management of solid and hazardous wastes. The direct disposal of operational wastes into offshore waters is also limited under the authority of the Clean Water Act. When injected underground, oil and natural gas wastes are regulated by the Underground Injection Control program under the Safe Drinking Water Act. If wastes are classified as hazardous, they must be properly transported, using a uniform hazardous waste manifest, documented, and disposed at an approved hazardous waste facility.

Resource Conservation and Recovery Act. The RCRA is the principal federal statute governing the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating requirements and liability for failure to meet such requirements on a person who is either a “generator” or “transporter” of hazardous waste or an “owner” or “operator” of a hazardous waste treatment, storage or disposal facility. At present, RCRA includes a statutory exemption that allows most oil and natural gas exploration and production waste to be classified as nonhazardous waste. A similar exemption is contained in many of the state counterparts to RCRA. As a result, we are not required to comply with a substantial portion of RCRA’s requirements because the operations generate minimal quantities of hazardous wastes. At various times in the past, proposals have been made to amend RCRA to rescind the exemption that excludes oil and natural gas exploration and production wastes from regulation as hazardous waste. Repeal or modification of the exemption by administrative, legislative or judicial process, or modification of similar exemptions in applicable state statutes, would increase the volume of hazardous waste we are required to manage and dispose of and would cause us to incur increased operating expenses.

Clean Water Act. The Clean Water Act and resulting regulations imposes restrictions and controls on the discharge of produced waters and other wastes into navigable waters. Permits must be obtained to discharge pollutants into state and federal waters and to conduct construction activities in waters and wetlands. Certain state regulations and the general permits issued under the Federal National Pollutant Discharge Elimination System program prohibit the discharge of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry into certain coastal and offshore waters. Further, the EPA has adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain permits for storm water discharges.

Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans. The Clean Water Act and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges for oil and other pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release. We believe that our operations comply in all material respects with the requirements of the Clean Water Act and state statutes enacted to control water pollution.

Safe Drinking Water Act. Underground injection is the subsurface placement of fluid through a well, such as the reinjection of brine produced and separated from oil and natural gas production. The Safe Drinking Water



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Act establishes a regulatory framework for underground injection, with the main goal being the protection of usable aquifers. The primary objective of injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migration of fluids from the injection zone into underground sources of drinking water. Hazardous-waste injection well operations are strictly controlled, and certain wastes, absent an exemption, cannot be injected into underground injection control wells. In Louisiana and Texas, no underground injection may take place except as authorized by permit or rule. We currently own and operate various underground injection wells. Failure to abide by the permits could subject us to civil and/or criminal enforcement. We believe we are in compliance in all material respects with the requirements of applicable state and federal underground injection control programs and permits.

Hydraulic Fracturing. Many of our exploration and production operations depend on the use of hydraulic fracturing to enhance production from oil and gas wells. This technology involves the injection of fluids, usually consisting mostly of water but typically including small amounts of several chemical additives, as well as sand into a well under high pressure in order to create fractures in the rock that allow oil or gas to flow more freely to the wellbore. Most of our wells would not be economical without the use of hydraulic fracturing to stimulate production from the well. Hydraulic fracturing operations have historically been overseen by state regulators as part of their oil and gas regulatory programs. However, bills have been introduced in Congress that would subject hydraulic fracturing to federal regulation under the Safe Drinking Water Act. If adopted, these bills could result in additional permitting requirements for hydraulic fracturing operations as well as various restrictions on those operations. These permitting requirements and restrictions could result in delays in operations at well sites as well as increased costs to make wells productive. Moreover, the bills introduced in Congress would require the public disclosure of certain information regarding the chemical makeup of hydraulic fracturing fluids, many of which are proprietary to the service companies that perform the hydraulic fracturing operations. Such disclosure could make it easier for third parties to initiate litigation against us in the event of perceived problems with drinking water wells in the vicinity of an oil or gas well or other alleged environmental problems. In addition to these federal legislative proposals, some states and local governments have adopted, and others are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances, including but not limited to requirements regarding chemical disclosure, casing and cementing of wells, withdrawal of water for use in high-volume hydraulic fracturing of horizontal wells, baseline testing of nearby water wells, and restrictions on the type of additives that may be used in hydraulic fracturing operations. If these types of conditions are adopted, we could be subject to increased costs and possibly limits on the productivity of certain wells.

Greenhouse Gas. In response to studies suggesting that emissions of carbon dioxide and certain other gases may be contributing to global climate change, the United States Congress has considered legislation to reduce emissions of greenhouse gases from sources within the United States between 2012 and 2050. In addition, many states have already taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. The EPA has also begun to regulate carbon dioxide and other greenhouse gas emissions under existing provisions of the Clean Air Act. This includes proposed regulation of methane emissions from the oil and gas sector. If we are unable to recover or pass through a significant portion of our costs related to complying with current and future regulations relating to climate change and GHGs, it could materially affect our operations and financial condition. To the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively impact our cost of, and access to, capital. Future legislation or regulations adopted to address climate change could also make our products more or less desirable than competing sources of energy.

Consideration of Environmental Issues in Connection with Governmental Approvals. Our operations frequently require licenses, permits and/or other governmental approvals. Several federal statutes, including OCSLA, the National Environmental Policy Act (“NEPA”), and the Coastal Zone Management Act (“CZMA”) require federal agencies to evaluate environmental issues in connection with granting such approvals and/or taking other major agency actions. OCSLA, for instance, requires the U.S. Department of Interior (“DOI”) to evaluate whether certain proposed activities would cause serious harm or damage to the marine, coastal or human environment. Similarly, NEPA requires DOI and other federal agencies to evaluate major agency actions having



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the potential to significantly impact the environment. In the course of such evaluations, an agency would have to prepare an environmental assessment and, potentially, an environmental impact statement. CZMA, on the other hand, aids states in developing a coastal management program to protect the coastal environment from growing demands associated with various uses, including offshore oil and natural gas development. In obtaining various approvals from the DOI, we must certify that we will conduct our activities in a manner consistent with an applicable program.

Lead-Based Paints. Various pieces of equipment and structures we own may have been coated with lead-based paints as was customary in the industry at the time these pieces of equipment were fabricated and constructed. These paints may contain lead at a concentration high enough to be considered a regulated hazardous waste when removed. If we need to remove such paints in connection with maintenance or other activities and they qualify as a regulated hazardous waste, this would increase the cost of disposal. High lead levels in the paint might also require us to institute certain administrative and/or engineering controls required by the Occupational Safety and Health Act and BSEE to ensure worker safety during paint removal.

Air Pollution Control. The Clean Air Act and state air pollution laws adopted to fulfill its mandates provide a framework for national, state and local efforts to protect air quality. Operations utilize equipment that emit air pollutants subject to federal and state air pollution control laws. These laws require utilization of air emissions abatement equipment to achieve prescribed emissions limitations and ambient air quality standards, as well as operating permits for existing equipment and construction permits for new and modified equipment. Air emissions associated with offshore activities are projected using a matrix and formula supplied by BSEE, which has primacy from the EPA for regulating such emissions.

Naturally Occurring Radioactive Materials. Naturally Occurring Radioactive Materials (“NORM”) are materials not covered by the Atomic Energy Act, whose radioactivity is enhanced by technological processing such as mineral extraction or processing through exploration and production conducted by the oil and natural gas industry. NORM wastes are regulated under the RCRA framework, but primary responsibility for NORM regulation has been a state function. Standards have been developed for worker protection, treatment, storage and disposal of NORM waste, management of waste piles, containers and tanks, and limitations upon the release of NORM contaminated land for unrestricted use. We believe that our operations are in material compliance with all applicable NORM standards established by the states, as applicable.

OSHA and Other Laws and Regulations. We are subject to the requirements of the federal Occupational Safety and Health Act (OSHA), and comparable state laws. The OSHA hazard communication standard, the EPA community right-to-know regulations under the Title III of CERCLA and similar state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations. Also, pursuant to OSHA, the Occupational Safety and Health Administration has established a variety of standards related to workplace exposure to hazardous substances and employee health and safety.

Taxation. Our oil and gas operations are affected by federal income tax laws applicable to the petroleum industry. For U.S. income tax reporting purposes, intangible drilling and development costs incurred or borne during the year are permitted to be deducted currently, rather than capitalized. As an independent producer, we are also entitled to a deduction for percentage depletion with respect to the first 1,000 barrels per day of domestic crude oil (and/or equivalent units of domestic natural gas) produced, if such percentage depletion exceeds cost depletion. Generally, this deduction is computed based upon the lesser of 100% of the net income, or 15% of the gross income from a property, without reference to the basis in the property. The amount of the percentage depletion deduction so computed which may be deducted in any given year is limited to 65% of taxable income. Any percentage depletion deduction disallowed due to the 65% of taxable income test may be carried forward indefinitely.

See Notes 1 and 8 to the consolidated financial statements included in this Report for a discussion of accounting for income taxes.



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## Competition and Markets

The business of acquiring producing properties and non-producing leases suitable for exploration and development is highly competitive. Our competition, in our efforts to acquire both producing and non-producing properties, include oil and gas companies, independent concerns, income programs and individual producers and operators, many of which have financial resources, staffs and facilities substantially greater than those available to us. Furthermore, domestic producers of oil and gas must not only compete with each other in marketing their output, but must also compete with producers of imported oil and gas and alternative energy sources such as coal, nuclear power and hydroelectric power. Competition among petroleum companies for favorable oil and gas properties and leases can be expected to increase.

The availability of a ready market for any oil and gas produced by us at acceptable prices per unit of production will depend upon numerous factors beyond our control, including the extent of domestic production and importation of oil and gas, the proximity of our producing properties to gas pipelines and the availability and capacity of such pipelines, the marketing of other competitive fuels, fluctuation in demand, governmental regulation of production, refining, transportation and sales, general national and worldwide economic conditions, and use and allocation of oil and gas and their substitute fuels. There is no assurance that we will be able to market all of the oil or gas produced by us or that favorable prices can be obtained for the oil and gas production.

## Major Customers

Listed below are the percent of our total oil and gas sales made to each of our customers whose purchases represented more than 10% of our oil and gas sales in 2016.

<table><tr><td>Oil Purchasers:</td><td></td></tr><tr><td>Plains All American Inc.</td><td>40.72%</td></tr><tr><td>Infinity Hydrocarbons, LLC.</td><td>15.18%</td></tr><tr><td>Gas Purchasers:</td><td></td></tr><tr><td>Targa Pipeline Mid-Continent</td><td>34.18%</td></tr><tr><td>Continuum Producer Services</td><td>11.87%</td></tr></table>

Although there are no long-term purchasing agreements with these purchasers, we believe that they will continue to purchase our oil and gas products and, if not, could be readily replaced by other purchasers.

## Employees

At March 1, 2017, we had 155 full-time employees, 48 of whom were employed at our principal offices in Houston, Texas, at the offices of Prime Operating Company, Eastern Oil Well Service Company and EOWS Midland Company, and 107 employees who were primarily involved in our district operations in Midland, Texas, Elmore City and Oklahoma City, Oklahoma and Charleston, West Virginia.



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## Item 1A. RISK FACTORS.

## Natural gas and oil prices fluctuate widely, and low prices for an extended period of time are likely to have a material adverse impact on our business.

Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing prices for natural gas and oil. Lower commodity prices may reduce the amount of natural gas and oil that we can produce economically. Natural gas prices, based on the twelve-month average of the first of the month Henry Hub index price, were $2.49 per Mmbtu in 2016 compared to $2.59 per Mmbtu in 2015, and have remained flat at $2.51 per Mmbtu in February 2017. Oil prices, based on the NYMEX monthly average price, were $43.29 per barrel in 2016 compared to $50.28 per barrel in 2015, and have increased to $53.16 through February 2017. Any substantial or extended decline in future natural gas or crude oil prices would have, a material adverse effect on our future business, financial condition, results of operations, cash flows, liquidity or ability to finance planned capital expenditures and commitments. Furthermore, substantial, extended decreases in natural gas and crude oil prices may cause us to delay or postpone a significant portion of our exploration, development and exploitation projects or may render such projects uneconomic, which may result in significant downward adjustments to our estimated proved reserves and could negatively impact our ability to borrow and cost of capital and our ability to access capital markets, increase our costs under our revolving credit facility, and limit our ability to execute aspects of our business plans.

Prices for natural gas and oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control. These factors include:

• the level of consumer product demand;

• weather conditions;

• political conditions in natural gas and oil producing regions, including the Middle East, Africa and South America;

• the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

• the price levels and quantities of foreign imports;

• actions of governmental authorities;

- the availability, proximity and capacity of gathering, transportation, processing and/or refining facilities in regional or localized areas that may affect the realized price for natural gas and oil;

• inventory storage levels;

• the nature and extent of domestic and foreign governmental regulations and taxation, including environmental and climate change regulation;

• the price, availability and acceptance of alternative fuels;

• technological advances affecting energy consumption;

• speculation by investors in oil and natural gas;

• variations between product prices at sales points and applicable index prices; and

• overall economic conditions.

These factors and the volatile nature of the energy markets make it impossible to predict with any certainty the future prices of natural gas and oil. If natural gas and oil prices decline significantly for a sustained period of time, the lower prices may adversely affect our ability to make planned expenditures, raise additional capital or meet our financial obligations.



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## Drilling natural gas and oil wells is a high-risk activity.

Our growth is materially dependent upon the success of our drilling program. Drilling for natural gas and oil involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be encountered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including:

• decreases in natural gas and oil prices;

• unexpected drilling conditions, pressure or irregularities in formations;

• equipment failures or accidents;

• adverse weather conditions;

• loss of title or other title related issues;

• surface access restrictions;

• lack of available gathering or processing facilities or delays in the construction thereof;

• compliance with, or changes in, governmental requirements and regulation, including with respect to wastewater disposal, discharge of greenhouse gases and fracturing; and

• shortages or delays in the availability of required goods or services such as drilling rigs or crews, the delivery of equipment and the availability of sufficient water for drilling operations.

Our future drilling activities may not be successful and, if unsuccessful, such failure will have an adverse effect on our future results of operations and financial condition. Our overall drilling success rate or our drilling success rate within a particular geographic area may decline. We may be unable to lease or drill identified or budgeted prospects within our expected time frame, or at all. We may be unable to lease or drill a particular prospect because, in some cases, we identify a prospect or drilling location before seeking an option or lease rights in the prospect or location. Similarly, our drilling schedule may vary from our capital budget. The final determination with respect to the drilling of any scheduled or budgeted wells will be dependent on a number of factors, including:

• the results of exploration efforts and the acquisition, review and analysis of the seismic data;

• the availability of sufficient capital resources to us and the other participants for the drilling of the prospects;

• the approval of the prospects by other participants after additional data has been compiled;

• economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling rigs and crews;

• our financial resources and results; and

• the availability of leases and permits on reasonable terms for the prospects.

These projects may not be successfully developed and the wells, if drilled, may not encounter reservoirs of commercially productive natural gas or oil.

Reserve estimates depend on many assumptions that may prove to be inaccurate. Any material inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net present value of our reserves to be overstated.

Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner. The process of estimating quantities of proved reserves is complex and inherently uncertain, and the reserve data included in this document are only estimates. The process relies on



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interpretations of available geologic, geophysical, engineering and production data. As a result, estimates of different engineers may vary. In addition, the extent, quality and reliability of this technical data can vary. The differences in the reserve estimation process are substantially due to the geological conditions in which the wells are drilled. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as natural gas and oil prices. Additional assumptions include drilling and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserve estimate is a function of:

• the quality and quantity of available data;

• the interpretation of that data;

• the accuracy of various mandated economic assumptions; and

• the judgment of the persons preparing the estimate.

Results of drilling, testing and production subsequent to the date of an estimate may justify revising the original estimate. Accordingly, initial reserve estimates often vary from the quantities of natural gas and oil that are ultimately recovered, and such variances may be material. Any significant variance could reduce the estimated quantities and present value of our reserves.

You should not assume that the present value of future net cash flows from our proved reserves is the current market value of our estimated natural gas and oil reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on the twelve-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month, and costs in effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties. Actual future prices and costs may differ materially from those used in the net present value estimate, and future net present value estimates using then current prices and costs may be significantly less than the current estimate. In addition, the 10% discount factor we use when calculating discounted future net cash flows for reporting requirements in compliance with the Financial Accounting Standards Board ("FASB") in Accounting Standards Codification ("ASC") Section 932 may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the natural gas and oil industry in general.

The Company’s expectations for future drilling activities will be realized over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of such activities.

The Company has identified drilling locations and prospects for future drilling opportunities, including development and infill drilling activities. These drilling locations and prospects represent a significant part of the Company’s future drilling plans. The Company’s ability to drill and develop these locations depends on a number of factors, including the availability of capital, seasonal conditions, regulatory approvals, negotiation of agreements with third parties, commodity prices, costs, access to and availability of equipment, services, resources and personnel and drilling results. Changes in the laws or regulations on which the Company relies in planning and executing its drilling programs could adversely impact the Company’s ability to successfully complete those programs. For example, under current Texas laws and regulations the Company may receive permits to drill, and may drill and complete, certain horizontal wells that traverse one or more units and/or leases; a change in those laws or regulations could adversely impact the Company’s ability to drill those wells. Because of these uncertainties, the Company cannot give any assurance as to the timing of these activities or that they will ultimately meet the Company’s expectations for success. As such, the Company’s actual drilling activities may materially differ from the Company’s current expectations, which could have a significant adverse effect on the Company’s proved reserves, financial condition and results of operations.

Our future performance depends on our ability to find or acquire additional natural gas and oil reserves that are economically recoverable.

In general, the production rate of natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Unless we successfully replace the reserves that we



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produce, our reserves will decline, eventually resulting in a decrease in natural gas and oil production and lower revenues and cash flow from operations. Our future natural gas and oil production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves. We may not be able to replace reserves through our exploration, development and exploitation activities or by acquiring properties at acceptable costs. Low natural gas and oil prices may further limit the kinds of reserves that we can develop economically. Lower prices also decrease our cash flow and may cause us to decrease capital expenditures.

Exploration, development and exploitation activities involve numerous risks that may result in dry holes, the failure to produce natural gas and oil in commercial quantities and the inability to fully produce discovered reserves.

We are continually identifying and evaluating opportunities to acquire natural gas and oil properties. We may not be able to successfully consummate any acquisition, to acquire producing natural gas and oil properties that contain economically recoverable reserves, or to integrate the properties into our operations profitably.

## We have substantial capital requirements, and we may not be able to obtain needed financing on satisfactory terms, if at all.

We rely upon access to our revolving credit facility as a source of liquidity for any capital requirements not satisfied by cash flow from operations or other sources. Future challenges in the global financial system, including the capital markets, may adversely affect our business and our financial condition. Our ability to access the capital markets may be restricted at a time when we desire, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. Adverse economic and market conditions could adversely affect the collectability of our trade receivables and cause our commodity hedging counterparties to be unable to perform their obligations or to seek bankruptcy protection. Future challenges in the economy could also lead to reduced demand for natural gas which could have a negative impact on our revenues.

Our debt agreements also require compliance with covenants to maintain specified financial ratios. If the price that we receive for our natural gas and oil production further deteriorates from current levels or continues for an extended period, it could lead to further reduced revenues, cash flow and earnings, which in turn could lead to a default under those ratios. Because the calculations of the financial ratios are made as of certain dates, the financial ratios can fluctuate significantly from period to period. A prolonged period of decreased natural gas and oil prices or a further decline could further increase the risk of our inability to comply with covenants to maintain specified financial ratios. In order to provide a margin of comfort with regard to these financial covenants, we may seek to reduce our capital expenditure plan, sell non-strategic assets or opportunistically modify or increase our derivative instruments to the extent permitted under our debt agreements. In addition, we may seek to refinance or restructure all or a portion of our indebtedness. We cannot assure you that we will be able to successfully execute any of these strategies, and such strategies may be unavailable on favorable terms or not at all.

## The borrowing base under our revolving credit facility may be reduced in light of recent commodity price declines, which could limit us in the future.

The borrowing base under our revolving credit facility is currently $75 million, and lender commitments under our revolving credit facility are $300 million. The borrowing base is redetermined semi-annually under the terms of the revolving credit facility. In addition, either we or the lenders may request an interim redetermination twice a year or in conjunction with certain acquisitions or sales of oil and gas properties. Our borrowing base may decrease as a result of lower natural gas or oil prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for other reasons set forth in our revolving credit agreement. In the event of a decrease in our borrowing base due to declines in commodity prices or otherwise, our ability to borrow under our revolving credit facility may be limited and we could be required to repay any indebtedness in excess of the redetermined borrowing base. In addition, we may be unable to access the equity or debt capital markets to meet our obligations, including any such debt repayment obligations.



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Strategic determinations, including the allocation of capital and other resources to strategic opportunities, are challenging, and our failure to appropriately allocate capital and resources among our strategic opportunities may adversely affect our financial condition and reduce our growth rate.

Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our business plan, we considered allocating capital and other resources to various aspects of our businesses including well-development (primarily drilling), reserve acquisitions, exploratory activity, corporate items and other alternatives. We also considered our likely sources of capital. Notwithstanding the determinations made in the development of our 2017 plan, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and growth rate may be adversely affected. Moreover, economic or other circumstances may change from those contemplated by our 2017 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives.

## Negative public perception regarding us and/or our industry could have an adverse effect on our operations.

Negative public perception regarding us and/or our industry resulting from, among other things, concerns raised by advocacy groups about hydraulic fracturing, oil spills, greenhouse gas or methane emissions and explosions of natural gas transmission lines, may lead to increased regulatory scrutiny, which may, in turn, lead to new state and federal safety and environmental laws, regulations, guidelines and enforcement interpretations. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens and increased risk of litigation. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits we need to conduct our operations to be withheld, delayed, or burdened by requirements that restrict our ability to profitably conduct our business.

## We face a variety of hazards and risks that could cause substantial financial losses.

Our business involves a variety of operating risks, including:

• blowouts, cratering and explosions;

• mechanical problems;

• uncontrolled flows of natural gas, oil or well fluids;

• formations with abnormal pressures;

• pollution and other environmental risks; and

• natural disasters.

Our operation of natural gas gathering and pipeline systems also involves various risks, including the risk of explosions and environmental hazards caused by pipeline leaks and ruptures.

## We may not be insured against all of the operating risks to which we are exposed.

We maintain insurance coverage against certain, but not all, hazards that could arise from our operations. Such insurance is believed to be reasonable for the hazards and risks faced by us. We do not carry business interruption insurance. In addition, pollution and environmental risks are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows.



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As of December 31, 2016, we maintain for our operations total excess liability insurance with limits of $20 million per occurrence and in the aggregate covering certain general liability and certain “sudden and accidental” environmental risks with a deductible of $10,000 per occurrence, subject to all terms, restrictions and sub-limits of the policies. We also maintain general liability insurance limits of $1 million per occurrence and $2 million in the aggregate.

We have several policies that cover environmental risks. We have environmental coverage under the per occurrence and aggregate limits of our general and umbrella liability policies (for a twelve-month term). These policies provide third-party surface cleanup, bodily injury and property damage coverage, and defense costs when a pollution event is sudden and accidental and is discovered within thirty days of commencement and reported to the insurance company within ninety days of discovery. This is standard coverage in oil and gas insurance policies.

We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our customers and contractors. However, customers and contractors who provide contractual indemnification protection may not in all cases maintain adequate insurance to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may not be able to maintain adequate insurance in the future at rates we consider reasonable.

From time to time, a small number of our contractors have requested contractual provisions that require us to respond to third-party claims. In some of these instances we have accepted the risk with the understanding that it would be covered under our current coverage. We evaluate these risk-transferring negotiations cautiously, and we feel that we have adequately mitigated this risk through existing coverage or acquiring supplemental coverage when appropriate.

Federal and state legislation and regulatory initiatives related to oil and gas development, including hydraulic fracturing, could result in increased costs and operating restrictions or delays.

Most of our exploration and production operations depend on the use of hydraulic fracturing to enhance production from oil and gas wells. This technology involves the injection of fluids – usually consisting mostly of water but typically including small amounts of several chemical additives – as well as sand or other proportions into a well under high pressure in order to create fractures in the rock that allow oil or gas to flow more freely to the wellbore. Most of our wells would not be economical without the use of hydraulic fracturing to stimulate production from the well. Hydraulic fracturing operations have historically been overseen by state regulators as part of their oil and gas regulatory programs; however, the EPA has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act and has released permitting guidance for hydraulic fracturing activities that use diesel in fracturing fluids in those states where EPA is the permitting authority, including Pennsylvania. As a result, we may be subject to additional permitting requirements for hydraulic fracturing operations as well as various restrictions on those operations. These permitting requirements and restrictions could result in delays in operations at well sites as well as increased costs to make wells productive. In addition, legislation introduced in Congress would provide for federal regulation of hydraulic fracturing under the Safe Drinking Water Act and require the public disclosure of certain information regarding the chemical makeup of hydraulic fracturing fluids. If adopted, this legislation could establish an additional level of regulation and permitting at the federal, state or local levels, and could make it easier for third parties opposed to the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect the environment, including groundwater, soil or surface water. Moreover, in May 2014, the EPA announced an Advanced Notice



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of Proposed Rulemaking under the Toxic Substances Control Act relating to data collection, including the chemical substances and mixtures used in hydraulic fracturing. Further, in March 2015, the Department of the Interior’s Bureau of Land Management (BLM) issued a final rule to regulate hydraulic fracturing on public and Indian land; however, enforcement of the rule has been delayed pending a decision in a legal challenge in the U.S. District Court of Wyoming.

On August 16, 2012, the EPA published final rules that establish new air emission control requirements for natural gas and NGL production, processing and transportation activities, including New Source Performance Standards (NSPS) to address emissions of sulfur dioxide and volatile organic compounds, and National Emission Standards for Hazardous Air Pollutants (NESHAPS) to address hazardous air pollutants frequently associated with gas production and processing activities. Among other things, these final rules require the reduction of volatile organic compound emissions from natural gas wells through the use of reduced emission completions or “green completions” on all hydraulically fractured wells constructed or refractured after January 1, 2015. In addition, gas wells were required to use completion combustion device equipment (i.e., flaring) if emissions cannot be directed to a gathering line. Further, the final rules under NESHAPS include maximum achievable control technology (MACT) standards for “small” glycol dehydrators that are located at major sources of hazardous air pollutants and modifications to the leak detection standards for valves. In December 2014, the EPA finalized additional amendments to these rules that, among other things, distinguish between multiple flowback stages during completion and clarified that storage tanks permanently removed from service are not affected by any requirements. In July 2015, the EPA finalized two updates to the rules addressing the definition of low pressure gas wells and references to tanks that are connected to one another. In September 2015, the EPA issued a proposed rule that would update and expand the NSPS by setting additional emissions limits for volatile organic compounds and regulating methane emissions for new and modified sources in the oil and gas industry. The EPA also issued a proposed rule in September 2015 concerning aggregation of sources that would affect source determinations for air permitting in the oil and gas industry.

Compliance with these requirements, especially the imposition of these green completion requirements and potential methane regulation, may require modifications to certain of our operations, including the installation of new equipment to control emissions at the well site that could result in significant costs, including increased capital expenditures and operating costs, and could adversely impact our business. Similarly, aggregating our oil and gas facilities for permitting could result in more complex, costly, and time consuming air permitting. Particularly in regard to obtaining pre-construction permits, the proposed aggregation rule could add costs and cause delays in our operations.

In addition to these federal legislative and regulatory proposals, some states in which we operate, such as West Virginia and Texas, and certain local governments have adopted, and others are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances, including requirements regarding chemical disclosure, casing and cementing of wells, withdrawal of water for use in high-volume hydraulic fracturing of horizontal wells, baseline testing of nearby water wells, and restrictions on the type of additives that may be used in hydraulic fracturing operations. For example, the City of Denton, Texas adopted a moratorium on hydraulic fracturing in November 2014, though it was later lifted in 2015, and New York issued a statewide ban on hydraulic fracturing in June 2015. In addition, Pennsylvania's Act 13 of 2012 became law on February 14, 2012 and amended the state's Oil and Gas Act to, among other things, increase civil penalties and strengthen the Pennsylvania Department of Environmental Protection's (PaDEP) authority over the issuance of drilling permits. Although the Pennsylvania Supreme Court struck down portions of Act 13 that made statewide rules on oil and gas preempt local zoning rules, this could lead to additional local restrictions on oil and gas activity in the state. Additional challenges to Act 13 are pending before the Pennsylvania Supreme Court; however, the timing of any decision is uncertain.

We use a significant amount of water in our hydraulic fracturing operations. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our operations, could adversely impact our operations. Moreover, new environmental initiatives and regulations could include restrictions on our ability to



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conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development or production of natural gas. Compliance with environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells may increase our operating costs and cause delays, interruptions or termination of our operations, the extent of which cannot be predicted, all of which could have an adverse effect on our operations and financial condition. For example, in April 2011, PaDEP called on all Marcellus Shale natural gas drilling operators to voluntarily cease by May 19, 2011 delivering wastewater to those centralized treatment facilities that were grandfathered from the application of PaDEP's Total Dissolved Solids regulations. In April 2015, the EPA published proposed pretreatment standards for disposal of wastewater produced from shale gas operations to publicly owned treatment works (POTWs). The regulations will be developed under the EPA's Effluent Guidelines Program under the authority of the Clean Water Act. In response to these actions, operators including us have begun to rely more on recycling of flowback and produced water from well sites as a preferred alternative to disposal.

A number of federal agencies are analyzing, or have been requested to review, a variety of environmental issues associated with hydraulic fracturing practices. The EPA is conducting a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. The EPA released a draft report in June 2015. It concluded that activities have not led to widespread systematic impacts on drinking water resources in the United States, but there are above and below ground mechanisms by which hydraulic fracturing could affect drinking water resources. This study and other studies that may be undertaken by EPA or other federal agencies could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act, the Toxic Substances Control Act, or other statutory and/or regulatory mechanisms.

Climate change and climate change legislation and regulatory initiatives could result in increased operating costs and decreased demand for the oil and natural gas that we produce.

Climate change, the costs that may be associated with its effects, and the regulation of greenhouse gas (GHG) emissions have the potential to affect our business in many ways, including increasing the costs to provide our products and services, reducing the demand for and consumption of our products and services (due to change in both costs and weather patterns), and the economic health of the regions in which we operate, all of which can create financial risks. In addition, legislative and regulatory responses related to GHG emissions and climate change may increase our operating costs. The United States Congress has previously considered legislation related to GHG emissions. There have also been international efforts seeking legally binding reductions in GHG emissions. For example, in November 2014, the Obama Administration announced an agreement with China to voluntarily reduce GHG emissions by 26% to 28% of 2005 levels by 2025. Further, the United States joined over 190 countries in Lima, Peru in December 2014 and agreed to draft an emissions reduction plan ahead of further international climate negotiations in Paris, France in 2015. The United States was actively involved in the negotiations in Paris, which led to the creation of the Paris Agreement. The Paris Agreement will be open for signing on April 22, 2016 and will require countries to review and “represent a progression” in their intended nationally determined contributions, which set emissions reduction goals, every five years, beginning in 2020. The Paris Agreement sets a goal of keeping warming well below 2 degrees Celsius and sets a target limit of 1.5 degrees Celsius. In addition, increased public awareness and concern may result in more state, regional and/or federal requirements to reduce or mitigate GHG emissions. For example, in June 2013, the Obama Administration announced its Climate Action Plan, which, among other things, directs federal agencies to develop a strategy for the reduction of methane emissions, including emissions from the oil and gas sector. Pursuant to this plan, the EPA issued a proposed rule updating New Source Performance Standards and setting requirements for methane emissions and volatile organic compounds in the oil and gas sector in September 2015.

In September 2009, the EPA finalized a mandatory GHG reporting rule that requires large sources of GHG emissions to monitor, maintain records on, and annually report their GHG emissions beginning January 1, 2010. The rule applies to large facilities emitting 25,000 metrics or more of carbon dioxide-equivalent (CO \( _{2} \) e)



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emissions per year and to most upstream suppliers of fossil fuels, as well as manufacturers of vehicles and engines. Subsequently, in November 2010, the EPA issued GHG monitoring and reporting regulations that went into effect on December 30, 2010, specifically for oil and natural gas facilities, including onshore and offshore oil and natural gas production facilities that emit 25,000 metric tons or more of CO \( _2 \)  per year. The rule required reporting of GHG emissions by regulated facilities to the EPA by March 2012 for emissions during 2011 and annually thereafter. We are required to report our GHG emissions to the EPA each year in March under this rule and have submitted our annual reports in compliance with the deadline. The EPA also issued a final rule that makes certain stationary sources and newer modification projects subject to permitting requirements for GHG emissions, beginning in 2011, under the CAA. However, in June 2014, the U.S. Supreme Court, in UARG v. EPA, limited the application of the GHG permitting requirements under the Prevention of Significant Deterioration and Title V permitting programs to sources that would otherwise need permits based on the emission of conventional pollutants.

Federal and state regulatory agencies can impose administrative, civil and/or criminal penalties for non-compliance with air permits or other requirements of the CAA and associated state laws and regulations. In addition, the passage of any federal or state climate change laws or regulations in the future could result in increased costs to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any GHG emissions program. If we are unable to recover or pass through a significant level of our costs related to complying with climate change regulatory requirements imposed on us, it could have a material adverse effect on our results of operations and financial condition. To the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively impact our cost of and access to capital. Legislation or regulations that may be adopted to address climate change could also affect the markets for our products by making our products more or less desirable than competing sources of energy.

Moreover, some experts believe climate change poses potential physical risks, including an increase in sea level and changes in weather conditions, such as an increase in changes in precipitation and extreme weather events. In addition, warmer winters as a result of global warming could also decrease demand for natural gas. To the extent that such unfavorable weather conditions are exacerbated by global climate change or otherwise, our operations may be adversely affected to a greater degree than we have previously experienced, including increased delays and costs. However, the uncertain nature of changes in extreme weather events (such as increased frequency, duration, and severity) and the long period of time over which any changes would take place make any estimations of future financial risk to our operations caused by these potential physical risks of climate change unreliable.

## We have limited control over the activities on properties we do not operate.

Other companies operate some of the properties in which we have an interest. We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them. The failure of an operator of our wells to adequately perform operations, an operator's breach of the applicable agreements or an operator's failure to act in ways that are in our best interest could reduce our production and revenues. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.

## Terrorist activities and the potential for military and other actions could adversely affect our business.

The threat of terrorism and the impact of military and other action have caused instability in world financial markets and could lead to increased volatility in prices for natural gas and oil, all of which could adversely affect the markets for our operations. Future acts of terrorism could be directed against companies operating in the United States. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of terrorist organizations. These developments have subjected our operations to increased risk and, depending on their ultimate magnitude, could have a material adverse effect on our business.



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Our ability to sell our natural gas and oil production could be materially harmed if we fail to obtain adequate services such as transportation and processing.

The sale of our natural gas and oil production depends on a number of factors beyond our control, including the availability and capacity of transportation and processing facilities. Our failure to obtain these services on acceptable terms could materially harm our business.

Competition in our industry is intense, and many of our competitors have substantially greater financial and technological resources than we do, which could adversely affect our competitive position.

Competition in the natural gas and oil industry is intense. Major and independent natural gas and oil companies actively bid for desirable natural gas and oil properties, as well as for the equipment and labor required to operate and develop these properties. Our competitive position is affected by price, contract terms and quality of service, including pipeline connection times, distribution efficiencies and reliable delivery record. Many of our competitors have financial and technological resources and exploration and development budgets that are substantially greater than ours. These companies may be able to pay more for exploratory projects and productive natural gas and oil properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry.

We may have hedging arrangements that expose us to risk of financial loss and limit the benefit to us of increases in prices for natural gas and oil.

From time to time, when we believe that market conditions are favorable, we use certain derivative financial instruments to manage price risks associated with our production in all of our regions. These hedging arrangements limit the benefit to us of increases in prices. While there are many different types of derivatives available, we generally utilize collar and swap agreements to attempt to manage price risk more effectively.

The collar arrangements are put and call options used to establish floor and ceiling prices for a fixed volume of production during a certain time period. They provide for payments to counterparties if the index price exceeds the ceiling and payments from the counterparties if the index price falls below the floor. The swap agreements call for payments to, or receipts from, counterparties based on whether the index price for the period is greater or less than the fixed price established for that period when the swap is put in place. These arrangements limit the benefit to us of increases in prices. In addition, these arrangements expose us to risks of financial loss in a variety of circumstances, including when:

• a counterparty is unable to satisfy its obligations

• production is less than expected; or

• there is an adverse change in the expected differential between the underlying price in the derivative instrument and actual prices received for our production.

The CFTC has promulgated regulations to implement statutory requirements for swap transactions. These regulations are intended to implement a regulated market in which most swaps are executed on registered exchanges or swap execution facilities and cleared through central counterparties. While we believe that our use of swap transactions exempt us from certain regulatory requirements, the changes to the swap market due to increased regulation could significantly increase the cost of entering into new swaps or maintaining existing swaps, materially alter the terms of new or existing swap transactions and/or reduce the availability of new or existing swaps. If we reduce our use of swaps as a result of the Dodd-Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable.



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## The loss of key personnel could adversely affect our ability to operate.

Our operations are dependent upon a relatively small group of key management and technical personnel, and one or more of these individuals could leave our employment. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on us. In addition, our drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced geologists, engineers and other professionals. Competition for experienced geologists, engineers and some other professionals is intense. If we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed.

## We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of doing business.

Our operations are subject to extensive federal, state and local laws and regulations, including tax laws and regulations and those relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. These laws and regulations can adversely affect the cost, manner or feasibility of doing business. Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both. These laws and regulations have increased the costs of planning, designing, drilling, installing and operating natural gas and oil facilities. In addition, we may be liable for environmental damages caused by previous owners of property we purchase or lease. Risks of substantial costs and liabilities related to environmental compliance issues are inherent in natural gas and oil operations. It is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from natural gas and oil production, would result in substantial costs and liabilities.

## The Company’s business could be negatively affected by security threats, including cybersecurity threats, and other disruptions.

As an oil and gas producer, the Company faces various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of the Company’s facilities and infrastructure or third party facilities and infrastructure, such as processing plants and pipelines; and threats from terrorist acts. The potential for such security threats has subjected the Company’s operations to increased risks that could have a material adverse effect on the Company’s business. In particular, the Company’s implementation of various procedures and controls to monitor and mitigate security threats and to increase security for the Company’s information, facilities and infrastructure may result in increased capital and operating costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to the Company’s operations and could have a material adverse effect on the Company’s reputation, financial position, results of operations or cash flows. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data. These events could damage the Company’s reputation and lead to financial losses from remedial actions, loss of business or potential liability.

## Item 1B. UNRESOLVED STAFF COMMENTS.

We are a smaller reporting company and therefore no response is required pursuant to this Item.

## Item 2. PROPERTIES.

Our executive offices as well as offices of Prime Operating Company, Eastern Oil Well Service Company, EOWS Midland Company and Prime Offshore LLC., are located in leased premises in Houston, Texas.



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We maintain district offices in Midland, Texas, Oklahoma City, Oklahoma and Charleston, West Virginia, and have field offices in Carrizo Springs and Midland, Texas, Elmore City, Oklahoma and Orma, West Virginia.

Substantially all of our oil and gas properties are subject to a mortgage given to collateralize indebtedness or are subject to being mortgaged upon request by our lenders for additional collateral.

The information set forth below concerning our properties, activities, and oil and gas reserves include our interests in affiliated entities.

The following table sets forth the exploratory and development drilling experience with respect to wells in which we participated during the three years ended December 31, 2016.

<table><tr><td rowspan="2">Exploratory:</td><td colspan="2">2016</td><td colspan="2">2015</td><td colspan="2">2014</td></tr><tr><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td></tr><tr><td>Oil</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Gas</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Dry</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Development:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Oil</td><td>27</td><td>3.6</td><td>8</td><td>3.6</td><td>25</td><td>11.79</td><td></td></tr><tr><td>Gas</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Dry</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td>Total:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Oil</td><td>27</td><td>3.6</td><td>8</td><td>3.6</td><td>25</td><td>11.79</td><td></td></tr><tr><td>Gas</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td></tr><tr><td>Dry</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td></td><td></td></tr><tr><td></td><td>27</td><td>3.6</td><td>8</td><td>3.6</td><td>25</td><td>11.79</td><td></td></tr></table>

## Oil and Gas Production

As of December 31, 2016, we had ownership interests in the following numbers of gross and net producing oil and gas wells (1).

<table><tr><td></td><td>Gross</td><td>Net</td></tr><tr><td>Producing wells(1):</td><td></td><td></td></tr><tr><td>Oil Wells</td><td>853</td><td>392</td></tr><tr><td>Gas Wells</td><td>775</td><td>460</td></tr></table>

(1) A gross well is a well in which a working interest is owned. A net well is the sum of the fractional revenue interests owned in gross wells. Wells are classified by their primary product. Some wells produce both oil and gas.

The following table shows our net production of oil and natural gas for each of the three years ended December 31, 2016. "Net" production is net after royalty interests of others are deducted and is determined by multiplying the gross production volume of properties in which we have an interest by percentage of the leasehold, mineral or royalty interest owned by us.

<table><tr><td></td><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Oil (barrels)</td><td>670,000</td><td>720,000</td><td>759,000</td></tr><tr><td>Gas (Mcf)</td><td>4,546,000</td><td>4,696,000</td><td>4,741,000</td></tr></table>



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The following table sets forth our average sales price per barrel of oil and average sales prices per one thousand cubic feet ("Mcf") of gas, together with our average production costs per unit of production for the three years ended December 31, 2016.

<table><tr><td></td><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Average sales price per barrel</td><td>$ 39.73</td><td>$ 70.93</td><td>$ 86.68</td></tr><tr><td>Average sales price per Mcf</td><td>2.57</td><td>3.35</td><td>5.15</td></tr><tr><td>Average production costs per net equivalent barrel(1)</td><td>18.21</td><td>21.24</td><td>25.51</td></tr></table>

(1) Net equivalent barrels are computed at a rate of 6 Mcf per barrel and costs exclude production taxes.

Average oil and gas prices received excluding the impact of derivatives were:

<table><tr><td></td><td>2016</td><td>2015</td><td>2014</td></tr><tr><td>Oil Price per barrel</td><td>$ 39.78</td><td>$ 45.74</td><td>$ 86.73</td></tr><tr><td>Gas Price per Mcf</td><td>2.56</td><td>2.71</td><td>5.32</td></tr></table>

## Acreage

The following table sets forth the approximate gross and net undeveloped acreage in which we have leasehold and mineral interests as of December 31, 2016. “Undeveloped acreage” is that acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.

<table><tr><td rowspan="2"></td><td colspan="3">Developed</td><td colspan="3">Undeveloped</td><td colspan="3">Total</td></tr><tr><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td><td></td></tr><tr><td>Leasehold acreage</td><td>187,579</td><td>82,908</td><td>3,016</td><td>252</td><td>190,596</td><td>83,159</td><td></td><td></td><td></td></tr><tr><td>Mineral fee acreage</td><td>1,640</td><td>117</td><td>19,257</td><td>417</td><td>20,897</td><td>534</td><td></td><td></td><td></td></tr><tr><td>Total</td><td>189,219</td><td>83,025</td><td>22,273</td><td>669</td><td>211,493</td><td>83,693</td><td></td><td></td><td></td></tr></table>

## Total Net Undeveloped Acreage Expiration

In the event that production is not established or we take no action to extend or renew the terms of our leases, our net undeveloped acreage that will expire over the next three years, as of December 31, 2016, is 35 acres for the year ending December 31, 2017, none in 2018, and 58 acres in 2019.

## Reserves

Our interests, including the interests held by the Partnerships, in proved developed and undeveloped oil and gas properties have been evaluated by Ryder Scott Company, L.P. for each of the three years ended December 31, 2016. The professional qualifications of the technical persons primarily responsible for overseeing the preparation of the reserves estimates can be found in Exhibit 99.1, the Ryder Scott Company, L.P. Report on Registrant's Reserves Estimates. In matters related to the preparation of our reserve estimates, our district managers report to the Engineering Data manager, who maintains oversight and compliance responsibility for the internal reserve estimate process and provides oversight for the annual preparation of reserve estimates of 100% of our year-end reserves by our independent third party engineers, Ryder Scott Company, L.P. The members of our district and central groups consist of degreed engineers, geologists and geophysicists and technicians with between approximately ten and thirty-five years of industry experience, and between three and twenty years of experience managing our reserves. Our Engineering Data manager, the technical person primarily responsible for overseeing the preparation of reserves estimates, has over twenty-five years of experience, holds a Bachelor degree in Geology and an MBA in finance and is a member of the Society of Petroleum Engineers and American Association of Petroleum Geologists. See Part II, Item 8. "Financial Statements and Supplementary Data", for additional discussions regarding proved reserves and their related cash flows.



All of our reserves are located within the continental United States. The following table summarizes our oil and gas reserves at each of the respective dates:

<table><tr><td rowspan="3">As of December 31,</td><td colspan="12">Reserve Category</td></tr><tr><td colspan="4">Proved Developed</td><td colspan="4">Proved Undeveloped</td><td colspan="4">Total</td></tr><tr><td>Oil (MBbls)</td><td>NGLs (MBbls)</td><td>Gas (MMcf)</td><td>Total (MBle)</td><td>Oil (MBbls)</td><td>NGLs (MBbls)</td><td>Gas (MMcf)</td><td>Total (MBle)</td><td>Oil (MBbls)</td><td>NGLs (MBbls)</td><td>Gas (MMcf)</td><td>Total (MBle)</td></tr><tr><td>2014</td><td>6,239</td><td>2,160</td><td>32,267</td><td>13,777</td><td>14,709</td><td>4,322</td><td>26,331</td><td>23,420</td><td>20,948</td><td>6,482</td><td>58,958</td><td>37,197</td></tr><tr><td>2015</td><td>4,579</td><td>1,673</td><td>23,275</td><td>10,131</td><td>52</td><td>12</td><td>55</td><td>73</td><td>4,631</td><td>1,685</td><td>23,330</td><td>10,204</td></tr><tr><td>2016</td><td>3,107</td><td>1,265</td><td>13,001</td><td>6,539</td><td>643</td><td>159</td><td>2,003</td><td>1,135</td><td>3,750</td><td>1,424</td><td>15,004</td><td>7,674</td></tr></table>

(a) In computing total reserves on a barrels of oil equivalent (Boe), gas is converted to oil based on its relative energy content at the rate of six Mcf of gas to one barrel of oil and NGLs are converted based upon volume; one barrel of natural gas liquids equals one barrel of oil.

Proved undeveloped reserves of 23,420 MBoe as of December 31, 2014 included 126 drilling locations in our West Texas drilling program, 10 drilling locations in our Mid-Continent region and 3 drilling locations in our Gulf Coast region. During 2015 we converted 997 MBoe to proved developed producing reserves at a cost of $7.9 million. For our December 31, 2015 reserve report we had removed all but one PUD location, due to the uncertainty of near term commodity prices and available capital for drilling expenditure. This PUD location, part of our West Texas horizontal drilling program, had net proved undeveloped reserves of 73 MBoe, as of December 31, 2015 and was drilled in the first quarter of 2016.

During 2016 five horizontal wells were drilled in West Texas, two in Oklahoma, and one vertical well was drilled onshore Texas Gulf Coast. In addition, we had an increase in reserves from over-riding royalty interest in 14 horizontal wells drilled in Oklahoma by other operators. In total, these projects added 924 MBoe to proved developed producing reserves at a cost of $20.8 million. Included in our December 31, 2016, reserve report are 20 PUD locations, 19 of these being horizontal, and many of these were drilled and cased by year-end, but had not yet been stimulated. Proved undeveloped reserves of 1,135 MBoe are attributable to these 20 wells. As of March 31, 2017, all 20 wells are drilled and cased, seven of these are completed and on production, three are in the process of being hydraulically fracture stimulated and ten are expected to be stimulated within the second quarter of 2017. In addition, the Company is actively participating in ten horizontal wells in West Texas that are in the process of being drilled or completed. The estimated 88ths cost of these ten wells will be approximately $70 Million, of which the Company's share will be about $23 Million. Future development plans have been established based on an expectation of available cash flows from operations and availability of funds under our revolving credit facility.

We employ technologies to establish proved reserves that have been demonstrated to provide consistent results capable of repetition. The technologies and economic data being used in the estimation of our proved reserves include, but are not limited to, electrical logs, radioactivity logs, geologic maps, production data and well test data. The estimated reserves of wells with sufficient production history are estimated using appropriate decline curves. Estimated reserves of producing wells with limited production history and for undeveloped locations are estimated using performance data from analogous wells in the area. These wells are considered analogous based on production performance from the same formation and with similar completion techniques.



## Table of Contents

The estimated future net revenue (using current prices and costs as of those dates) and the present value of future net revenue (at a 10% discount for estimated timing of cash flow) for our proved developed and proved undeveloped oil and gas reserves at the end of each of the three years ended December 31, 2016, are summarized as follows (in thousands of dollars):

<table><tr><td rowspan="2"></td><td colspan="3">Proved Developed</td><td colspan="3">Proved Undeveloped</td><td colspan="4">Total</td></tr><tr><td>Future Net Revenue</td><td>Present Value 10 Of Future Net Revenue</td><td>Future Net Revenue</td><td>Present Value 10 Of Future Net Revenue</td><td>Future Net Revenue</td><td>Future Net Revenue</td><td>Present Value 10 Of Future Net Revenue</td><td>Present Value 10 Of Future Net Taxes</td><td>Standardized Measure of Discounted Cash flow</td><td></td></tr><tr><td>As of December 31,</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2014</td><td>$ 295,554</td><td>$ 185,566</td><td>$ 864,024</td><td>$ 312,073</td><td>$ 1,159,578</td><td>$ 497,639</td><td>$ 154,351</td><td>$ 343,288</td><td></td><td></td></tr><tr><td>2015</td><td>$ 70,834</td><td>$ 60,962</td><td>$ 1,098</td><td>$ 233</td><td>$ 71,932</td><td>$ 61,195</td><td>$ 2,393</td><td>$ 58,802</td><td></td><td></td></tr><tr><td>2016</td><td>$ 56,467</td><td>$ 46,827</td><td>$ 18,114</td><td>$ 10,403</td><td>$ 74,581</td><td>$ 57,230</td><td>$ 4,993</td><td>$ 52,237</td><td></td><td></td></tr></table>

The PV 10 Value represents the discounted future net cash flows attributable to our proved oil and gas reserves before income tax, discounted at 10%. Although this measure is not in accordance with U.S. generally accepted accounting principles ("GAAP"), we believe that the presentation of the PV 10 Value is relevant and useful to investors because it presents the discounted future net cash flow attributable to proved reserves prior to taking into account corporate future income taxes and the current tax structure. We use this measure when assessing the potential return on investment related to oil and gas properties. The PV 10 of future income taxes represents the sole reconciling item between this non-GAAP PV 10 Value versus the GAAP measure presented in the standardized measure of discounted cash flow. A reconciliation of these values is presented in the last three columns of the table above. The standardized measure of discounted future net cash flows represents the present value of future cash flows attributable to proved oil and natural gas reserves after income tax, discounted at 10%.

“Proved developed” oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. “Proved undeveloped” oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Our reserves include amounts attributable to non-controlling interests in the Partnerships. These interests represent less than 10% of our reserves.

In accordance with U.S. generally accepted accounting principles, product prices are determined using the twelve-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month, adjusted for oilfield or gas gathering hub and wellhead price differentials (e.g. grade, transportation, gravity, sulfur, and basic sediment and water) as appropriate. Also in accordance with SEC specifications and U.S. generally accepted accounting principles, changes in market prices subsequent to December 31 are not considered.

While it may reasonably be anticipated that the prices received for the sale of our production may be higher or lower than the prices used in this evaluation, as described above, and the operating costs relating to such production may also increase or decrease from existing levels, such possible changes in prices and costs were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation for the SEC case. Actual volumes produced, prices received and costs incurred may vary significantly from the SEC case.

Natural gas prices, based on the twelve-month average of the first of the month Henry Hub index price, were $2.49 per MMBtu in 2016 as compared to $2.59 per MMBtu in 2015. Oil prices, based on the NYMEX monthly average price, were $43.29 per barrel in 2016 as compared to $48.66 per barrel in 2015.

Since January 1, 2017, we have not filed any estimates of our oil and gas reserves with, nor were any such estimates included in any reports to, any federal authority or agency, other than the Securities and Exchange Commission.



## Table of Contents

## District Information

The following table presents certain reserve, production and well information as of December 31, 2016.

<table><tr><td></td><td>Appalachian</td><td>Gulf Coast</td><td>Mid-Continent</td><td>West Texas</td><td>Other</td><td>Total</td></tr><tr><td>Proved Reserves at Year End (MBoe)</td><td>193</td><td>766</td><td>1,280</td><td>4,244</td><td>57</td><td>6,540</td></tr><tr><td>Developed</td><td>—</td><td>—</td><td>289</td><td>846</td><td>—</td><td>1,135</td></tr><tr><td>Undeveloped</td><td>193</td><td>766</td><td>1,569</td><td>5,090</td><td>57</td><td>7,675</td></tr><tr><td>Total</td><td>279</td><td>486</td><td>1,089</td><td>1,882</td><td>50</td><td>3,786</td></tr><tr><td>Average Daily Production (Boe per day)</td><td>632</td><td>291</td><td>585</td><td>514</td><td>97</td><td>2,119</td></tr><tr><td>Gross Wells</td><td>387</td><td>134</td><td>246</td><td>175</td><td>17</td><td>959</td></tr><tr><td>Net Wells</td><td>477</td><td>254</td><td>359</td><td>366</td><td>57</td><td>1,513</td></tr><tr><td>Gross Operated Wells</td><td>477</td><td>254</td><td>359</td><td>366</td><td>57</td><td>1</td></tr></table>

In several of our regions we operate field service groups to service our operated wells and locations as well as third party operators in the area. These services consist of well service support, site preparation and construction services for drilling and workover operations. Our operations are performed utilizing workover or swab rigs, water transport trucks, saltwater disposal facilities, various land excavating equipment and trucks we own and that are operated by our field employees.

## Appalachian Region

Our Appalachian activities are concentrated primarily in West Virginia. This region is managed from our office in Charleston, West Virginia. Our assets in this region include a large acreage position and a high concentration of wells. At December 31, 2016, we had 632 wells (387 net), of which 477 wells are operated. There are multiple producing intervals that include the Big Lime, Injun, Blue Monday, Weir, Berea, Gordon and Devonian Shale formations at depths primarily ranging from 1,600 to 5,600 feet. Average net daily production in 2016 was 279 Boe. While natural gas production volumes from Appalachian reservoirs are relatively low on a per-well basis compared to other areas of the United States, the productive life of Appalachian reserves is relatively long. At December 31, 2016, we had 193 MBoe of proved reserves (substantially all natural gas) in the Appalachian region, constituting 3% of our total proved reserves. We maintain an acreage position of over 40,200 gross (33,400 net) acres in this region, primarily in Calhoun, Clay and Roane counties. We operate a small field service group in this region utilizing one swab rig, one paraffin truck, one saltwater hauling truck and limited excavating equipment to primarily service our own operated wells and locations. As of March 31, 2017 the Appalachian region has no wells in the process of being drilled, no waterfloods in the process of being installed and no other related activities of material importance.

## Gulf Coast Region

Our development, exploitation, exploration and production activities in the Gulf Coast region are primarily concentrated in southeast Texas. This region is managed from our office in Houston, Texas. Principal producing intervals are in the Marg Tex, Wilcox, Pettit, Glenrose, Woodbine, San Miguel, Olmos, and Yegua formations at depths ranging from 3,000 to 12,500 feet. We had 291 wells (134 net) in the Gulf Coast region as of December 31, 2016, of which 254 wells are operated by us. Average daily production in 2016 was 486 Boe. At December 31, 2016, we had 766 MBoe of proved reserves in the Gulf Coast region, which represented 10% of our total proved reserves. We maintain an acreage position of over 20,000 gross (9,500 net) acres in this region, primarily in Dimmit, Duval and Polk counties. We operate a field service group in this region from a field office in Carrizo Springs, Texas utilizing 3 workover rigs, 18 water transport trucks, two saltwater disposal well and several trucks and excavating equipment. Services including well service support, site preparation and construction services for drilling and workover operations are provided to third party operators as well as utilized in our own operated wells and locations. As of March 31, 2017 the Gulf Coast region has no operated wells in the process of being drilled, no waterfloods in the process of being installed and no other related activities of material importance.



## Table of Contents

## Mid-Continent Region

Our Mid-Continent activities are concentrated in central Oklahoma. This region is managed from our office in Oklahoma City, Oklahoma. As of December 31, 2016, we had 585 wells (246 net) in the Mid-Continent area, of which 359 wells are operated by us. Principal producing intervals are in the Roberson, Avant, Skinner, Sycamore, Bromide, McLish, Hunton, Mississippi, Oswego, Red Fork, and Chester formations at depths ranging from 1,100 to 10,500 feet. Average net daily production in 2016 was 1,089 Boe. At December 31, 2016, we had 1569 MBoE of proved reserves in the Mid-Continent area, or 20% of our total proved reserves. We maintain an acreage position of over 86,000 gross (29,000 net) acres in this region, primarily in Canadian, Kingfisher, Grant and Garvin counties. We operate a field service group in this region from a field office in Elmore City, utilizing one workover rig and 1 saltwater hauling truck. Our Mid-Continent region is actively participating with third party operators in the horizontal development of lands that include Company owned interest in several counties in the Stack and Scoop plays of Oklahoma where drilling is primarily targeting reservoirs of the Mississippi, Woodford, and Hunton formations. As of March 31, 2017, the Mid-Continent region has participated in the drilling and completion of two wells included as Proved Undeveloped at year-end. In addition, the Company is currently participating, with 11.8% working interest, in the drilling of a horizontal well operated by Marathon Corporation in Kingfisher County targeting a Mississippi interval.

## West Texas Region

Our West Texas activities are concentrated in the Permian Basin in Texas and New Mexico. The Spraberry field was discovered in 1949, encompasses eight counties in West Texas and the Company believes it is the largest oil field in the United States. The field is approximately 150 miles long and 75 miles wide at its widest point. The oil produced is West Texas Intermediate Sweet, and the gas produced is casing-head gas with an average energy content of 1,400 Btu. The oil and gas are produced primarily from six formations; the upper and lower Spraberry, the Dean, the Wolfcamp, the Strawn and the Atoka, at depths ranging from 6,700 feet to 11,300 feet. This region is managed from our office in Midland, Texas. As of December 31, 2016, we had 514 wells (175 net) in the West Texas area, of which 366 wells are operated by us. Principal producing intervals are in the Spraberry, Wolfcamp and San Andres formations at depths ranging from 5,500 to 12,500 feet. Average net daily production in 2016 was 1,882BoE. At December 31, 2016, we had 5090 MBoE of proved reserves in the West Texas area, or 66% of our total proved reserves. We maintain an acreage position of over 19,600 gross (11,860 net) acres in the Permian Basin in West Texas, primarily in Reagan, Upton, Martin and Midland counties and believe this acreage has significant resource potential for horizontal drilling in the Spraberry and Wolfcamp intervals. We operate a field service group in this region utilizing 8 workover rigs, 4 hot oiler trucks and 1 kill truck. Services including well service support, site preparation and construction services for drilling and workover operations are provided to third party operators as well as utilized in our own operated wells and locations. At December 31, 2016 the Company had identified and committed to participate in 18 Proved Undeveloped horizontal drilling locations. As of March 31, 2017 all 18 of these wells have been drilled and are either on production or are in the process of being fracture stimulated. In addition, the Company is currently participating for 38.25% working interest in the drilling of six horizontal wells operated by Apache that are targeting the Wolfcamp Formation.

## Item 3. LEGAL PROCEEDINGS.

None.

## Item 4. MINESAFETY DISCLOSURES.

Not applicable.



## PART II

## Item 5.

## MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is listed and principally traded on the NASDAQ Stock Market under the ticker symbol "PNRG". The following table presents the high and low prices per share of our common stock during certain periods, as reported in the consolidated transaction reporting system.

<table><tr><td></td><td>High</td><td>Low</td></tr><tr><td>2016</td><td></td><td></td></tr><tr><td>First Quarter</td><td>$ 52.00</td><td>$ 33.39</td></tr><tr><td>Second Quarter</td><td>63.00</td><td>27.50</td></tr><tr><td>Third Quarter</td><td>61.00</td><td>48.01</td></tr><tr><td>Fourth Quarter</td><td>58.99</td><td>43.25</td></tr><tr><td>2015</td><td></td><td></td></tr><tr><td>First Quarter</td><td>$ 73.00</td><td>$ 52.01</td></tr><tr><td>Second Quarter</td><td>59.80</td><td>50.01</td></tr><tr><td>Third Quarter</td><td>77.00</td><td>50.79</td></tr><tr><td>Fourth Quarter</td><td>72.53</td><td>45.31</td></tr></table>

The above quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.

As of March 31, 2017, there were 453 registered holders of the common stock.

No dividends have been declared or paid during the past two years on our common stock. Provisions of our line of credit agreement restrict our ability to pay dividends. Such dividends may be declared out of funds legally available therefore, when and as declared by our Board of Directors.



## Table of Contents

## Issuer Purchases of Equity Securities

In December 1993, we announced that the Board of Directors authorized a stock repurchase program whereby we may purchase outstanding shares of the common stock from time-to-time, in open market transactions or negotiated sales. On October 31, 2012, the Board of Directors of the Company approved an additional 500,000 shares of the Company's stock to be included in the stock repurchase program. A total of 3,500,000 shares have been authorized, to date, under this program. Through December 31, 2016, a total of 3,262,953 shares have been repurchased under this program for $5,129,650 at an average price of $16.90 per share. Additional purchases of shares may occur as market conditions warrant. We expect future purchases will be funded with internally generated cash flow or from working capital.

<table><tr><td></td><td>Number of Shares</td><td>Average Price Paid per share</td><td>Maximum Number of Shares that May Yet Be Purchased Under The Program at Month-End</td></tr><tr><td>2016 Month</td><td>10,070</td><td>47.96</td><td>248,158</td></tr><tr><td>January</td><td>—</td><td>—</td><td>248,158</td></tr><tr><td>February</td><td>61</td><td>34.72</td><td>248,097</td></tr><tr><td>March</td><td>143</td><td>32.03</td><td>247,954</td></tr><tr><td>April</td><td>446</td><td>42.42</td><td>247,508</td></tr><tr><td>May</td><td>—</td><td>—</td><td>247,508</td></tr><tr><td>June</td><td>—</td><td>—</td><td>247,508</td></tr><tr><td>July</td><td>—</td><td>—</td><td>247,508</td></tr><tr><td>August</td><td>—</td><td>—</td><td>247,508</td></tr><tr><td>September</td><td>—</td><td>—</td><td>247,508</td></tr><tr><td>October</td><td>99</td><td>57.57</td><td>247,409</td></tr><tr><td>November</td><td>83</td><td>49.71</td><td>247,326</td></tr><tr><td>December</td><td>10,279</td><td>55.90</td><td>237,047</td></tr><tr><td>Total / Average</td><td>21,181</td><td>51.60</td><td></td></tr></table>

## Item 6. SELECTED FINANCIAL DATA

We are a smaller reporting company and therefore no response is required pursuant to this Item.

## Item 7.

## MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements included elsewhere in this Report contains additional information that should be referred to when reviewing this material. Our subsidiaries are listed in Note 1 to the Consolidated Financial Statements.

## Overview:

We are an independent oil and natural gas company engaged in acquiring, developing and producing oil and natural gas. We presently own producing and non-producing properties located primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado and Louisiana. In addition, we own a substantial amount of well servicing equipment. All of our oil and gas properties and interests are located in the United States. Assets in our principal focus areas include mature properties with long-lived reserves and significant development opportunities as well as newer properties with development and exploration potential. We believe our balanced portfolio of assets and our ongoing hedging program position us well for both the current commodity price environment and future potential upside as we develop our attractive resource opportunities. Our primary sources of liquidity are cash generated from our operations and our credit facility.



## Table of Contents

We attempt to assume the position of operator in all acquisitions of producing properties and will continue to evaluate prospects for leasehold acquisitions and for exploration and development operations in areas in which we own interests. We continue to actively pursue the acquisition of producing properties. In order to diversify and broaden our asset base, we will consider acquiring the assets or stock in other entities and companies in the oil and gas business. Our main objective in making any such acquisitions will be to acquire income producing assets so as to build stockholder value through consistent growth in our oil and gas reserve base on a cost-efficient basis.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of any increases in oil and gas prices above the maximum fixed amount specified in the derivative agreements and subjects us to the credit risk of the counterparties to such agreements. Since all of our derivative contracts are accounted for under mark-to-market accounting, we expect continued volatility in gains and losses on mark-to-market derivative contracts in our consolidated statement of operations as changes occur in the NYMEX price indices.

## Market Conditions and Commodity Prices:

Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. In addition, our realized prices are further impacted by our derivative and hedging activities. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital program, production volumes or revenues. Location differentials have increased in certain regions, such as in the Appalachian region, resulting in further declines in natural gas prices. We expect natural gas and crude oil prices to remain volatile. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success.

## Critical Accounting Estimates:

## Proved Oil and Gas Reserves

Proved oil and gas reserves directly impact financial accounting estimates, including depreciation, depletion and amortization. Proved reserves represent estimated quantities of natural gas, crude oil, condensate, and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.

## Depreciation, Depletion and Amortization for Oil and Gas Properties

The quantities of estimated proved oil and gas reserves are a significant component of our calculation of depletion expense and revisions in such estimates may alter the rate of future expense. Holding all other factors constant, if reserves were revised upward or downward, earnings would increase or decrease respectively. Depreciation, depletion and amortization of the cost of proved oil and gas properties are calculated using the



## Table of Contents

unit-of-production method. The reserve base used to calculate depletion, depreciation or amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition costs and the cost to acquire proved properties. The reserve base includes only proved developed reserves for lease and well equipment costs, which include development costs and successful exploration drilling costs. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are taken into account.

## Liquidity and Capital Resources:

Our primary sources of liquidity are cash generated from our operations, through our producing oil and gas properties, field services business and sales of acreage.

Net cash provided by operating activities for the year ended December 31, 2016 was $11.0 million, compared to $21 million in the prior year. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control.

Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of derivatives.

If our exploratory drilling results in significant new discoveries, we will have to expend additional capital in order to finance the completion, development, and potential additional opportunities generated by our success. We believe that, because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years, we will be able to access sufficient additional capital through bank financing.

Maintaining a strong balance sheet and ample liquidity are key components of our business strategy. For 2017, we will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry. Our 2017 capital budget is reflective of decreased commodity prices and has been established based on an expectation of available cash flows, with any cash flow deficiencies expected to be funded by borrowings under our revolving credit facility. As we have done historically to preserve or enhance liquidity we may adjust our capital program throughout the year, divest assets, or enter into strategic joint ventures. We are actively in discussions with financial partners for funding to develop our asset base and, if required, pay down our revolving credit facility should our borrowing base become limited due to the deterioration of commodity prices.

On February 15, 2017, the Company and its lenders entered into a Third Amended and Restated Credit Agreement with a maturity date of February 15, 2021, providing for a credit facility totaling $300 million, with a borrowing base of $75 million. As of March 31, 2017 the Company has $24.8 million in outstanding borrowings and $40.2 million in availability under this facility. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves. The next borrowing base review is scheduled for June 2017. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement. We are currently in compliance with these covenants and expect to be in compliance over the next twelve months. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable. Our borrowing base may decrease as a result of lower natural gas or oil prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for other reasons set forth in our revolving credit agreement. In the event of a decrease in our borrowing base due to declines in commodity prices or otherwise, our ability to borrow under our revolving credit facility may be limited and we could be required to repay any indebtedness in excess of the redetermined borrowing base.



## Table of Contents

Our credit agreement required us to hedge a portion of our production as forecasted for the PDP reserves included in our borrowing base review engineering reports. Accordingly the Company has in place the following swap agreements for oil and natural gas.

<table><tr><td rowspan="2"></td><td rowspan="2">Year</td><td colspan="2">Monthly Hedge Volumes</td><td colspan="2">Price</td></tr><tr><td>BBLs</td><td>MMBTU</td><td>BBLs</td><td>MMBTU</td></tr><tr><td>January through December</td><td>2017</td><td>14,300</td><td>235,000</td><td>$50.10</td><td>$ 3.11</td></tr><tr><td>January through December</td><td>2018</td><td>11,900</td><td>200,000</td><td>$52.02</td><td>$ 2.97</td></tr><tr><td>January through March</td><td>2019</td><td>12,500</td><td>130,000</td><td>$50.75</td><td>$ 3.12</td></tr></table>

In accordance with SEC rules governing the scheduling of the drilling of PUD reserves we have only included in our year-end reserve report, the 18 PUD locations for which we have an AFE and a definitive plan to drill. As described below, additional capital expenditures are expected in both our West Texas and Oklahoma regions.

Our West Texas horizontal drilling program began in 2015 with the drilling of two wells. Through December 31, 2016 we have drilled and completed eight wells. Development is continuing and we are currently participating in an additional 19 horizontal wells in this program. As of March 31, 2017, these wells are in various stages of being drilled, completed, have been placed on production, or are waiting on hydraulic fracture stimulation. We anticipate the drilling of an additional 13 wells in 2017, although AFEs and specific plans for drilling have not been received. Although the actual count may vary, this additional activity brings the anticipated total to 32 horizontal wells drilled in 2017 in our West Texas horizontal drilling program. In addition, the Company is participating for less than 1% interest in 13 other horizontal wells.

In Upton County, Texas, we are developing a contiguous 3,900 acre block with our joint venture partner, Apache Corporation, where the Company holds approximately 48% interest in 2,606 gross acres. Through year-end 2016 six wells had been drilled and completed. In the first quarter of 2017 an additional eight wells have been spud and are in various stages of being drilled or completed. Apache Corporation has indicated their plans to PAD drill the acreage and that future phases of the development will result in approximately 60 horizontal wells being drilled at a cost of about $470 million. We own various interests ranging from 14% to 49% in the lands to be developed in this project and expect our share of these capital expenditures to be approximately $120 million. The actual number of wells to be drilled and the timing of the drilling may vary based on commodity market conditions. Apache drilling plans indicate an additional nine wells will be drilled later this year at a cost of $60 million, of which our share is approximately $19 million. These wells meet the definition of proved undeveloped reserves, however, they were not included in our year-end reserve report because we had not yet received AFEs and formal drilling plans. Also in Upton County, the Company is participating for 4% interest with Apache in the development of a 640 acre block where six wells, that were spud in 2016, have been completed and are on production as of March 31, 2017. These wells were included in our year end reserve report as Proved Undeveloped Reserves.

In 2016 we commenced our Martin County, Texas horizontal drilling program with the drilling of two wells that began production in July, 2016. These wells were drilled on a 960 acre block that the Company is developing with RSP Permian. An additional two wells were spud in the fourth quarter of 2016 and as of March 31, 2017, they are both producing. These two wells were included as PUDs in our year-end reserve report with the Company owning 35% to 38% interest. RSP Permian drilling plans indicate an additional two wells will be drilled in 2017, however, these were not included in the reserves report, as AFEs for these have not yet been received.

The Company maintains an acreage position of 21,166 gross (13,021 net) acres in the Permian Basin in West Texas, primarily in Reagan, Upton, Midland and Martin counties. We believe this acreage has significant resource potential in multiple Spraberry and Wolfcamp intervals that support the potential drilling of as many as 250 additional wells.



## Table of Contents

Our Oklahoma horizontal development program, which began in 2012, has participated in 24 horizontal wells for approximately $23 million through the first quarter of 2017. Over this same time period the Company choose to retain an over-riding royalty interest in 21 other horizontal wells. Presently the Company is participating with 17.6% interest in a horizontal well in Canadian County operated by Devon Energy and with 11.8% interest in a horizontal well in Kingfisher County operated by Marathon Oil Company. Our share of these two wells will be approximately $2.2 Million. We have also elected to retain an ORRI in two additional horizontal wells currently being drilled in Garfield and Canadian counties. In addition, we are currently participating for 50% interest in a vertical well in Garvin County with an expected cost, net to PrimeEnergy, of $1.3 Million. As of March 31, 2017, all five wells have been spud and are either drilling, in the process of being completed and production tested, or are waiting on hydraulic fracture stimulation. The horizontal activity on company acreage is primarily focused in Canadian, Garvin, Grady and Kingfisher counties where we have approximately 2,295 net acres. We believe our acreage has significant additional resource potential that could support the drilling of 78 new horizontal wells based on an estimate of only two wells per section with our share of the capital expenditure being about $42 Million at an average 10.5% ownership level.

In 2016, the limited partners of the Company managed drilling funds, located in West Virginia, voted to terminate the partnerships, sell the wells to the Company and retain their proportionate share of the leases previously held by those partnerships. These leases may potentially see future development should the horizontal shale plays of the Appalachian Basin expand into these areas.

To supplement cash flow and finance our drilling program we have sold or farmed out certain acreage in exchange for cash and a royalty or working interest in both West Texas and Oklahoma. During 2016 proceeds under these agreements were approximately $34.4 million and during the first quarter of 2017 we have closed on transactions for an additional $46.9 million.

As of March 2017, the Company has $6.3 million outstanding on our equipment financing facilities which are secured by substantially all of our field service equipment. The majority of our capital spending is discretionary, and the ultimate level of expenditures will be dependent on our assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.

The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Spending under these programs in 2016 was $1.3 million. The Company expects continued spending under these programs in 2017.

## Results of Operations:

## 2016 and 2015 Compared

We reported net income for 2016 of $3.3 million, or $1.50 per share, compared to a net loss for 2015 of $12.8 million, or $5.53 per share. Gains related to the sale of acreage during 2016 combined with reductions in expenses offset declines oil and gas sales compared to 2015. The significant components of net income are discussed below.

Oil and gas sales decreased $7.3 million, or 16.0% to $38.3 million for the year ended December 31, 2016 from $45.6 million for the year ended December 31, 2015. Crude oil and natural gas sales vary due to changes in volumes of production sold and realized commodity prices. Our realized prices at the well head decreased an average of $5.96 per barrel, or 13% on crude oil and decreased $0.15 per Mcf, or 5.5% on natural gas during 2016 as compared to 2015.

Our crude oil production decreased by 50,000 barrels, or 6.9% from 720,000 barrels for the year ended December 31, 2015 to 670,000 barrels for the year ended December 31, 2016. Our natural gas production



## Table of Contents

decreased by 150 MMcf, or 3.23% from 4,696 MMcf for the year ended December 31, 2015 to 4,546 MMcf for the year ended December 31, 2016. The decrease in crude oil and natural gas production volumes are a result of the natural decline of existing properties offset by our continued drilling success in the West Texas and Oklahoma regions as we place new wells into production.

The following table summarizes the primary components of production volumes and average sales prices realized for the years ended December 31, 2016 and 2015 (excluding realized gains and losses from derivatives).

<table><tr><td rowspan="2"></td><td colspan="2">Year Ended December 31,</td><td colspan="2">Increase (Decrease)</td></tr><tr><td>2016</td><td>2015</td><td>Amount</td><td>Percent</td></tr><tr><td>Barrels of Oil Produced</td><td>670,000</td><td>720,000</td><td>(50,000)</td><td>-6.9%</td></tr><tr><td>Average Price Received (excluding the impact of derivatives)</td><td>$ 39.78</td><td>$ 45.74</td><td>$ (5.96)</td><td>-13.0%</td></tr><tr><td>Oil Revenue (In 000&#x27;s)</td><td>$ 26,655</td><td>$ 32,923</td><td>$ (6,305)</td><td>19.2%</td></tr><tr><td>Mcf of Gas Produced</td><td>4,546,000</td><td>4,696,000</td><td>(150,000)</td><td>-3.2%</td></tr><tr><td>Average Price Received (excluding the impact of derivatives)</td><td>$ 2.56</td><td>$ 2.71</td><td>$ (0.15)</td><td>-5.5%</td></tr><tr><td>Gas Revenue (In 000&#x27;s)</td><td>$ 11,651</td><td>$ 12,709</td><td>$ (1,037)</td><td>-8.2%</td></tr><tr><td>Total Oil &amp; Gas Revenue (In 000&#x27;s)</td><td>$ 38,306</td><td>$ 45,632</td><td>$ (7,342)</td><td>-16.1%</td></tr></table>

Realized net gains (losses) on derivative instruments, net include net losses of $0.04 million and net gains of $0.02 million on the settlements of crude oil and natural gas derivatives, respectively for the year ended December 31, 2016. This item included net gains of $18.1 million and $3.0 million on the settlements of crude oil and natural gas derivatives, respectively for the year ended December 31, 2015.

Oil and gas prices received including the impact of derivatives were:

<table><tr><td rowspan="2"></td><td colspan="2">Year Ended December 31,</td><td colspan="2">Increase (Decrease)</td></tr><tr><td>2016</td><td>2015</td><td>Amount</td><td>Percent</td></tr><tr><td>Oil Price</td><td>$ 39.73</td><td>$ 70.93</td><td>$ (31.20)</td><td>(44.0)%</td></tr><tr><td>Gas Price</td><td>$ 2.57</td><td>$ 3.35</td><td>$ (0.15)</td><td>(23.4)%</td></tr></table>

We do not apply hedge accounting to any of our commodity based derivatives thus changes in the fair market value of commodity contracts held at the end of a reported period, referred to as mark-to-market adjustments, are recognized as unrealized gains and losses in the accompanying consolidated statements of operations. As oil and natural gas prices remain volatile, mark-to-market accounting treatment creates volatility in our revenues. During the year ended December 31, 2016 we recognized net unrealized losses of $1.7 million associated with crude oil fixed swaps and $1.9 million associated with natural gas fixed swap contracts due to market fluctuations in natural gas and crude oil futures market prices between July 2016 and December 31, 2016. During the year ended December 31, 2015, we recognized net unrealized losses of $14.6 million associated with crude oil fixed swaps and collars and $2.3 million associated with natural gas fixed swap contracts due to market fluctuations in natural gas and crude oil futures market prices between January 1, 2015 and December 31, 2015.

Field service income decreased $5.5 million, or 26.3% from $20.9 million for the year ended December 31, 2015 to $15.4 million for the year ended December 31, 2016. We reduced rates on our workover rig and hot oiler services during 2016 in response to the reduced commodity prices. This decrease was offset by increases in our SWD income related to increased utilization of the pipeline and capacity upgrades added during 2015 and 2016.

Lease operating expense decreased $7.7 million, or 21.9% from $35.2 million for the year ended December 31, 2015 to $27.5 million for the year ended December 31, 2016. This decrease was largely due to cost reductions from suppliers and improved operational efficiencies.



## Table of Contents

Field service expense decreased $5.1 million, or 29.0% from $17.6 million for the year ended December 31, 2015 to $12.5 million for the year ended December 31, 2016. Field service expenses primarily consist of salaries and vehicle operating expenses which have been reduced during 2016 in response to falling rates and utilization of our equipment services.

Depreciation, depletion, amortization and accretion on discounted liabilities remained relatively flat decreasing $1.4 million, or 4.4% from $31.6 million for the year ended December 31, 2015 to $30.2 million for the year ended December 31, 2016. The DD&A expense is primarily attributable to our properties in West Texas and Oklahoma.

General and administrative expense decreased $4.5 million, or 36.6% from $12.3 million for the year ended December 31, 2015 to $7.8 million for the year ended December 31, 2016 related to reductions in personnel costs, including salaries and employee related taxes and insurance.

Gain on sale and exchange of assets of $32.4 million for the year ended December 31, 2016 and $1.4 million for the year ended December 31, 2015 consists of sales of non-producing acreage and oil and gas interests and non-essential field service equipment.

Interest expense decreased $0.1 million, or 2.8% from $3.6 million for the year ended December 31, 2015 to $3.5 million for the year ended December 31, 2016. This decrease relates to a decrease in average debt outstanding during 2016 as compared to 2015 combined with an increase in weighted average interest rates during the 2016 periods. The average interest rate paid on outstanding bank borrowings subject to interest during 2016 and 2015 were 3.93% and 3.44%, respectively. As of December 31, 2016 and 2015, the total outstanding borrowings were $69.2 million and $95.6 million, respectively.

A tax provision of $2.1 million, or an effective rate of 38% was recorded for the year ended December 31, 2016, versus a tax benefit of $6.65 million, or an effective rate of 34% for the year ended December 31, 2015. The tax rate was higher in 2016 primarily due to higher income in Oklahoma, which has a 6% corporate tax rate, as opposed to Texas whose rate is less than 1%, along with the settlement of an IRS audit for the year 2014.

## Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company and therefore no response is required pursuant to this Item.

## Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements and supplementary information included in this Report are described in the Index to Consolidated Financial Statements at Page F-1 of this Report.

## Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

## Item 9A. CONTROLS AND PROCEDURES.

As of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have evaluated the effectiveness of our "disclosure controls and procedures" ("Disclosure Controls"). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange



## Table of Contents

Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the chief executive officer and chief financial officer, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Members of our management, including our chief executive officer and chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of December 31, 2016, the end of the period covered by this Report. Based upon that evaluation, these officers concluded that our disclosure controls and procedures were effective as of December 31, 2016.

## Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2016.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.



## Table of Contents

There have been no changes in our internal controls over financial reporting during the fourth fiscal quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

## Item 9B. OTHER INFORMATION.

None.



## PART III

## Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information relating to the Company’s Directors, nominees for Directors and executive officers will be included in the Company’s definitive proxy statement relating the Company’s Annual Meeting of Stockholders to be held in June, 2017 which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2016, and which is incorporated herein by reference.

## Item 11. EXECUTIVE COMPENSATION.

Information relating to executive compensation will be included in the Company’s definitive proxy statement relating to the Company’s Annual Meeting of Stockholders to be held in June, 2017, which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2016, and which is incorporated herein by reference.

## Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information relating to security ownership of certain beneficial owners and management will be included in the Company’s definitive proxy statement relating to the Company’s Annual Meeting of Stockholders to be held in June, 2017, which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2016, and which is incorporated herein by reference.

## Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information relating to certain transactions by Directors and executive officers of the Company will be included in the Company’s definitive proxy statement relating to the Company’s Annual Meeting of Stockholders to be held in June, 2017, which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2016, and which is incorporated herein by reference.

## Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information relating to principal accountant fees and services will be included in the Company’s definitive proxy statement relating to the Company’s Annual Meeting of Stockholders to be held in June, 2017, which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2016, and which is incorporated herein by reference.



## PART IV

## Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following documents are filed as part of this Report:

1. Financial statements (Index to Consolidated Financial Statements at page F-1 of this Report)

2. Financial Statement Schedules (Index to Consolidated Financial Statements – Supplementary Information at page F-1 of this Report)

3. Exhibits:

## Exhibit No.

3.1 Restated Certificate of Incorporation of PrimeEnergy Corporation (effective July 1, 2009) (Incorporated by reference to Exhibit 3.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009).

3.2 Bylaws of PrimeEnergy Corporation as amended and restated as of May 20, 2015 (filed as Exhibit 3.2 of PrimeEnergy Corporation Form 8-K on May 21, 2015 and incorporated herein by reference).

10.18 Composite copy of Non-Statutory Option Agreements (Incorporated by reference to Exhibit 10.18 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004).

10.22.5.10 Third Amended and Restated Credit Agreement dated as of February 15, 2017 among PrimeEnergy Corporation, as Borrower, Compass Bank, as Administrative Agent and Lender, Wells Fargo, National Association, as Document Agent, the Lenders Party Hereto (Compass Bank, Wells Fargo, National Association, Citibank, N.A.) and BBVA Compass Bank, as Letter of Credit Issuer and Sole Lead Arranger and Sole Bookrunner (filed herewith).

10.22.5.11 Amended, Restated and Consolidated Guaranty dated as of February 15, 2017, among PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Prime Offshore L.L.C. in favor of Compass Bank, as Administrative Agent for the Lenders (filed herewith).

10.22.5.12 Amended, Restated and Consolidated Pledge and Security Agreement dated as of February 15, 2017, among PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Prime Offshore L.L.C. and Compass Bank, as Administrative Agent for the Secured Parties (filed herewith).

10.23.1 Loan and Security Agreement dated July 31, 2013, by and between JP Morgan Chase Bank, N.A. and Eastern Oil Well Service Company, EOWS Midland Company and Southwest Oilfield Construction Company (Incorporated by reference to Exhibit 10.23.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2013).

10.23.2 Business Purpose Promissory Note dated July 31, 2013, made by Eastern Oil Well Service Company, EOWS Midland Company and Southwest Oilfield Construction Company to JP Morgan Chase Bank N.A. (Incorporated by reference to Exhibit 10.23.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2013).

10.23.3 Guaranty dated July 31, 2013, made by PrimeEnergy Corporation in favor of JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.23.3 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2013).



## Table of Contents

Exhibit No.
10.23.4 Agreement of Equipment Substitution dated January 15, 2014, by and between JP Morgan Chase Bank, N.A. and Eastern Oil Well Service Company, EOWS Midland Company and Southwest Oilfield Construction Company (Incorporated by reference to Exhibit 10.23.4 to PrimeEnergy Corporation Form 10-Q for the quarter ended March 31, 2014).
10.24.1 Loan and Security Agreement dated July 29, 2014, by and between JP Morgan Chase Bank, N.A. and Eastern Oil Well Service Company, EOWS Midland Company and Southwest Oilfield Construction Company (Incorporated by reference to Exhibit 10.24.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2014).
10.24.2 Business Purpose Promissory Note dated July 29, 2014, made by Eastern Oil Well Service Company, EOWS Midland Company and Southwest Oilfield Construction Company to JP Morgan Chase Bank N.A. (Incorporated by reference to Exhibit 10.24.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2014).
10.24.3 Guaranty dated July 29, 2014, made by PrimeEnergy Corporation in favor of JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.24.3 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2014).
10.25 Purchase and Sale Agreement dated as of January 25, 2017, among PrimeEnergy Corporation, PrimeEnergy Management Corporation, PrimeEnergy Operating Company, PrimeEnergy Asset and Income Fund, L.P. A-2, PrimeEnergy Asset and Income Fund, L.P. A-3, PrimeEnergy Asset and Income Fund, L.P. AA-2, and PrimeEnergy Asset and Income Fund, L.P. AA-4, as Sellers and Guidon Operating LLC, as Purchaser (filed herewith).
14 PrimeEnergy Corporation Code of Business Conduct and Ethics, as amended December 16, 2011 (Incorporated by reference to Exhibit 14 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2011).
21 Subsidiaries (filed herewith).
23 Consent of Ryder Scott Company, L.P. (filed herewith).
31.1 Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.1 Summary Reserve Report dated March 20, 2016, of Ryder Scott Company, L.P. (filed herewith).
101.INS XBRL (eXtensible Business Reporting Language) Instance Document (filed herewith)
101.SCH XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of April, 2017.

PrimeEnergy Corporation

By: /S/ CHARLESE. DRIMAL, JR.

Charles E. Drimal, Jr.

Chairman, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the 17th day of April, 2017.

/s/ CHARLESE. DRIMAL, JR.

Charles E. Drimal, Jr.

/s/ BEVERLY A. CUMMINGS

Beverly A. Cummings

/S/ GAINES WEHRLE

Gaines Wehrle

/s/ H. GIFFORD FONG

H. Gifford Fong

/s/ THOMAS S.T. GIMBEL

Thomas S.T. Gimbel

/s/ THOMAS S.T. GIMBEL

Director

Director

Director

Chairman, Chief Executive Officer and President; The Principal Executive Officer

Director, Executive Vice President and Treasurer; The Principal Financial Officer

/s/ CLINT HURT

Clint Hurt

/s/ JAN K. SMEETS

Jan K. Smeets

Director



## INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2
Financial Statements
Consolidated Balance Sheet – As of December 31, 2016 and 2015 F-3
Consolidated Statement of Operations – For the years ended December 31, 2016 and 2015 F-4
Consolidated Statement of Comprehensive Income – For the years ended December 31, 2016 and 2015 F-5
Consolidated Statement of Equity – For the years ended December 31, 2016 and 2015 F-6
Consolidated Statement of Cash Flows – For the years ended December 31, 2016 and 2015 F-7
Notes to Consolidated Financial Statements F-8
Supplementary Information:
Capitalized Costs Relating to Oil and Gas Producing Activities, years ended December 31, 2016 and 2015 F-22
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities, years ended December 31, 2016 and 2015 F-22
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves, years ended December 31, 2016 and 2015 F-22
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves, years ended December 31, 2016 and 2015 F-23
Reserve Quantity Information, years ended December 31, 2016 and 2015 F-24
Results of Operations from Oil and Gas Producing Activities, years ended December 31, 2016 and 2015 F-24
Notes to Supplementary Information F-25



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of PrimeEnergy Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheets of PrimeEnergy Corporation and Subsidiaries (the Company) as of December 31, 2016 and 2015, and related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years then ended. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PrimeEnergy Corporation and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Hassid Co, CPAs, P.C.

GRASSI & CO., CPAs, P.C.

New York, New York
April 17, 2017



## PRIMENERGY CORPORATION AND SUBSIDIARIES

## CONSOLIDATED BALANCE SHEET
(Thousands of dollars)

<table><tr><td rowspan="2"></td><td colspan="2">As of December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Current Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 6,568</td><td>$ 9,750</td></tr><tr><td>Restricted cash and cash equivalents</td><td>3,543</td><td>3,513</td></tr><tr><td>Accounts receivable, net</td><td>7,400</td><td>9,543</td></tr><tr><td>Prepaid obligations</td><td>412</td><td>619</td></tr><tr><td>Other current assets</td><td>160</td><td>196</td></tr><tr><td>Total Current Assets</td><td>18,083</td><td>23,621</td></tr><tr><td>Property and Equipment</td><td></td><td></td></tr><tr><td>Oil and gas properties at cost</td><td>417,821</td><td>395,129</td></tr><tr><td>Less: Accumulated depletion and depreciation</td><td>(230,331)</td><td>(204,213)</td></tr><tr><td></td><td>187,490</td><td>190,916</td></tr><tr><td>Field and office equipment at cost</td><td>26,902</td><td>27,919</td></tr><tr><td>Less: Accumulated depreciation</td><td>(18,024)</td><td>(16,824)</td></tr><tr><td></td><td>8,878</td><td>11,095</td></tr><tr><td>Total Property and Equipment, Net</td><td>196,368</td><td>202,011</td></tr><tr><td>Other Assets</td><td>203</td><td>629</td></tr><tr><td>Total Assets</td><td>$ 214,654</td><td>$ 226,261</td></tr><tr><td>LIABILITIES AND EQUITY</td><td></td><td></td></tr><tr><td>Current Liabilities</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 11,965</td><td>$ 12,355</td></tr><tr><td>Accrued liabilities</td><td>8,184</td><td>6,122</td></tr><tr><td>Current portion of long-term debt</td><td>2,949</td><td>3,059</td></tr><tr><td>Current portion of asset retirement and other long-term obligations</td><td>1,563</td><td>1,435</td></tr><tr><td>Derivative liability short-term</td><td>2,547</td><td>7</td></tr><tr><td>Total Current Liabilities</td><td>27,208</td><td>22,978</td></tr><tr><td>Long-Term Bank Debt</td><td>66,316</td><td>92,581</td></tr><tr><td>Asset Retirement Obligations</td><td>15,943</td><td>10,452</td></tr><tr><td>Derivative Liability Long-Term</td><td>1,092</td><td>—</td></tr><tr><td>Deferred Income Taxes</td><td>37,500</td><td>37,349</td></tr><tr><td>Other Long-Term Obligations</td><td>715</td><td>—</td></tr><tr><td>Total Liabilities</td><td>148,774</td><td>163,360</td></tr><tr><td>Commitments and Contingencies</td><td></td><td></td></tr><tr><td>Equity</td><td></td><td></td></tr><tr><td>Common stock, \(.10 par value; 2016 and 2015: Authorized: 4,000,000 shares, issued: 3,836,397 shares; outstanding 2016: 2,283,503 shares; 2015: 2,304,684 shares</td><td>383</td><td>383</td></tr><tr><td>Paid-in capital</td><td>8,313</td><td>7,854</td></tr><tr><td>Retained earnings</td><td>96,322</td><td>92,878</td></tr><tr><td>Accumulated other comprehensive loss, net</td><td>—</td><td>(5)</td></tr><tr><td>Treasury stock, at cost; 2016: 1,542,894; 2015: 1,531,713 shares</td><td>(46,473)</td><td>(45,380)</td></tr><tr><td>Total Stockholders&#x27; Equity - PrimeEnergy</td><td>58,545</td><td>55,730</td></tr><tr><td>Non-controlling interest</td><td>7,335</td><td>7,171</td></tr><tr><td>Total Equity</td><td>65,880</td><td>62,901</td></tr><tr><td>Total Liabilities and Equity</td><td>$ 214,654</td><td>$ 226,261</td></tr></table>

The accompanying Notes are an integral part of these Consolidated Financial Statements



## PRIMENERGY CORPORATION AND SUBSIDIARIES

## CONSOLIDATED STATEMENT OF OPERATIONS
(Thousands of dollars, except per share amounts)

<table><tr><td rowspan="2"></td><td colspan="2">For the Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Revenues</td><td></td><td></td></tr><tr><td>Oil and gas sales</td><td>$ 38,306</td><td>$ 45,632</td></tr><tr><td>Realized (loss) gain on derivative instruments, net</td><td>(16)</td><td>21,151</td></tr><tr><td>Field service income</td><td>15,432</td><td>20,879</td></tr><tr><td>Administrative overhead fees</td><td>6,567</td><td>8,287</td></tr><tr><td>Unrealized (loss) gain on derivative instruments</td><td>(3,582)</td><td>(16,901)</td></tr><tr><td>Other income</td><td>59</td><td>58</td></tr><tr><td>Total Revenues</td><td>56,766</td><td>79,106</td></tr><tr><td>Costs and Expenses</td><td></td><td></td></tr><tr><td>Lease operating expense</td><td>27,544</td><td>35,206</td></tr><tr><td>Field service expense</td><td>12,549</td><td>17,641</td></tr><tr><td>Depreciation, depletion, amortization and accretion on discounted liabilities</td><td>30,174</td><td>31,551</td></tr><tr><td>General and administrative expense</td><td>7,849</td><td>12,267</td></tr><tr><td>Total Costs and Expenses</td><td>78,116</td><td>96,665</td></tr><tr><td>Gain on Sale and Exchange of Assets</td><td>32,378</td><td>1,386</td></tr><tr><td>Income (Loss) from Operations</td><td>11,028</td><td>(16,173)</td></tr><tr><td>Other Income and Expenses</td><td></td><td></td></tr><tr><td>Less: Interest expense</td><td>3,507</td><td>3,627</td></tr><tr><td>Add: Interest income</td><td>1</td><td>2</td></tr><tr><td>Income (Loss) Before Provision (Benefit) for Income Taxes</td><td>7,522</td><td>(19,798)</td></tr><tr><td>Provision (Benefit) for Income Taxes</td><td>2,100</td><td>(6,648)</td></tr><tr><td>Net Income (Loss)</td><td>5,422</td><td>(13,150)</td></tr><tr><td>Less: Net Income (Loss) Attributable to Non-Controlling Interest</td><td>1,978</td><td>(366)</td></tr><tr><td>Net Income (Loss) Attributable to PrimeEnergy</td><td>$ 3,444</td><td>$ (12,784)</td></tr><tr><td>Basic Income (Loss) Per Common Share</td><td>$ 1.50</td><td>$ (5.53)</td></tr><tr><td>Diluted Income (Loss) Per Common Share</td><td>$ 1.13</td><td>$ (5.53)</td></tr></table>



## PRIMENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Thousands of dollars)

<table><tr><td rowspan="2"></td><td colspan="2">For the Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Net Income (Loss)</td><td>$ 5,422</td><td>$ (13,150)</td></tr><tr><td>Other Comprehensive Income, net of taxes:</td><td></td><td></td></tr><tr><td>Changes in fair value of hedge positions, net of taxes of $(2) and $(50), respectively</td><td>5</td><td>87</td></tr><tr><td>Total other comprehensive income</td><td>5</td><td>87</td></tr><tr><td>Comprehensive income (loss)</td><td>5,427</td><td>(13,063)</td></tr><tr><td>Less: Comprehensive income (loss) attributable to non-controlling interest</td><td>1,978</td><td>(366)</td></tr><tr><td>Comprehensive Income (loss) attributable to PrimeEnergy</td><td>$ 3,449</td><td>$ (12,697)</td></tr></table>



## PRIMENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY

(Thousands of dollars)

<table><tr><td rowspan="2"></td><td colspan="2">Common Stock</td><td rowspan="2">Additional Paid-In Capital</td><td rowspan="2">Retained Earnings</td><td rowspan="2">Accumulated Other Comprehensive Income (Loss)</td><td rowspan="2">Treasury Stock</td><td rowspan="2">Total Stockholders&#x27; Equity - Prime Energy</td><td rowspan="2">Non-Controlling Interest</td><td rowspan="2">Total Equity</td></tr><tr><td>Shares</td><td>Amount</td></tr><tr><td>Balance at December 31, 2014</td><td>3,836,397</td><td>$ 383</td><td>$ 7,186</td><td>$ 105,662</td><td>$ (92)</td><td>$ (43,527)</td><td>$ 69,612</td><td>$ 8,648</td><td>$ 78,260</td></tr><tr><td>Purchase 28,720 shares of common stock</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(1,853)</td><td>(1,853)</td><td>—</td><td>(1,853)</td></tr><tr><td>Net loss</td><td>—</td><td>—</td><td>—</td><td>(12,784)</td><td>—</td><td>—</td><td>(12,784)</td><td>(366)</td><td>(13,150)</td></tr><tr><td>Other comprehensive income, net of taxes</td><td>—</td><td>—</td><td>—</td><td>—</td><td>87</td><td>—</td><td>87</td><td>—</td><td>87</td></tr><tr><td>Purchase of non-controlling interest</td><td>—</td><td>—</td><td>668</td><td>—</td><td>—</td><td>—</td><td>668</td><td>(1,077)</td><td>(409)</td></tr><tr><td>Distributions to non-controlling interest</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(34)</td><td>(34)</td></tr><tr><td>Balance at December 31, 2015</td><td>3,836,397</td><td>$ 383</td><td>$ 7,854</td><td>$ 92,878</td><td>$ (5)</td><td>$ (45,380)</td><td>$ 55,730</td><td>$ 7,171</td><td>$ 62,901</td></tr><tr><td>Purchase 21,181 shares of common stock</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(1,093)</td><td>(1,093)</td><td>—</td><td>(1,093)</td></tr><tr><td>Net income</td><td>—</td><td>—</td><td>—</td><td>3,444</td><td>—</td><td>—</td><td>3,444</td><td>1,978</td><td>5,422</td></tr><tr><td>Other comprehensive income, net of taxes</td><td>—</td><td>—</td><td>—</td><td>—</td><td>5</td><td>—</td><td>5</td><td>—</td><td>5</td></tr><tr><td>Purchase of non-controlling interest</td><td>—</td><td>—</td><td>459</td><td>—</td><td>—</td><td>—</td><td>459</td><td>(683)</td><td>(224)</td></tr><tr><td>Distributions to non-controlling interest</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td><td>(1,131)</td><td>(1,131)</td></tr><tr><td>Balance at December 31, 2016</td><td>3,836,397</td><td>$ 383</td><td>$ 8,313</td><td>$ 96,322</td><td>$ —</td><td>$ (46,473)</td><td>$ 58,545</td><td>$ 7,335</td><td>$ 65,880</td></tr></table>



## PRIMENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)

<table><tr><td rowspan="2"></td><td colspan="2">For the Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Cash Flows from Operating Activities:</td><td></td><td></td></tr><tr><td>Net Income (loss)</td><td>$ 5,422</td><td>$ (13,150)</td></tr><tr><td>Adjustments to reconcile net income (loss) to net cash provided by operating activities:</td><td></td><td></td></tr><tr><td>Depreciation, depletion, amortization and accretion on discounted liabilities</td><td>30,174</td><td>31,551</td></tr><tr><td>Gain on sale of properties</td><td>(32,378)</td><td>(1,386)</td></tr><tr><td>Unrealized loss on derivative instruments</td><td>3,582</td><td>16,856</td></tr><tr><td>Provision for deferred income taxes</td><td>147</td><td>(6,389)</td></tr><tr><td>Changes in assets and liabilities:</td><td></td><td></td></tr><tr><td>Decrease in accounts receivable</td><td>2,143</td><td>2,769</td></tr><tr><td>Increase (Decrease) in due from related parties</td><td>(25)</td><td>308</td></tr><tr><td>Decrease in inventories</td><td>61</td><td>64</td></tr><tr><td>Decrease in prepaid expenses and other assets</td><td>207</td><td>410</td></tr><tr><td>Decrease in accounts payable</td><td>(390)</td><td>(3,539)</td></tr><tr><td>Increase (Decrease) in accrued liabilities</td><td>2,062</td><td>(6,280)</td></tr><tr><td>Net Cash Provided by Operating Activities</td><td>11,005</td><td>21,214</td></tr><tr><td>Cash Flows from Investing Activities:</td><td></td><td></td></tr><tr><td>Capital expenditures, including exploration expense</td><td>(20,843)</td><td>(14,550)</td></tr><tr><td>Proceeds from sale of properties and equipment</td><td>35,226</td><td>1,926</td></tr><tr><td>Net Cash Provided by (Used in) Investing Activities</td><td>14,383</td><td>(12,624)</td></tr><tr><td>Cash Flows from Financing Activities:</td><td></td><td></td></tr><tr><td>Purchase of stock for treasury</td><td>(1,093)</td><td>(1,853)</td></tr><tr><td>Purchase of non-controlling interests</td><td>(224)</td><td>(409)</td></tr><tr><td>Increase in long-term bank debt and other long-term obligations</td><td>13,500</td><td>27,700</td></tr><tr><td>Repayment of long-term bank debt and other long-term obligations</td><td>(39,910)</td><td>(33,453)</td></tr><tr><td>Distribution to non-controlling interest</td><td>(843)</td><td>(34)</td></tr><tr><td>Net Cash Used in Financing Activities</td><td>(28,570)</td><td>(8,049)</td></tr><tr><td>Net Decrease (Increase) in Cash and Cash Equivalents</td><td>(3,182)</td><td>541</td></tr><tr><td>Cash and Cash Equivalents at the Beginning of the Year</td><td>9,750</td><td>9,209</td></tr><tr><td>Cash and Cash Equivalents at the End of the Year</td><td>$ 6,568</td><td>$ 9,750</td></tr><tr><td>Supplemental Disclosures:</td><td></td><td></td></tr><tr><td>Income taxes paid during the year</td><td>$ 120</td><td>$ 410</td></tr><tr><td>Interest paid during the year</td><td>$ 3,476</td><td>$ 3,695</td></tr></table>



# PRIMENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

## 1. Description of Operations and Significant Accounting Policies

## Nature of Operations:

PrimeEnergy Corporation (“PEC”), a Delaware corporation, was organized in March 1973 and is engaged in the development, acquisition and production of oil and natural gas properties. PrimeEnergy Corporation and its subsidiaries are herein referred to as the “Company.” The Company owns leasehold, mineral and royalty interests in producing and non-producing oil and gas properties across the United States, including Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia and Wyoming and the Gulf of Mexico. The Company operates over 1,200 active wells and owns non-operating interests in approximately 400 additional wells. Additionally, the Company provides well-servicing support operations, site-preparation and construction services for oil and gas drilling and reworking operations, both in connection with the Company’s activities and providing contract services for third parties. The Company is publicly traded on the NASDAQ under the symbol “PNRG.” PEC owns Eastern Oil Well Service Company (“EOWSC”), EOWS Midland Company (“EMID”) and Southwest Oilfield Construction Company (“SOCC”), all of which perform oil and gas field servicing. PEC also owns Prime Operating Company (“POC”), which serves as operator for most of the producing oil and gas properties owned by the Company and affiliated entities. PEC also owns Prime Offshore L.L.C. (“Prime Offshore”), formerly F-W Oil Exploration LLC, which has owned and operated properties in the Gulf of Mexico. PrimeEnergy Management Corporation (“PEMC”), a wholly-owned subsidiary, acts as the managing general partner, providing administration, accounting and tax preparation services for 7 limited partnerships and 2 trusts (collectively, the “Partnerships”). The markets for the Company’s products are highly competitive, as oil and gas are commodity products and prices depend upon numerous factors beyond the control of the Company, such as economic, political and regulatory developments and competition from alternative energy sources.

## Consolidation and Presentation:

The consolidated financial statements include the accounts of PrimeEnergy Corporation, its subsidiaries and the Partnerships, using the full consolidation method for those partnerships which are controlled by the Company. The proportionate consolidation method is used to account for those undivided interests in oil and gas properties owned by the Company as well as interests held in unincorporated legal entities, such as partnerships, engaged in oil and gas production, which are not controlled by the Company. For those entities which are proportionately consolidated, the proportionate share of each entity’s assets, liabilities, revenue and expenses is included in the appropriate classifications in the consolidated financial statements. Reserve estimates associated with the proportionately consolidated oil and gas interests are calculated for each property at the Partnership level, and depletion, depreciation and amortization (“DD&A”) rates are determined at the Partnership level. The Company’s reserve estimates are based on the ownership percentage of Partnership reserve reports. DD&A expense and evaluation of impairment may differ from the Partnership as the Company’s cost basis for the Partnership interests acquired may be different than the cost basis at the Partnership level for properties acquired by the Partnership. All significant intercompany balances and transactions are eliminated in preparing the consolidated financial statements.

## Reclassifications:

Certain reclassifications have been made to prior year statements to conform with the current year presentation. These reclassifications have no impact on net income and no material impact on any other financial statement captions.



## Table of Contents

## Subsequent Events:

Subsequent events have been evaluated through the date that the consolidated financial statements were issued. During this period, there were no material subsequent items requiring disclosure other than as stated in footnote 1 and 4 to these financial statements.

## Use of Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Estimates of oil and gas reserves, as determined by independent petroleum engineers, are continually subject to revision based on price, production history and other factors. Depletion expense, which is computed based on the units of production method, could be significantly impacted by changes in such estimates. Additionally, U.S. generally accepted accounting principles require that if the expected future undiscounted cash flows from an asset are less than its carrying cost, that asset must be written down to its fair market value. As the fair market value of an oil and gas property will usually be significantly less than the total undiscounted future net revenues expected from that asset, slight changes in the estimates used to determine future net revenues from an asset could lead to the necessity of recording a significant impairment of that asset.

## Property and Equipment:

The Company follows the “successful efforts” method of accounting for its oil and gas properties. Under the successful efforts method, costs of acquiring undeveloped oil and gas leasehold acreage, including lease bonuses, brokers’ fees and other related costs are capitalized. Provisions for impairment of undeveloped oil and gas leases are based on periodic evaluations. Annual lease rentals and exploration expenses, including geological and geophysical expenses and exploratory dry hole costs, are charged against income as incurred. Costs of drilling and equipping productive wells, including development dry holes and related production facilities, are capitalized. All other property and equipment are carried at cost. Depreciation and depletion of oil and gas production equipment and properties are determined under the unit-of-production method based on estimated proved developed recoverable oil and gas reserves. Depreciation of all other equipment is determined under the straight-line method using various rates based on useful lives generally ranging from 5 to 10 years. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings.

## Capitalization of Interest:

Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated or until the projects are substantially complete and ready for their intended use if the projects are evaluated and successful.

## Impairment of Long-Lived Assets:

The Company reviews long-lived assets, including oil and gas properties, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recovered. If the carrying amounts are not expected to be recovered by undiscounted cash flows, the assets are impaired and an impairment loss is recorded. The amount of impairment is based on the estimated fair value of the assets determined by discounting anticipated future net cash flows.

## Fair Value:

The Company follows the authoritative guidance that establishes a formal framework for measuring fair values of assets and liabilities in financial statements that are already required by U.S. generally accepted



## Table of Contents

accounting principles to be measured at fair value. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability.

The Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The guidance establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.

## Asset Retirement Obligation:

The Company follows the accounting standard for asset retirement obligation. The asset retirement obligation primarily represents the estimated present value of the amount the Company will incur to plug, abandon and remediate producing properties (including removal of offshore platforms) at the end of their productive lives, in accordance with applicable state laws. The Company determined its asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The asset retirement obligation is recorded as a liability at its estimated present value at its inception, with an offsetting increase to producing properties. Periodic accretion of discount of the estimated liability is recorded as an expense in the statement of operations.

## Income Taxes:

The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to turn around. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. As of December 31, 2016 and 2015, we had no valuation allowance.

The Company is required to make judgments, including estimating reserves for potential adverse outcomes regarding tax positions that the Company has taken. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties.

## General and Administrative Expenses:

General and administrative expenses represent cost and expenses associated with the operation of the Company.

## Earnings Per Common Share:

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock in gain periods.



## Table of Contents

## Statements of Cash Flows:

For purposes of the consolidated statements of cash flows, the Company considers short-term, highly liquid investments with original maturities of less than ninety days to be cash equivalents.

## Concentration of Credit Risk:

The Company maintains significant banking relationships with financial institutions in the State of Texas. The Company limits its risk by periodically evaluating the relative credit standing of these financial institutions. The Company’s oil and gas production purchasers consist primarily of independent marketers and major gas pipeline companies.

## Hedging:

The Company periodically enters into oil and gas financial instruments to manage its exposure to oil and gas price volatility. The oil and gas reference prices upon which the price hedging instruments are based reflect various market indices that have a high degree of historical correlation with actual prices received by the Company.

The financial instruments are accounted for in accordance with applicable accounting standards for derivative instruments and hedging activities. Such standards require that applicable derivative instruments be measured at fair market value and recognized as assets or liabilities in the balance sheet. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation is generally established at the inception of a derivative. For derivatives designated as cash flow hedges and meeting applicable effectiveness guidelines, changes in fair value, to the extent effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. At December 31, 2016 and 2015, the entire other comprehensive income amount is comprised of the impact of cash flow hedges. Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value of a derivative resulting from ineffectiveness or an excluded component of the gain/loss is recognized immediately in the statement of operations.

## Recently Issued Accounting Standards:

In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 seeks to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the provisions of ASU 2016-15 and assessing the impact, if any, it may have on its statement of consolidated cash flows.

The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the Revenue recognition requirements in Topic 605, Revenue Recognition and industry-specific guidance in Subtopic 932-605. Extractives – Oil and Gas Revenue Recognition. This ASU provides guidance concerning the recognition and measurement of revenue from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. The effective date for ASU 2014-09 was delayed through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual and interim periods beginning in 2018 and is required to be adopted using either the retrospective or cumulative effect (modified retrospective) transition method, with early adoption permitted in 2017. The Company is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures and does not plan on early adopting.

The FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities such, as



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limited partnerships, limited liability corporations and securitization structures, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models This ASU adopted by the Company beginning January 1, 2016 did not have a material impact on the Company's consolidated financial statements and related disclosures.

The FASB issued ASU 2015-03, Interest – Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest – Imputation of Interest (Topic 835): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASU's require debt issuance costs related to a recognized debt liability, except for those related to revolving credit facilities, to be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability rather than an asset. These ASU adopted by the Company beginning January 1, 2016 did not have a material impact on the Company's consolidated financial statements and related disclosures.

The FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This ASU is effective for annual and interim periods beginning in 2017 and can be applied prospectively or retrospectively, with early adoption permitted. This ASU was early-adopted by the Company effective January 1, 2016 and applied retrospectively, and did not have a material impact on the Company's financial statements and related disclosures.

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statement of cash flows. It is effective for fiscal years commencing after December 15, 2018 and early adoption is permitted. This ASU will not have a material impact on the Company’s financial statements and related disclosures.

## 2. Acquisitions and Dispositions

Historically, the Company has repurchased the non-controlling interests of the partners and trust unit holders in certain of the Partnerships, which consist primarily of oil and gas interests. The Company purchased such non-controlling interests in an amount totaling $224,000 in 2016 and $409,000 in 2015.

During 2016, the Company has sold or farmed out interests in certain non-core undeveloped oil and natural gas properties through a number of separate, individually negotiated transactions in exchange for cash and a royalty or working interest in both West Texas and Oklahoma. Proceeds under these agreements are $34.4 million. The Company has entered into an agreement and closed on the sale of additional non-core acreage for an $46.9 million during the first quarter of 2017.

## 3. Additional Balance Sheet Information

Accounts receivable at December 31, 2016 and 2015 consisted of the following:

<table><tr><td rowspan="2"></td><td colspan="2">December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>(Thousands of dollars)</td><td></td><td></td></tr><tr><td>Joint interest billings</td><td>$2,345</td><td>$ 2,667</td></tr><tr><td>Trade receivables</td><td>1,070</td><td>1,452</td></tr><tr><td>Oil and gas sales</td><td>4,078</td><td>3,576</td></tr><tr><td>Other</td><td>204</td><td>2,377</td></tr><tr><td></td><td>7,697</td><td>10,072</td></tr><tr><td>Less: Allowance for doubtful accounts</td><td>(297)</td><td>(529)</td></tr><tr><td>Total</td><td>$7,400</td><td>$ 9,543</td></tr></table>



## Table of Contents

Accounts payable at December 31, 2016 and 2015 consisted of the following:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Trade</td><td>$ 3,967</td><td>$ 3,289</td></tr><tr><td>Royalty and other owners</td><td>5,909</td><td>5,973</td></tr><tr><td>Partner advances</td><td>592</td><td>1,083</td></tr><tr><td>Prepaid drilling deposits</td><td>83</td><td>390</td></tr><tr><td>Other</td><td>1,414</td><td>1,620</td></tr><tr><td>Total</td><td>$ 11,965</td><td>$ 12,355</td></tr></table>

Accrued liabilities at December 31, 2016 and 2015 consisted of the following:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Compensation and related expenses</td><td>$ 2,295</td><td>$ 2,294</td></tr><tr><td>Property costs</td><td>3,317</td><td>3,302</td></tr><tr><td>Income tax</td><td>1,988</td><td>—</td></tr><tr><td>Other</td><td>584</td><td>526</td></tr><tr><td>Total</td><td>$ 8,184</td><td>$ 6,122</td></tr></table>

## 4. Long-Term Debt

## Bank Debt:

Effective July 30, 2010 the Company entered into a Second Amended and Restated Credit Agreement between Compass Bank as agent and a syndicated group of lenders (“Credit Agreement”). The Credit Agreement had a revolving line of credit and letter of credit facility of up to $250 million with a final maturity date of July 30, 2017. The credit facility was secured by substantially all of the Company’s oil and gas properties. The credit facility was subject to a borrowing base determined by the lenders taking into consideration the estimated value of PEC’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. This process involves reviewing PEC’s estimated proved reserves and their valuation. The borrowing base was redetermined semi-annually, and the available borrowing amount could be increased or decreased as a result of such redetermination. In addition, PEC and the lenders each had at their discretion the right to request the borrowing base be redetermined with a maximum of one such request each year. A revision to PEC’s reserves could have prompted such a request on the part of the lenders, which would have possibly resulted in a reduction in the borrowing base and availability under the credit facility. At any time if the sum of the outstanding borrowings and letter of credit exposures exceeded the applicable portion of the borrowing base, PEC would be required to repay the excess amount within a prescribed period.

This Credit Agreement was amended from time to time to further define the limitations on loans or advances and investments made in the Company’s limited partnerships; modify the Company’s borrowing base and monthly reduction amounts; remove the floor rate component of LIBO rate loans; modify financial reporting requirements to the agent; increase hedging allowances; allow for a one-time advance to be made to the Company’s offshore subsidiary; and amend restrictions on the payments for dividends, distributions or repurchase of PEC’s stock.

The Credit Agreement included terms and covenants that require the Company to maintain a minimum current ratio, total indebtedness to EBITDAX (earnings before depreciation, depletion, amortization, taxes, interest expense and exploration costs) ratio and interest coverage ratio, as defined, and restrictions were placed on the payment of dividends, the amount of treasury stock the Company could purchase, commodity hedge agreements, and loans and investments in its consolidated subsidiaries and limited partnerships.



## Table of Contents

At December 31, 2016, the credit facility borrowing base was $80 million with no required monthly reduction amount. The borrowings made within the credit facility could be placed in a base rate loan or LIBO rate loan. The Company’s borrowing rates in the credit facility provided for base rate loans at the prime rate (3.75% at December 31, 2016) plus applicable margin utilization rates that ranged from 1.50% to 2.50%, and LIBO rate loans at LIBO published rates plus applicable utilization rates (2.50% to 3.50% at December 31, 2016). At December 31, 2016, the Company had in place one base rate loan and one LIBO rate loan with effective rates of 6.00% and 3.87%, respectively.

At December 31, 2016, the Company had a total of $63 million of borrowings outstanding under its revolving credit facility at a weighted-average interest rate of 4.49% and $17 million available for future borrowings. The combined weighted average interest rate paid on outstanding bank borrowings subject to base rate and LIBO interest was 3.93% for the year ended December 31, 2016 as compared to 3.44% for the year ended December 31, 2015. The Company's borrowings under this credit facility approximates fair value because the interest rates are variable and reflective of market rates.

On February 15, 2017, the Company and its lenders entered into a Third Amended and Restated Credit Agreement (the "2017 Credit Agreement") with a maturity date of February 15, 2021. The Second Amended and Restated Credit Agreement and subsequent amendments were incorporated into the 2017 Credit Agreement. Pursuant to the terms and conditions of the 2017 Credit Agreement, the Company has a revolving line of credit and letter of credit facility of up to $300 million subject to a borrowing base that is determined semi-annually by the lenders based upon the Company's financial statements and the estimated value of the Company's oil and gas properties, in accordance with the Lenders' customary practices for oil and gas loans. Currently, the Company's borrowing base is $75 million. The 2017 Credit Agreement includes terms and covenants that require the Company to maintain a minimum current ratio, total indebtedness to EBITDAX (earnings before depreciation, depletion, amortization, taxes, interest expense and exploration costs) ratio and interest coverage ratio, as defined, and restrictions are placed on the payment of dividends, the amount of treasury stock the Company may purchase, commodity hedge agreements, and loans and investments in its consolidated subsidiaries and limited partnerships. At March 31, 2017, the Company had in place one LIBO rate loan of $24.8 million outstanding with an effective rate of 3.53%.

The Company entered into interest rate hedge agreements to help manage interest rate exposure. These contracts include interest rate swaps. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. In July 2012, the Company entered into interest swap agreements for a period of two years, which commenced in January 2014, related to $75 million of the Company's bank debt resulting in a LIBO fixed rate of 0.563% and terminated in January 2016. The Company recorded interest expense and paid $7,000 and $284,000 related to the settlement of interest rate swaps for years ended December 31, 2016 and 2015, respectively.

## Equipment Loans:

On July 31, 2013, the Company entered into a $10.0 million Loan and Security Agreement with JP Morgan Chase Bank (“Equipment Loan”). The Equipment Loan is secured by a portion of the Company’s field service equipment, carries an interest rate of 3.95% per annum, requires monthly payments (principal and interest) of $184,000, and has a final maturity date of July 31, 2018. As December 31, 2016, the Company had a total of $3.34 million outstanding on this Equipment Loan.

On July 29, 2014, the Company entered into additional equipment financing facilities ("Additional Equipment Loans") totaling $6.0 million with JP Morgan Chase Bank. In August 2014, the Company drew down $4.8 million of this facility that is secured by field service equipment, carries an interest rate of 3.40% per annum, requires monthly payments (principal and interest) of $87,800, and has a final maturity date of July 31, 2019. The remaining $1.2 million under the Additional Equipment Loans was available for interim draws to finance the acquisition of any future field service equipment. In December 2014, the Company made an interim



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draw of an additional $0.5 million on this facility that is secured by recently purchased field service equipment. Interim draws on this facility carried a floating interest rate, payable monthly at the LIBO published rate plus 2.50% and on June 26, 2015 converted into a fixed term loan requiring monthly payments (principal and interest) of $8,700 with a final maturity date of June 26, 2020. As of December 31, 2016, the Company had a total of $2.91 million outstanding on the Additional Equipment Loans.

The Company determined these loans are Level 3 liabilities in the fair-value hierarchy and estimated their fair value as $6.3 million and $9.4 million at December 31, 2016 and 2015, respectively, using a discounted cash flow model.

## 5. Commitments

## Operating Leases:

The Company has several non-cancelable operating leases, primarily for rental of office space, that have a term of more than one year. The future minimum lease payments for the operating leases at December 31, 2016 are as follows.

<table><tr><td>(Thousands of dollars)</td><td>Operating Leases</td></tr><tr><td>2017</td><td>$ 597</td></tr><tr><td>2018</td><td>59</td></tr><tr><td>Total minimum payments</td><td>$ 656</td></tr></table>

Rent expense for office space for the years ended December 31, 2016 and 2015 was $892,000 and $786,000, respectively.

## Asset Retirement Obligation:

A reconciliation of the liability for plugging and abandonment costs for the years ended December 31, 2016 and 2015 is as follows:

<table><tr><td rowspan="2"></td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Asset retirement obligation at beginning of period</td><td>$ 11,737</td><td>$ 12,501</td></tr><tr><td>Liabilities incurred</td><td>68</td><td>28</td></tr><tr><td>Liabilities settled</td><td>(288)</td><td>(1,112)</td></tr><tr><td>Accretion expense</td><td>498</td><td>517</td></tr><tr><td>Revisions in estimated liabilities</td><td>5,490</td><td>(197)</td></tr><tr><td>Asset retirement obligation at end of period</td><td>$ 17,505</td><td>$ 11,737</td></tr></table>

The Company’s liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive life of wells and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to producing properties, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of the Company’s wells, the costs to ultimately retire the wells may vary significantly from previous estimates. During 2016 revisions in estimated liabilities for asset retirement obligations resulted from substantially lower commodity prices and increased field costs resulting in shorter productive life of marginal wells.



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## 6. Contingent Liabilities

The Company, as managing general partner of the affiliated Partnerships, is responsible for all Partnership activities, including the drilling of development wells and the production and sale of oil and gas from productive wells. The Company also provides the administration, accounting and tax preparation work for the Partnerships, and is liable for all debts and liabilities of the affiliated Partnerships, to the extent that the assets of a given limited Partnership are not sufficient to satisfy its obligations.

The Company is subject to environmental laws and regulations. Management believes that future expenses, before recoveries from third parties, if any, will not have a material effect on the Company’s financial condition. This opinion is based on expenses incurred to date for remediation and compliance with laws and regulations, which have not been material to the Company’s results of operations.

From time to time, the Company is party to certain legal actions arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.

## 7. Stock Options and Other Compensation

In May 1989, non-statutory stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. At December 31, 2016 and 2015, options on 767,500 shares were outstanding and exercisable at prices ranging from $1.00 to $1.25. According to their terms, the options have no expiration date.

## 8. Income Taxes

The components of the provision (benefit) for income taxes for the years ended December 31, 2016 and 2015 are as follows:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Current:</td><td></td><td></td></tr><tr><td>Federal</td><td>$ 1,789</td><td>$ 27</td></tr><tr><td>State</td><td>164</td><td>(237)</td></tr><tr><td>Total current</td><td>1,953</td><td>(210)</td></tr><tr><td>Deferred:</td><td></td><td></td></tr><tr><td>Federal</td><td>117</td><td>(6,330)</td></tr><tr><td>State</td><td>30</td><td>(108)</td></tr><tr><td>Total deferred</td><td>147</td><td>(6,438)</td></tr><tr><td>Total income tax provision (benefit)</td><td>$ 2,100</td><td>$ (6,648)</td></tr></table>



<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">At December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Deferred Tax Assets:</td><td></td><td></td></tr><tr><td>Accrued liabilities</td><td>$ 550</td><td>$ 593</td></tr><tr><td>Allowance for doubtful accounts</td><td>152</td><td>188</td></tr><tr><td>Derivative Contracts</td><td>1,273</td><td>3</td></tr><tr><td>Alternative minimum tax credits</td><td>6,612</td><td>5,319</td></tr><tr><td>Net operating loss carry-forwards</td><td>586</td><td>575</td></tr><tr><td>Percentage depletion carry-forwards</td><td>3,025</td><td>3,751</td></tr><tr><td>Total deferred tax assets</td><td>12,198</td><td>10,429</td></tr><tr><td>Deferred Tax Liabilities:</td><td></td><td></td></tr><tr><td>Basis differences relating to managed partnerships</td><td>6,211</td><td>6,238</td></tr><tr><td>Depletion and depreciation</td><td>43,487</td><td>41,290</td></tr><tr><td>Derivative contracts</td><td>—</td><td>250</td></tr><tr><td>Total deferred tax liabilities</td><td>49,698</td><td>47,778</td></tr><tr><td>Net non-current deferred income tax liabilities</td><td>$ 37,500</td><td>$ 37,349</td></tr></table>

The total provision for income taxes for the years ended December 31, 2016 and 2015 varies from the federal statutory tax rate as a result of the following:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Expected tax expense (benefit)</td><td>$ 1,885</td><td>$ (6,607)</td></tr><tr><td>State income tax, net of federal benefit</td><td>194</td><td>(228)</td></tr><tr><td>Percentage depletion</td><td>(84)</td><td>(200)</td></tr><tr><td>IRS settlement</td><td>75</td><td>—</td></tr><tr><td>Other, net</td><td>30</td><td>387</td></tr><tr><td>Total income tax provision (benefit)</td><td>$ 2,100</td><td>$ (6,648)</td></tr></table>

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes.

The Company is entitled to percentage depletion on certain of its wells, which is calculated without reference to the basis of the property. To the extent that such depletion exceeds a property’s basis, it creates a permanent difference, which lowers the Company’s effective rate.

The Company has $6.61 million in alternative minimum tax(“AMT”) credits which can be used to lower the regular tax liability to the tentative AMT amount in years where the tentative AMT amount is less. These credits do not expire.

The Company is allowed a credit against the Texas Franchise Tax based on net operating losses incurred in prior periods. The credits allowed are $89 thousand in the years 2017 through 2026. Any credits not utilized in a given year due to the allowable credit exceeding the tax liability may be carried forward. No credit may be carried forward past 2026. The value of the credit is calculated net of the federal income tax effect.

The Company paid $75 thousand in settlement of an audit of its 2014 federal income tax return.

The company has not recorded any provision for uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The 2004, 2005, 2006, 2009 and 2014 federal income tax returns have been audited by the Internal Revenue Service. The 2013 and 2015 returns are



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currently open for examination by the IRS. Returns for unexamined earlier years may be examined and adjustments made to the amount of percentage depletion and AMT credit carryforwards flowing from those years into an open tax year, although in general no assessment of income tax may be made for those years on which the statute has closed. State returns for the years 2013, 2014 and 2015 remain open for examination by the relevant taxing authorities.

## 9. Segment Information and Major Customers

The Company operates in one industry – oil and gas exploration, development, operation and servicing. The Company’s oil and gas activities are entirely in the United States.

The Company sells its oil and gas production to a number of purchasers. Listed below are the percent of the Company’s total oil and gas sales made to each of the customers whose purchases represented more than 10% of the Company’s oil and gas sales in the year 2016.

<table><tr><td>Oil Purchasers:</td><td>Gas Purchasers:</td></tr><tr><td>Plains All American Inc.</td><td>40.72% Targa Pipeline Mid-Continent</td></tr><tr><td>Infinity Hydrocarbons, LLC.</td><td>15.18% Continuum Producer Services</td></tr></table>

Although there are no long-term oil and gas purchasing agreements with these purchasers, the Company believes that they will continue to purchase its oil and gas products and, if not, could be replaced by other purchasers.

## 10. Financial Instruments

## Fair Value Measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and 2015:

<table><tr><td>December 31, 2016
(Thousands of dollars)
Assets</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td><td>Balance at December 31, 2016</td></tr><tr><td>Commodity derivative contracts</td><td>$ —</td><td>$ —</td><td>$ 57</td><td>$ 57</td></tr><tr><td>Total assets</td><td>$ —</td><td>$ —</td><td>$ 57</td><td>$ 57</td><td></td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Commodity derivative contracts</td><td>$ —</td><td>$ —</td><td>$ (3,639)</td><td>$ (3,639)</td></tr><tr><td>Total liabilities</td><td>$ —</td><td>$ —</td><td>$ (3,639)</td><td>$ 3,639</td></tr><tr><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td><td>Balance at December 31, 2015</td></tr><tr><td>December 31, 2015
(Thousands of dollars)
Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest rate derivative contracts</td><td>$ —</td><td>$ —</td><td>$ (7)</td><td>$ (7)</td></tr><tr><td>Total liabilities</td><td>$ —</td><td>$ —</td><td>$ (7)</td><td>$ (7</td></tr></table>



## Table of Contents

The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.

The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties' valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the years ended December 31, 2016 and 2015.

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Net (liabilities) assets at beginning of period</td><td>$ (7)</td><td>$ 16,757</td></tr><tr><td>Total realized and unrealized gains (losses):</td><td></td><td></td></tr><tr><td>Included in earnings (a)</td><td>(3,604)</td><td>3,966</td></tr><tr><td>Included in other comprehensive income (loss)</td><td>7</td><td>137</td></tr><tr><td>Purchases, sales, issuances and settlements</td><td>22</td><td>(20,867)</td></tr><tr><td>Net liabilities at end of period</td><td>$ (3,582)</td><td>$ (7)</td></tr></table>

(a) Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments, and interest rate swap instruments are reported as an increase or reduction to interest expense.

## Derivative Instruments:

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. Both realized and unrealized gains and losses associated with commodity derivative instruments are recognized in earnings.

Interest rate swap derivatives continue to be treated as cash-flow hedges and are used to fix our floating interest rates on existing debt. The value of these interest rate swaps at December 31, 2016 and 2015 are located, if applicable, in accumulated other comprehensive loss, net of tax. Settlements of the swaps, which began in January 2014 and concluded in January 2016, are recognized within interest expense.



## Table of Contents

The following table sets forth the effect of derivative instruments on the consolidated balance sheets at December 31, 2016 and 2015:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td rowspan="2">Balance Sheet Location</td><td colspan="2">Fair Value</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Asset Derivatives:</td><td></td><td></td><td></td></tr><tr><td>Derivatives not designated as cash-flow hedging instruments:</td><td></td><td></td><td></td></tr><tr><td>Natural gas commodity contracts</td><td>Derivative Contracts-long term</td><td>$ 57</td><td>$ —</td></tr><tr><td>Total</td><td></td><td>$ 57</td><td>$ —</td></tr><tr><td>Liability Derivatives:</td><td></td><td></td><td></td></tr><tr><td>Derivatives designated as cash-flow hedging instruments:</td><td></td><td></td><td></td></tr><tr><td>Interest rate swap contracts</td><td>Derivative liability short-term</td><td>$ —</td><td>$ (7)</td></tr><tr><td>Derivatives not designated as cash-flow hedging instruments:</td><td></td><td></td><td></td></tr><tr><td>Crude oil commodity contracts</td><td>Derivative liability short-term</td><td>(1,065)</td><td>—</td></tr><tr><td>Natural gas commodity contracts</td><td>Derivative liability short-term</td><td>(1,482)</td><td>—</td></tr><tr><td>Natural gas commodity contracts</td><td>Derivative liability long-term</td><td>(463)</td><td>—</td></tr><tr><td>Crude oil commodity contracts</td><td>Derivative liability long-term</td><td>(629)</td><td>—</td></tr><tr><td>Total</td><td></td><td>$ (3,639)</td><td>$ (7)</td></tr><tr><td>Total derivative instruments</td><td></td><td>$ (3,582)</td><td>$ (7)</td></tr></table>

The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the years ended December 31, 2016 and 2015:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td rowspan="2">Location of gain/loss recognized in income</td><td colspan="2">Amount of gain/loss recognized in income</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Derivative designated as cash-flow hedge instruments:</td><td></td><td></td><td></td></tr><tr><td>Interest rate swap contracts</td><td>Interest expense</td><td>$ (7)</td><td>$ (284)</td></tr><tr><td>Derivatives not designated as cash-flow hedge instruments:</td><td></td><td></td><td></td></tr><tr><td>Natural gas commodity contracts</td><td>Unrealized (loss) gain on derivative instruments, net</td><td>(1,888)</td><td>(2,273)</td></tr><tr><td>Crude oil commodity contracts</td><td>Unrealized (loss) gain on derivative instruments, net</td><td>(1,694)</td><td>(14,628)</td></tr><tr><td>Natural gas commodity contracts</td><td>Realized gain (loss) on derivative instruments, net</td><td>20</td><td>3,017</td></tr><tr><td>Crude oil commodity contracts</td><td>Realized gain (loss) on derivative instruments, net</td><td>(36)</td><td>18,134</td></tr><tr><td></td><td></td><td>$ (3,605)</td><td>$ 3,966</td></tr></table>

## 11. Related Party Transactions

The Company, as managing general partner or managing trustee, makes an annual offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships or Trusts. The Company purchased such interests in an amount totaling $224,000 during 2016 and $409,000 during 2015.



## Table of Contents

Treasury stock purchases in any reported period may include shares from a related party, which may include members of the Company’s Board of Directors. In 2016, the Company purchased 10,000 shares from a related party.

Receivables from related parties consist of reimbursable general and administrative costs, lease operating expenses and reimbursement for property development and related costs. These receivables are due from joint venture partners, which may include members of the Company’s Board of Directors.

Payables owed to related parties primarily represent receipts collected by the Company as agent for the joint venture partners, which may include members of the Company’s Board of Directors, for oil and gas sales net of expenses.

## 12. Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents include $3.54 million and $3.51 million at December 31, 2016 and 2015, respectively, of cash primarily pertaining to oil and gas revenue payments. There were corresponding accounts payable recorded at December 31, 2016 and 2015 for these liabilities. Both the restricted cash and the accounts payable are classified as current on the accompanying consolidated balance sheets.

## 13. Salary Deferral Plan

The Company maintains a salary deferral plan (the “Plan”) in accordance with Internal Revenue Code Section 401(k), as amended. The Plan provides for matching contributions, of which $465,000 and $577,000 were made in 2016 and 2015, respectively.

## 14. Earnings per Share

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock in gain periods. The following reconciles amounts reported in the financial statements:

<table><tr><td rowspan="3"></td><td colspan="7">Year Ended December 31,</td></tr><tr><td colspan="3">2016</td><td colspan="3">2015</td></tr><tr><td>Net Loss (In 000&#x27;s)</td><td>Weighted Average Number of Shares Outstanding</td><td>Per Share Amount</td><td>Net Income (In 000&#x27;s)</td><td>Weighted Average Number of Shares Outstanding</td><td>Net Income (In 000&#x27;s)</td></tr><tr><td>Basic</td><td>$ 3,444</td><td>2,293,688</td><td>$ 1.50</td><td>$ (12,784)</td><td>$ 2,312,810</td><td>$ (5.53)</td></tr><tr><td>Effect of dilutive securities:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Options</td><td></td><td>751,563</td><td></td><td>—</td><td>—</td><td>—</td></tr><tr><td>Diluted (a)</td><td>$ 3,444</td><td>3,045,251</td><td>$ 1.13</td><td>$ (12,784)</td><td>2,312,810</td><td>$ (5.53)</td></tr></table>

(a) The effect of the 767,500 outstanding stock options is antidilutive for the twelve months ended December 31, 2015 due to a net loss reported for the period.

## 15. Shareholder's Equity

The Company has in place a stock repurchase program whereby it may purchase outstanding shares of its common stock from time-to-time, in open market transactions or negotiated sales. The Company uses the cost method to account for its treasury share purchases.



# PRIMEENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION

# CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES Years Ended December 31, 2016 and 2015

## (Unaudited)

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">As of December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Proved Developed oil and gas properties</td><td>$ 417,824</td><td>$ 395,129</td></tr><tr><td>Proved Undeveloped oil and gas properties</td><td>—</td><td>—</td></tr><tr><td>Total Capitalized Costs</td><td>417,824</td><td>395,129</td></tr><tr><td>Accumulated depreciation, depletion and valuation allowance</td><td>230,333</td><td>204,213</td></tr><tr><td>Net Capitalized Costs</td><td>$ 187,491</td><td>$ 190,916</td></tr></table>

## COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
Years Ended December 31, 2016 and 2015

(Unaudited)

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Development Costs</td><td>$ 19,042</td><td>$ 14,550</td></tr></table>

## STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES Years Ended December 31, 2016 and 2015

(Unaudited)

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">As of December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Future cash inflows</td><td>$ 221,542</td><td>$ 293,745</td></tr><tr><td>Future production costs</td><td>(115,091)</td><td>(191,227)</td></tr><tr><td>Future development costs</td><td>(31,870)</td><td>(30,586)</td></tr><tr><td>Future income tax expenses</td><td>(7,883)</td><td>(4,815)</td></tr><tr><td>Future Net Cash Flows</td><td>66,698</td><td>67,117</td></tr><tr><td>10% annual discount for estimated timing of cash flows</td><td>(14,461)</td><td>(8,315)</td></tr><tr><td>Standardized Measure of Discounted Future Net Cash Flows</td><td>$ 52,237</td><td>$ 58,802</td></tr></table>

See accompanying Notes to Supplementary Information



# STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES Years Ended December 31, 2016 and 2015

## (Unaudited)

The following are the principal sources of change in the standardized measure of discounted future net cash flows during 2016 and 2015:

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Sales of oil and gas produced, net of production costs</td><td>$ (10,762)</td><td>$ (10,426)</td></tr><tr><td>Net changes in prices and production costs</td><td>(6,895)</td><td>(511,116)</td></tr><tr><td>Extensions, discoveries and improved recovery</td><td>27,706</td><td>24,967</td></tr><tr><td>Revisions of previous quantity estimates</td><td>(5,214)</td><td>(180,048)</td></tr><tr><td>Net change in development costs</td><td>(26,953)</td><td>235,285</td></tr><tr><td>Reserves sold</td><td>—</td><td>(1,160)</td></tr><tr><td>Reserves purchased</td><td>—</td><td>737</td></tr><tr><td>Accretion of discount</td><td>5,880</td><td>34,329</td></tr><tr><td>Net change in income taxes</td><td>(2,600)</td><td>146,339</td></tr><tr><td>Changes in production rates (timing) and other</td><td>12,273</td><td>(23,393)</td></tr><tr><td>Net change</td><td>(6,565)</td><td>(284,486)</td></tr><tr><td>Standardized measure of discounted future net cash flow:</td><td></td><td></td></tr><tr><td>Beginning of year</td><td>58,802</td><td>343,288</td></tr><tr><td>End of year</td><td>$ 52,237</td><td>$ 58,802</td></tr></table>



# PRIMENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION

## RESERVE QUANTITY INFORMATION
Years Ended December 31, 2016 and 2015

(Unaudited)

<table><tr><td rowspan="3"></td><td colspan="6">As of December 31,</td></tr><tr><td colspan="3">2016</td><td colspan="3">2015</td></tr><tr><td>Oil (MBbls)</td><td>NGLs (MBbls)</td><td>Gas (MMcf)</td><td>Oil (MBbls)</td><td>NGLs (MBbls)</td><td>Gas (MMcf)</td></tr><tr><td>Proved Developed Reserves:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Beginning of year</td><td>4,579</td><td>1,673</td><td>23,275</td><td>6,239</td><td>2,160</td><td>32,267</td></tr><tr><td>Extensions, discoveries and improved recovery</td><td>577</td><td>176</td><td>1,136</td><td>47</td><td>85</td><td>2,067</td></tr><tr><td>Revisions of previous estimates</td><td>(1,425)</td><td>(527)</td><td>(7,342)</td><td>(1,650)</td><td>(560)</td><td>(8,368)</td></tr><tr><td>Converted from undeveloped reserves</td><td>46</td><td>14</td><td>65</td><td>677</td><td>163</td><td>944</td></tr><tr><td>Reserves sold</td><td>—</td><td>(1)</td><td>(7)</td><td>(53)</td><td>—</td><td>(26)</td></tr><tr><td>Reserve purchased</td><td>—</td><td>—</td><td>—</td><td>39</td><td>12</td><td>372</td></tr><tr><td>Production</td><td>(670)</td><td>(70)</td><td>(4,126)</td><td>(720)</td><td>(187)</td><td>(3,981)</td></tr><tr><td>End of year</td><td>3,107</td><td>1,265</td><td>13,001</td><td>4,579</td><td>1,673</td><td>23,275</td></tr><tr><td>Proved Undeveloped Reserves:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Beginning of year</td><td>52</td><td>12</td><td>55</td><td>14,709</td><td>4,322</td><td>26,331</td></tr><tr><td>Extensions, discoveries and improved recovery</td><td>635</td><td>157</td><td>1,994</td><td>420</td><td>101</td><td>701</td></tr><tr><td>Revisions of previous estimates</td><td>2</td><td>4</td><td>19</td><td>(14,400)</td><td>(4,248)</td><td>(26,033)</td></tr><tr><td>Converted to developed reserves</td><td>(46)</td><td>(14)</td><td>(65)</td><td>(677)</td><td>(163)</td><td>(944)</td></tr><tr><td>End of year</td><td>643</td><td>159</td><td>2,003</td><td>52</td><td>12</td><td>55</td></tr><tr><td>Total Proved Reserves at the End of the Year</td><td>3,750</td><td>1,424</td><td>15,004</td><td>4,631</td><td>1,685</td><td>23,330</td></tr></table>

## RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
Years Ended December 31, 2016 and 2015

(Unaudited)

<table><tr><td rowspan="2">(Thousands of dollars)</td><td colspan="2">Year Ended December 31,</td></tr><tr><td>2016</td><td>2015</td></tr><tr><td>Revenue:</td><td></td><td></td></tr><tr><td>Oil and gas sales</td><td>$ 38,306</td><td>$ 45,632</td></tr><tr><td>Costs and Expenses:</td><td></td><td></td></tr><tr><td>Lease operating expenses</td><td>27,544</td><td>35,206</td></tr><tr><td>Depreciation, depletion and accretion</td><td>27,534</td><td>28,531</td></tr><tr><td>Income tax (benefit) expense</td><td>(5,870)</td><td>(6,156)</td></tr><tr><td>Total Costs and Expenses</td><td>49,208</td><td>57,581</td></tr><tr><td>Results of Operations From Producing Activities (excluding corporate overhead and interest costs)</td><td>$ (10,902)</td><td>$ (11,949)</td></tr></table>

See accompanying Notes to Supplementary Information



# PRIMENERGY CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY INFORMATION
(Unaudited)

## 1. Presentation of Reserve Disclosure Information

Reserve disclosure information is presented in accordance with U.S. generally accepted accounting principles. The Company’s reserves include amounts attributable to non-controlling interests in the Partnerships. These interests represent less than 10% of the Company’s reserves.

## 2. Determination of Proved Reserves

The estimates of the Company’s proved reserves were determined by an independent petroleum engineer in accordance with U.S. generally accepted accounting principles. The estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development and other factors. Estimated future net revenues were computed by reserves, less estimated future development and production costs based on current costs.

Proved reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that proved reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future.

## 3. Results of Operations from Oil and Gas Producing Activities

The results of operations from oil and gas producing activities were prepared in accordance with U.S. generally accepted accounting principles. General and administrative expenses, interest costs and other unrelated costs are not deducted in computing results of operations from oil and gas activities.

## 4. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves

The standardized measure of discounted future net cash flows relating to proved oil and gas reserves and the changes of standardized measure of discounted future net cash flows relating to proved oil and gas reserves were prepared in accordance with U.S. generally accepted accounting principles.

Future cash inflows are computed as described in Note 2 by applying current prices to year-end quantities of proved reserves.

Future production and development costs are computed estimating the expenditures to be incurred in developing and producing the oil and gas reserves at year-end, based on year-end costs and assuming continuation of existing economic conditions.

Future income tax expenses are calculated by applying the year-end U.S. tax rate to future pre-tax cash inflows relating to proved oil and gas reserves, less the tax basis of properties involved. Future income tax expenses give effect to permanent differences and tax credits and allowances relating to the proved oil and gas reserves.



## Table of Contents

Future net cash flows are discounted at a rate of 10% annually (pursuant to applicable guidance) to derive the standardized measure of discounted future net cash flows. This calculation does not necessarily represent an estimate of fair market value or the present value of such cash flows since future prices and costs can vary substantially from year-end and the use of a 10% discount figure is arbitrary.

## 5. Changes in Reserves

The 2016 and 2015 extensions and discoveries reflect the successful drilling activity in the Company’s West Texas and Mid-Continent areas. The Company is employing technologies to establish proved reserves that have been demonstrated to provide consistent results capable of repetition. The technologies and economic data being used in the estimation of its proved reserves include, but are not limited to, electrical logs, radioactivity logs, geologic maps, production data and well test data. The estimated reserves of wells with sufficient production history are estimated using appropriate decline curves. Estimated reserves of producing wells with limited production history and for undeveloped locations are estimated using performance data from analogous wells in the area. These wells are considered analogous based on production performance from the same formation and with similar completion techniques. Future development plans are reflective of the significant decrease in commodity prices and have been established based on an expectation of available cash flows from operations and availability under our revolving credit facility.



THIRD AMENDED AND RESTATED CREDIT AGREEMENT

dated as of

February 15, 2017

among

PRIMEENERGY CORPORATION,
as Borrower,

COMPASS BANK,
as Administrative Agent,

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Documentation Agent,

and

THE LENDERS PARTY HEREBO

BBVA COMPASS
Sole Lead Arranger and Sole Book Runner



## ARTICLE I DEFINITIONS AND ACCOUNTING MATTERS

Section 1.01 Terms Defined Above 1
Section 1.02 Certain Defined Terms 1
Section 1.03 Types of Loans and Borrowings 24
Section 1.04 Terms Generally; Rules of Construction 25
Section 1.05 Accounting Terms and Determinations; GAAP 25
Section 1.06 Timing of Payment or Performance 25
ARTICLE II THE CREDITS 25
Section 2.01 Commitments 25
Section 2.02 Loans and Borrowings 26
Section 2.03 Requests for Borrowings 26
Section 2.04 Interest Elections 27
Section 2.05 Funding of Borrowings 29
Section 2.06 Termination and Reduction of Aggregate Maximum Credit Amounts 29
Section 2.07 Borrowing Base 30
Section 2.08 Letters of Credit 32
ARTICLE III PAYMENTS OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES 37
Section 3.01 Repayment of Loans 37
Section 3.02 Interest 37
Section 3.03 Alternate Rate of Interest 38
Section 3.04 Prepayments 38
Section 3.05 Fees 40
ARTICLE IV PAYMENTS; PRO RATA TREATMENT; SHARING OF SET-OFFS 41
Section 4.01 Payments Generally; Pro Rata Treatment; Sharing of Set-offs 41
Section 4.02 Presumption of Payment by the Borrower 42
Section 4.03 Certain Deductions by the Administrative Agent 42
Section 4.04 Disposition of Proceeds 43
Section 4.05 Defaulting Lenders 43
ARTICLE V INCREASED COSTS; BREAK FUNDING PAYMENTS; TAXES 45
Section 5.01 Increased Costs 45
Section 5.02 Break Funding Payments 46
Section 5.03 Taxes 47
Section 5.04 Designation of Different Lending Office 50
Section 5.05 Replacement of Lenders 51
Section 5.06 Illegality 51
ARTICLE VI CONDITIONS PRECEDENT 51
Section 6.01 Effective Date 51
Section 6.02 Each Credit Event 53



## ARTICLE VII REPRESENTATIONS AND WARRANTIES

Section 7.01 Organization; Powers 54
Section 7.02 Authority; Enforceability 54
Section 7.03 Approvals; No Conflicts 54
Section 7.04 Financial Condition; No Material Adverse Change 54
Section 7.05 Litigation 54
Section 7.06 Environmental Matters 55
Section 7.07 Compliance with the Laws and Agreements; No Defaults 55
Section 7.08 Investment Company Status 56
Section 7.09 Taxes 56
Section 7.10 ERISA 57
Section 7.11 Disclosure; No Material Misstatements 57
Section 7.12 Insurance 57
Section 7.13 Restriction on Liens 58
Section 7.14 Group Members 58
Section 7.15 Foreign Operations 58
Section 7.16 Location of Business and Offices 58
Section 7.17 Properties; Defensible Title, Etc 58
Section 7.18 Maintenance of Properties 59
Section 7.19 Gas Imbalances; Prepayments 60
Section 7.20 Marketing of Production 60
Section 7.21 Security Documents 60
Section 7.22 Swap Agreements and Eligible Contract Participant 60
Section 7.23 Use of Loans and Letters of Credit 60
Section 7.24 Solvency 60
Section 7.25 Anti-Corruption Laws and Sanctions 61
Section 7.26 EEA Financial Institutions 61

ARTICLE VIII AFFIRMATIVE COVENANTS

Section 8.01 Financial Statements; Other Information 61
Section 8.02 Notices of Material Events 64
Section 8.03 Existence; Conduct of Business 64
Section 8.04 Payment of Obligations 64
Section 8.05 Performance of Obligations under Loan Documents 64
Section 8.06 Operation and Maintenance of Properties 64
Section 8.07 Insurance 64
Section 8.08 Books and Records; Inspection Rights 65
Section 8.09 Compliance with Laws and Material Contractual Obligations 65
Section 8.10 Environmental Matters 65
Section 8.11 Further Assurances 66
Section 8.12 Reserve Reports 67
Section 8.13 Title Information 68
Section 8.14 Additional Collateral; Additional Guarantors 69
Section 8.15 ERISA Compliance 70
Section 8.16 Marketing Activities 71
Section 8.17 Use of Proceeds 71
Section 8.18 Consolidated Cash Balance Information 71
Section 8.19 Control Agreements 72
Section 8.20 Swap Agreements 72



## ARTICLE IX NEGATIVE COVENANTS

Section 9.01 Financial Covenants 72
Section 9.02 Debt 72
Section 9.03 Liens 73
Section 9.04 Restricted Payments; Certain Debt Payments 73
Section 9.05 Investments, Loans and Advances 74
Section 9.06 Nature of Business; No International Operations 75
Section 9.07 ERISA Compliance 75
Section 9.08 Sale or Discount of Receivables 75
Section 9.09 Mergers, Etc 76
Section 9.10 Sale of Properties and Termination of Hedging Transactions 76
Section 9.11 Sales and Leasebacks 76
Section 9.12 Environmental Matters 77
Section 9.13 Transactions with Affiliates 77
Section 9.14 Negative Pledge Agreements; Dividend Restrictions 77
Section 9.15 Take-or-Pay or Other Prepayments 77
Section 9.16 Swap Agreements 78
Section 9.17 Amendments to Organizational Documents and Material Contracts 79
Section 9.18 Changes in Fiscal Periods 79
Section 9.19 Debt of Borrowing Base Partnerships 79
ARTICLE X EVENTS OF DEFAULT; REMEDIES 79
Section 10.01 Events of Default 79
Section 10.02 Remedies 81
ARTICLE XI THE ADMINISTRATIVE AGENT 82
Section 11.01 Appointment; Powers 82
Section 11.02 Duties and Obligations of Administrative Agent 82
Section 11.03 Action by Administrative Agent 83
Section 11.04 Reliance by Administrative Agent 83
Section 11.05 Subagents 84
Section 11.06 Resignation of Administrative Agent 84
Section 11.07 Administrative Agent as Lender 84
Section 11.08 No Reliance 84
Section 11.09 Administrative Agent May File Proofs of Claim 85
Section 11.10 Authority of Administrative Agent to Release Collateral and Liens 85
Section 11.11 Duties of the Arranger 86
ARTICLE XII MISCELLANEOUS 86
Section 12.01 Notices 86
Section 12.02 Waivers; Amendments 87
Section 12.03 Expenses, Indemnity; Damage Waiver 89
Section 12.04 Successors and Assigns 91
Section 12.05 Survival; Revival; Reinstatement 94



Section 12.06 Counterparts; Integration; Effectiveness Page
Section 12.07 Severability 95
Section 12.08 Right of Setoff 95
Section 12.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS 96
Section 12.10 Headings 97
Section 12.11 Confidentiality 97
Section 12.12 Interest Rate Limitation 98
Section 12.13 Collateral Matters; Swap Agreements 98
Section 12.14 No Third Party Beneficiaries 98
Section 12.15 EXCULPATION PROVISIONS 99
Section 12.16 USA Patriot Act Notice 99
Section 12.17 Flood Insurance Provisions 99
Section 12.18 Releases 99
Section 12.19 Acknowledgement and Consent to Bail-In of EEA Financial Institutions 100
Section 12.20 Amendment and Restatement 100



## ANNEXES, EXHIBITS AND SCHEDULES

Annex I

Exhibit A

Exhibit B

Exhibit C

Exhibit D

Exhibit E-1

Exhibit E-2

Exhibit E-3

Exhibit F

Exhibit G-1

Exhibit G-2

Exhibit G-3

Exhibit G-4

Schedule 1.02(a)

Schedule 7.05

Schedule 7.06

Schedule 7.12

Schedule 7.14

Schedule 7.19

Schedule 7.20

Schedule 7.22

Schedule 9.02

Schedule 9.03

Schedule 9.05

List of Maximum Credit Amounts

Form of Note

Form of Borrowing Request

Form of Interest Election Request

Form of Compliance Certificate

Security Instruments

Form of Guaranty Agreement

Form of Security Agreement

Form of Assignment and Assumption

Form of U.S. Tax Compliance Certificate

(Non-U.S. Lenders; non-partnerships)

Form of U.S. Tax Compliance Certificate (Foreign Participants; non-partnerships)

Form of U.S. Tax Compliance Certificate

(Foreign Participants; partnerships)

Form of U.S. Tax Compliance Certificate

(Non-U.S. Lenders; partnerships)

Excluded Accounts

Litigation

Environmental Matters

Insurance

Group Members

Gas Imbalances

Marketing of Production

Swap Agreements

Debt

Liens

Investments



THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of February 15, 2017, is among PRIMENERGY CORPORATION, a Delaware corporation (the "Borrower"), each of the Lenders from time to time party hereto and COMPASS BANK (in its individual capacity, "BBVA Compass"), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent").

## RECITALS

A. The Borrower, the Guarantors party thereto, the Administrative Agent, and certain other parties, as lenders, have entered into that certain Second Amended and Restated Credit Agreement dated as of July 30, 2010 (as amended prior to the date hereof, the "Existing Credit Agreement").

B. The Borrower has requested and the Lenders and the Administrative Agent have agreed to amend and restate the Existing Credit Agreement, subject to the terms and conditions of this Agreement.

C. In consideration of the mutual covenants and agreements herein contained and of the loans, extensions of credit and commitments hereinafter referred to, the parties hereto agree as follows and agree that the Existing Credit Agreement shall be amended and restated in its entirety to read as follows:

## ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS

Section 1.01 Terms Defined Above. As used in this Agreement, each term defined above has the meaning indicated above.

Section 1.02 Certain Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

“ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

“Adjusted LIBOR Rate” means, with respect to any Loan the interest on which is determined by reference to the LIBOR Rate, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the LIBOR Rate for such Interest Period multiplied by the Statutory Reserve Rate.

“Administrative Agent” has the meaning set forth in the preamble hereto.

“Administrative Questionnaire” means an administrative questionnaire in a form supplied by the Administrative Agent.

“Affected Loans” has the meaning assigned to such term in Section 5.06.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

“Agent” means each of the Administrative Agent and any other agent or sub-agent pursuant to Section 11.05 appointed by the Administrative Agent with respect to matters related to the Loan Documents.



“Aggregate Maximum Credit Amounts” means, at any, an amount equal to the sum of the Maximum Credit Amounts, as the same may be reduced or terminated pursuant to Section 2.06.

“Agreement” means this Third Amended and Restated Credit Agreement, including the Schedules and Exhibits hereto, as the same has been or may be amended, modified, supplemented, restated, replaced or otherwise modified from time to time.

“Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1.00% and (c) the Adjusted LIBO Rate for a one-month Interest Period on such day (or if such day is not a Business Day, the immediately preceding Business Day) plus 1.00%; provided that, the Adjusted LIBO Rate for any day shall be based on the LIBO Rate at approximately 11:00 a.m. London time on such day, subject to the interest rate floors set forth therein. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate shall be effective from and including the effective date of such change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted LIBO Rate, respectively.

“Anti-Corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or any of its Affiliates from time to time concerning or relating to bribery or corruption.

“Applicable Margin” means, for any date, the applicable rate per annum set forth below as determined based upon the Borrowing Base Utilization Percentage then in effect:

<table><tr><td>Borrowing Base</td><td></td><td></td></tr><tr><td>Utilization Percentage</td><td>Eurodollar Loans</td><td>ABR Loans</td></tr><tr><td>&lt;25%</td><td>2.50%</td><td>1.50%</td></tr><tr><td>≥25% and &lt;50%</td><td>2.75%</td><td>1.75%</td></tr><tr><td>≥50% and &lt;75%</td><td>3.00%</td><td>2.00%</td></tr><tr><td>≥75% and &lt;90%</td><td>3.25%</td><td>2.25%</td></tr><tr><td>≥90%</td><td>3.50%</td><td>2.50%</td></tr></table>

Each change in the Applicable Margin shall apply during the period commencing on the effective date of such change in the Borrowing Base Utilization Percentage and ending on the date immediately preceding the effective date of the next such change; provided, that if at any time the Borrower fails to deliver a Reserve Report pursuant to Section 8.12(a), then until delivery of such Reserve Report, the Applicable Margin shall mean the rate per annum set forth on the grid when the Borrowing Base Utilization Percentage is at its highest level.

“Applicable Percentage” means, with respect to any Lender, the percentage of the Aggregate Maximum Credit Amounts represented by such Lender’s Maximum Credit Amount. The initial Applicable Percentage of each Lender is set forth on Annex I.

“Approved Counterparty” means (a) any Lender or any Affiliate of a Lender or (b) any other Person whose long term senior unsecured debt rating at the time a particular Swap Agreement transaction is entered into is A- or A3 by S&P or Moody’s (or their equivalent), respectively, or higher.



“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“Approved Petroleum Engineers” means (a) Ryder Scott Company Petroleum Consultants, L.P., and (b) any other independent petroleum engineers selected by the Borrower and reasonably acceptable to the Administrative Agent.

“Arranger” means BBVA Compass, in its capacity as the sole lead arranger and sole bookrunner hereunder.

“ASC” means the Financial Accounting Standards Board Accounting Standards Codification, as in effect from time to time.

“Assignee” has the meaning assigned to such term in Section 12.04(b).

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Assignee (with the consent of any party whose consent is required by Section 12.04(b)), and accepted by the Administrative Agent, in substantially the form of Exhibit F or any other form approved by the Administrative Agent.

“Availability Period” means the period from and including the Effective Date to but excluding the Termination Date.

“Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.

“Bail-In Legislation” means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.

“Board” means the Board of Governors of the Federal Reserve System of the United States of America or any successor Governmental Authority.

“Borrowing” means Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Borrowing Base” means at any time an amount determined in accordance with Section 2.07, as the same may be adjusted from time to time pursuant to the Borrowing Base Adjustment Provisions.

“Borrowing Base Adjustment Provisions” means Section 8.13(c), Section 9.10(f) and any other provisions hereunder which adjust the amount of the Borrowing Base.

“Borrowing Base Deficiency” occurs if, at any time, the total Revolving Credit Exposures at such time exceeds the Borrowing Base in effect at such time. The amount of the Borrowing Base Deficiency at such time is the amount by which the total Revolving Credit Exposures of all Lenders at such time exceeds the Borrowing Base in effect at such time.

“Borrowing Base Oil and Gas Properties” means the Oil and Gas Properties directly owned by the Loan Parties, as included and indicated in the Initial Reserve Report and thereafter in the most recently delivered Reserve Report delivered pursuant to Section 8.12.



“Borrowing Base Partnerships” means the Loan Parties’ Equity Interests in the limited partnerships listed on Schedule 9.05 hereto, the Oil and Gas Properties of which are included and indicated in the Initial Reserve Report and thereafter in the most recently delivered Reserve Report delivered pursuant to Section 8.12.

“Borrowing Base Properties” means the Borrowing Base Oil and Gas Properties and the Borrowing Base Partnerships.

“Borrowing Base Utilization Percentage” means, as of any day, the fraction expressed as a percentage, the numerator of which is the sum of the Revolving Credit Exposures of the Lenders on such day, and the denominator of which is the Borrowing Base in effect on such day.

“Borrowing Base Value” means, with respect to any Oil and Gas Property of a Loan Party or any Swap Agreement in respect of commodities, the value the Administrative Agent attributed to such asset in connection with the most recent determination of the Borrowing Base hereunder (which value has been approved by the Required Lenders).

“Borrowing Requests” means a request by the Borrower for a Borrowing in accordance with Section 2.03.

“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in Houston, Texas are authorized or required by law to remain closed; and if such day relates to a Borrowing or continuation of, a payment or prepayment of principal or interest on, or a conversion of or into, or the Interest Period for, a Eurodollar Loan or a notice by the Borrower with respect to any such Borrowing or continuation, payment, prepayment, conversion or Interest Period, any day which is also a day on which banks are open for dealings in dollar deposits in the London interbank market.

“Capital Leases” means, in respect of any Person, all leases that are or should be, in accordance with GAAP, recorded as capital leases on the balance sheet of the Person liable (whether contingent or otherwise) for the payment of rent thereunder. Any lease that was treated as an operating lease under GAAP at the time it was entered into that later becomes a capital lease as a result of a change in GAAP during the life of such lease, including any renewals, shall be treated as an operating lease for all purposes under this Agreement, and any lease that was treated as a capital lease under GAAP at the time it was entered into that later becomes an operating lease as a result of a change in GAAP during the life of such lease, including any renewals, shall be treated as a capital lease for all purposes under this Agreement.

“Cash Collateralize” means, to pledge and deposit with or deliver to the Administrative Agent (in a manner reasonably satisfactory to the Administrative Agent, which may require such deposit to made into a controlled account), for the benefit of the Issuing Bank or the Lenders, as collateral for LC Exposure or obligations of the Lenders to fund participations in respect of LC Exposure, cash or deposit account balances or, if the Administrative Agent and the Issuing Bank shall agree, in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to the Administrative Agent and the Issuing Bank. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such Cash Collateral and other credit support.

“Cash Management Services” means (a) commercial credit cards, merchant card services, purchase or debit cards, including non-card e-payables services, (b) treasury management services (including controlled disbursement, overdraft, automated clearing house services, return items, interstate depository network services, electronic funds transfer services, lockbox services and stop payment services), (c) any other demand deposit or operating account relationships and (d) any other cash management services, including for collections and for operating, payroll and trust accounts of the Borrower or any of the Borrower’s Subsidiaries.



“Casualty Event” means any loss, casualty or other insured damage to, or any nationalization, taking under power of eminent domain or by condemnation or similar proceeding of, any Property of any Loan Party having a fair market value in excess of $2,500,000.

“CERCLA” has the meaning assigned to such term within the definition of “Environmental Laws.”

“Change in Control” means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the date hereof), of Equity Interests representing more than 51% of the aggregate ordinary voting power represented by the issued and outstanding Equity Interests of the Borrower; or (b) occupation at any time of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) directors of the Borrower on the date of this Agreement nor (ii) nominated or appointed by the board of directors of the Borrower.

“Change in Law” means the occurrence, after the Effective Date, of any of the following: (a) the adoption of or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines, requirements or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States of America or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted, issued or implemented.

“Code” means the Internal Revenue Code of 1986.

“Collateral” means the Mortgaged Properties and all other property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Instrument; provided, however, notwithstanding anything in any Loan Document to the contrary, (a) in no event shall the Collateral include any Building (as defined in the applicable Flood Insurance Regulations) or Manufactured (Mobile) Home (as defined in the applicable Flood Insurance Regulations) and (b) no Building or Manufactured (Mobile) Home shall be subject to any Lien created by any Loan Document, and each Lender hereby empowers and authorizes the Administrative Agent to execute and deliver any and all releases of Liens, termination statements, mortgage amendments or other documents required to effectuate the foregoing.

“Commitment” means, with respect to each Lender, the obligation of such Lender to make or continue Loans and to incur or acquire participations in Letters of Credit hereunder, as such obligation may be (a) modified from time to time pursuant to Section 2.06, (b) modified from time to time pursuant to assignments by or to such Lender pursuant to Section 12.04(b), or (c) otherwise modified pursuant to the terms of this Agreement. The amount representing each Lender’s Commitment shall at any time be the lesser of (x) such Lender’s Maximum Credit Amount and (y) such Lender’s Applicable Percentage of the then effective Borrowing Base. As of the Effective Date, the aggregate Commitments of the Lenders are $75,000,000.

“Commitment Fee Rate” means, for any date, a rate per annual equal to 0.50%.



“Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.).

“Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

“Consolidated Cash Balance” means, at any time, the aggregate amount of unrestricted cash and cash equivalents, marketable securities, treasury bonds and bills, certificates of deposit, investments in money market funds and commercial paper, in each case held by the Borrower and its Consolidated Subsidiaries, other than (a) any cash set aside to pay in the ordinary course of business amounts of the Borrower or any Subsidiary then due and owing to unaffiliated third parties and for which the Borrower or such Subsidiary has issued checks or has initiated wires or ACH transfers in order to pay such amounts, and (b) cash and cash equivalents held in Excluded Accounts.

“Consolidated Cash Balance Threshold” means $15,000,000.

“Consolidated Net Income” means, with respect to the Borrower and the Consolidated Subsidiaries, for any period, the aggregate of the net income (or loss) of the Borrower and the Consolidated Subsidiaries determined on a consolidated basis in accordance with GAAP, provided that there shall be excluded from such net income (to the extent otherwise included therein) the following: (a) the net income of any Person in which the Borrower or any Consolidated Subsidiary has an interest (which interests does not cause the net income of such other Person to be consolidated with the net income of the Borrower and the Consolidated Subsidiaries in accordance with GAAP), except to the extent of the amount of dividends or distributions actually paid in cash during such period by such other Person to the Borrower or to a Consolidated Subsidiary, as the case may be; (b) the net income (but not loss) during such period of any Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions or transfers or loans by that Consolidated Subsidiary is not at the time permitted by operation of the terms of its charter or any agreement, instrument or Governmental Requirement applicable to such Consolidated Subsidiary or is otherwise restricted or prohibited, in each case determined in accordance with GAAP; and (c) the net income (or loss) of any Person acquired in a pooling of interests transaction for any period prior to the date of such transaction.

“Consolidated Subsidiaries” means each Subsidiary of the Borrower (whether now existing or hereafter created or acquired) the financial statements of which shall be (or should have been) consolidated with the financial statements of the Borrower in accordance with GAAP.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. For the purposes of this definition, and without limiting the generality of the foregoing, any Person that owns directly or indirectly 10% or more of the Equity Interests having ordinary voting power for the election of the directors or other governing body of a Person (other than as a limited partner of such other Person) will be deemed to “control” such other Person. “Controlling” and “Controlled” have meanings correlative thereto.

“Control Agreement” means a deposit account control agreement or securities account control agreement (or similar agreement), as applicable, in form and substance satisfactory to the Administrative Agent, executed by the Borrower or any of its Subsidiaries, as applicable, the Administrative Agent and the relevant financial institution party thereto. Such agreement shall provide (a) a first priority perfected Lien in favor of the Administrative Agent, for the benefit of the Lenders, in the Borrower’s or such Subsidiary’s, as applicable, deposit account and/or securities account and (b) that the Administrative Agent may exercise exclusive control upon an Event of Default.



“Controlled Account” means (a) a deposit account or securities account that is subject to a Control Agreement or (b) in the sole discretion of the Administrative Agent, a deposit account or securities account maintained with the Administrative Agent.

“Debt” means, for any Person, the sum of the following (without duplication): (a) all obligations of such Person for borrowed money or evidenced by bonds, bankers’ acceptances, debentures, notes or other similar instruments; (b) all obligations of such Person (whether contingent or otherwise) in respect of letters of credit, surety or other bonds and similar instruments; (c) all accounts payable and all accrued expenses, liabilities or other obligations of such Person to pay the deferred purchase price of Property or services that are more than 90 days past the date of invoice other than those which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (d) all obligations under Capital Leases; (e) all obligations under Synthetic Leases; (f) all Debt (as defined in the other clauses of this definition) of others secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) a Lien on any Property of such Person, whether or not such Debt is assumed by such Person; (g) all Debt (as defined in the other clauses of this definition) of others guaranteed by such Person or in which such Person otherwise assures a creditor against loss of the Debt (howsoever such assurance shall be made) to the extent of the lesser of the amount of such Debt and the maximum stated amount of such guarantee or assurance against loss; (h) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or covenants of others or to purchase the Debt or Property of others; (i) obligations to deliver commodities, goods or services, including Hydrocarbons, in consideration of one or more advance payments, made more than one month in advance of the month in which the commodities, goods or services are to be delivered other than gas balancing arrangements in the ordinary course of business; (j) obligations to pay for goods or services even if such goods or services are not actually received or utilized by such Person; (k) any Debt of a partnership for which such Person is liable either by agreement, by operation of law or by a Governmental Requirement but only to the extent of such liability; (l) Disqualified Capital Stock; and (m) the undischarged balance of any production payment created by such Person or for the creation of which such Person directly or indirectly received payment. The Debt of any Person shall include all obligations of such Person of the character described above to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is not included as a liability of such Person under GAAP. Debt shall not include liabilities resulting from endorsements of instruments for collection in the ordinary course of business.

“Debtor Relief Laws” means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.

“Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“Defaulting Lender” means, subject to Section 4.05(b) any Lender that (a) has failed to (i) fund all or any portion of its Loans within two Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, the Issuing Bank, or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit) within two Business Days of the date when due, (b) has notified the Borrower, the Administrative Agent or the Issuing Bank in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public



statement relates to such Lender's obligation to fund a Loan hereunder and states that such position is based on such Lender's determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity, or (iii) become the subject of a Bail-In Action; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 4.05(b)) upon delivery of written notice of such determination to the Borrower, the Issuing Bank, and each Lender.

“Deficiency Notification Date” has the meaning assigned to such term in Section 3.04(c)(ii).

“Disposition” or “Dispose” means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any Property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.

“Disqualified Capital Stock” means any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event, matures or is mandatorily redeemable for any consideration other than other Equity Interests (which would not constitute Disqualified Capital Stock), pursuant to a sinking fund obligation or otherwise, or is convertible or exchangeable for Debt or redeemable for any consideration other than other Equity Interests (which would not constitute Disqualified Capital Stock) at the option of the holder thereof, in whole or in part, on or prior to the date that is one year after the earlier of (a) the Maturity Date and (b) the date on which there are no Loans, LC Exposure or other obligations hereunder outstanding and all of the Commitments are terminated.

“dollars” or “$” refers to lawful money of the United States of America.

“Domestic Subsidiary” means any Subsidiary that is organized under the laws of the United States of America or any state thereof or the District of Columbia.

“EBITDAX” means, as of any date and for any period of determination thereof, Consolidated Net Income for such period; plus, without duplication and to the extent deducted in the calculation of Consolidated Net Income for such period, the sum of (a) income or franchise Taxes paid or accrued, (b) Interest Expense, (c) amortization, depletion and depreciation expense, and any non-cash, ceiling test writedowns, (d) exploration expenses and other similar non-cash charges and expenses, (e) any non-cash losses, charges or gains under Swap Agreements resulting from the requirements of ASC 815 or with



respect to retirement obligations resulting from the requirements of ASC 410 for that period (provided that, for the avoidance of doubt, any losses or charges in respect of the termination of any Swap Agreements shall not be added to Consolidated Net Income and gains will not be subtracted), (f) losses from sales or other dispositions of assets (other than Hydrocarbons produced in the ordinary course of business) and other extraordinary or non-recurring losses, and (g) other non-cash charges (excluding accruals for cash expenses made in the ordinary course of business); minus, to the extent included in the calculation of Consolidated Net Income for such period, the sum of (i) any non-cash gains on any Swap Agreements resulting from the requirements of ASC 815 or with respect to retirement obligations resulting from the requirements of ASC 410 for such period, (ii) extraordinary or non-recurring gains attributable to such period, and (iii) gains from sales or other dispositions of assets (other than Hydrocarbons produced in the ordinary course of business) attributable to such period; provided that, for purposes of calculating the ratios set forth in Sections 9.01(a) and 9.01(b), EBITDAX shall be subject to pro forma adjustments for Material Acquisitions and Material Dispositions assuming that such transactions had occurred on the first day of the applicable calculation period, which adjustments shall be made in a manner reasonably acceptable to the Administrative Agent.

“ECP” means an “eligible contract participant” as defined in Section 1(a)(18) of the Commodity Exchange Act or any regulations promulgated thereunder and the applicable rules issued by the Commodity Futures Trading Commission and/or the SEC.

“EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

“EEA Member Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.

“EEA Resolution Authority” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

“Effective Date” means the date on which the conditions specified in Section 6.01 are satisfied (or waived in accordance with Section 12.02).

“Electronic System” means any electronic system, including e-mail, e-fax, Intralinks \( ^{®} \) , ClearPar \( ^{®} \) , Debt Domain, Syndtrak and any other Internet or extranet-based site, whether such electronic system is owned, operated or hosted by the Administrative Agent and the Issuing Bank and any of its respective Related Parties or any other Person, providing for access to data protected by passcodes or other security system.

“Engineering Reports” has the meaning assigned to such term in Section 2.07(c)(i).

“Environmental Laws” means any and all Governmental Requirements pertaining in any way to health and safety (insofar as either may be affected by a Release of, or exposure to, Hazardous Materials) the environment, the preservation or reclamation of natural resources, or the management, Release or threatened Release of any Hazardous Materials, in effect in any and all jurisdictions in which the Borrower or any Subsidiary is conducting, or at any time has conducted, business, or where any Property of the Borrower or any Subsidiary is located, including, the Oil Pollution Act of 1990, as amended, the



Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 (“CERCLA”), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 (“RCR4”), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, the Natural Gas Pipeline Safety Act of 1968, as amended, the Hazardous Liquid Pipeline Safety Act of 1979, as amended, and other environmental conservation or protection Governmental Requirements.

“Environmental Permit” means any permit, registration, license, notice, approval, consent, exemption, variance, or other authorization required under or issued pursuant to applicable Environmental Laws.

“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any of the foregoing.

“ERISA” means the Employee Retirement Income Security Act of 1974.

“ERISA Affiliate” means each trade or business (whether or not incorporated) which together with any Group Member would be deemed to be a “single employer” within the meaning of Section 4001(b)(1) of ERISA or subsections (b), (c), (m) or (o) of Section 414 of the Code.

“ERISA Event” means (a) a Reportable Event with respect to any Plan subject to Title IV of ERISA, (b) the withdrawal of the Borrower or any of its Subsidiaries or ERISA Affiliates from a Plan subject to Title IV of ERISA during a plan year in which it was a “substantial employer” (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Plan or a Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Plan subject to Title IV of ERISA, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, or (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of the Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan.

“EU Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time.

“Eurodollar” when used in reference to any Loan or Borrowing, refers to such Loan, or the Loans comprising such Borrowing, bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” has the meaning assigned to such term in Section 10.01.

“Accepted Liens” means: (a) Liens for Taxes, assessments or other governmental charges or levies which are not delinquent or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (b) Liens in connection with workers’ compensation, unemployment insurance or other social security, old age pension or public liability obligations which are not delinquent or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (c) statutory



landlord's liens, operators', vendors', carriers', warehousemen's, repairmen's, mechanics', suppliers', workers', materialmen's, construction or other like Liens arising by operation of law or otherwise in the ordinary course of business or incident to the exploration, development, operation and maintenance of Oil and Gas Properties each of which is in respect of obligations that are not delinquent or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP; (d) contractual Liens which arise in the ordinary course of business under real property leases, operating agreements, joint venture agreements, oil and gas partnership agreements, oil and gas leases, farm-out agreements, division orders, contracts for the sale, transportation or exchange of oil and natural gas, unitization and pooling declarations and agreements, area of mutual interest agreements, overriding royalty agreements, marketing agreements, processing agreements, net profits agreements, development agreements, service agreements, supply agreements, gas balancing or deferred production agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or other geophysical permits or agreements, and other agreements which are usual and customary in the oil and gas business and are for claims which are not delinquent or which are being contested in good faith by appropriate action and for which adequate reserves have been maintained in accordance with GAAP, provided that any such Lien referred to in this clause does not materially impair the use of the Property covered by such Lien for the purposes for which such Property is held by any Group Member or materially impair the value of such Property subject thereto; (e) Liens arising solely by virtue of any statutory or common law provision or customary deposit account terms relating to banker's liens, rights of set-off or similar rights and remedies and burdening only deposit accounts or other funds maintained with a creditor depository institution, provided that no such deposit account is a dedicated cash collateral account or is subject to restrictions against access by the depositor in excess of those set forth by regulations promulgated by the Board and no such deposit account is intended by any Group Member to provide collateral to the depository institution to secure any Debt (other than pursuant to the Loan Documents); (f) zoning and land use requirements, easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations in any Property of any Group Member for the purpose of roads, pipelines, transmission lines, transportation lines, distribution lines for the removal of gas, oil, coal or other minerals or timber, and other like purposes, or for the joint or common use of real estate, rights of way, facilities and equipment, that do not secure any monetary obligations and which in the aggregate do not materially impair the use of such Property for the purposes of which such Property is held by any Group Member or materially impair the value of such Property subject thereto; (g) Liens on cash or securities pledged to secure performance of tenders, surety and appeal bonds, government contracts, performance and return of money bonds, bids, trade contracts, leases, statutory obligations, regulatory obligations and other obligations of a like nature incurred in the ordinary course of business and not in connection with the borrowing of money, and (h) judgment and attachment Liens not giving rise to an Event of Default, provided that any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceeding may be initiated shall not have expired and no action to enforce such Lien has been commenced; provided, further, that Liens described in clauses (a) through (e) shall remain "Excepted Liens" only for so long as no action to enforce such Lien has been commenced, and no intention to subordinate the first priority Lien otherwise granted in favor of the Administrative Agent and the Lenders is to be hereby implied or expressed by the permitted existence of such Excepted Liens.

“Excess Cash” means, at any time, the amount of the Consolidated Cash Balance (minus Late Receipts) in excess of the Consolidated Cash Balance Threshold.

“Excluded Accounts” means those accounts listed on Schedule 1.2(a), provided that in no event shall any operating account of the Borrower or any Subsidiary constitute an Excluded Account.

“Excluded Swap Obligation” means, with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guarantee of such Guarantor of, or the grant by such Guarantor of



a security interest to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor's failure for any reason to constitute an ECP at the time the Guarantee of such Guarantor or the grant of such security interest becomes or would become effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guarantee or security interest is or becomes illegal.

“Excluded Taxes” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof), or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan, Letter of Credit or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan, Letter of Credit or Commitment (other than pursuant to an assignment request by the Borrower under Section 5.05) or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 5.03, amounts with respect to such Taxes were payable either to such Lender's assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its lending office, (c) Taxes attributable to any Recipient's failure to comply with Section 5.03(c), and (d) any United States federal withholding Taxes imposed under FATCA.

“FATCA” means Sections 1471 through 1474 of the Code, as of the Effective Date (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b)(1) of the Code, any intergovernmental agreement entered into in connection with the implementation of such Sections of the Code and any fiscal or regulatory legislation, rules or practices adopted pursuant to such intergovernmental agreement.

“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of Dallas, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

“Fee Letter” means the letter agreement dated December 21, 2016, between the Borrower and the Administrative Agent and any other separate letter agreement among the Borrower, the Administrative Agent and/or the Arranger concerning fees to be paid to the Administrative Agent and/or the Arranger.

“Financial Officer” means, for any Person, the Chief Executive Officer, Chief Financial Officer, principal accounting officer, treasurer or controller of such Person. Unless otherwise specified, all references herein to a Financial Officer means a Financial Officer of the Borrower.

“fiscal quarter” means each fiscal quarter ending on the last day of each March, June, September and December.



“fiscal year” means each fiscal year of the Borrower and its Subsidiaries for accounting and tax purposes, ending on December 31 of each year.

“Flood Insurance Regulations” means (a) the National Flood Insurance Act of 1968 as now or hereafter in effect or any successor statute thereto, (b) the Flood Disaster Protection Act of 1973 as now or hereafter in effect or any successor statute thereto, (c) the National Flood Insurance Reform Act of 1994 (amending 42 USC § 4001, et seq.), as the same may be amended or recodified from time to time, (d) the Flood Insurance Reform Act of 2004, and (e) the Biggert-Waters Flood Reform Act of 2012, and any regulations promulgated thereunder.

“Foreign Lender” means a Lender that is not a U.S. Person.

“Foreign Subsidiary” means any Subsidiary that is not a Domestic Subsidiary.

“Fronting Exposure” means, at any time there is a Defaulting Lender, with respect to the Issuing Bank, such Defaulting Lender’s Applicable Percentage of the outstanding LC Exposures other than LC Exposures as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof.

“Fund” means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans, bonds and similar extensions of credit in the ordinary course of its activities.

“GAAP” means generally accepted accounting principles in the United States of America as in effect from time to time subject to the terms and conditions set forth in Section 1.05.

“Governmental Authority” means the government of the United States of America on any other nation, or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

“Governmental Requirement” means any law, statute, code, ordinance, order, determination, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, rules of common law, authorization or other directive or requirement, whether now or hereinafter in effect, of any Governmental Authority.

“Group Members” means the collective reference to the Borrower and its Subsidiaries.

“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Debt or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Debt or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Debt or obligation; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.



“Guarantors” means each Group Member that guarantees the Secured Obligations pursuant to Section 8.14(b).

“Guaranty Agreement” means an agreement executed by the Guarantors in favor of the Administrative Agent in substantially the form of Exhibit E-2, as the same may be amended, modified or supplemented from time to time.

“Hazardous Material” means any substance regulated or as to which liability might arise under any applicable Environmental Law including: (a) any chemical, compound, material, product, byproduct, substance or waste defined as or included in the definition or meaning of “hazardous substance,” “hazardous material,” “hazardous waste,” “solid waste,” “toxic waste,” “extremely hazardous substance,” “toxic substance,” “contaminant,” “pollutant,” or words of similar meaning or import found in any applicable Environmental Law; (b) Hydrocarbons, petroleum products, petroleum substances, natural gas, oil, oil and gas waste (including drilling fluids and any produced water), crude oil, and any components, fractions, or derivatives thereof; and (c) radioactive materials, explosives, asbestos or asbestos containing materials, polychlorinated biphenyls, radon, infectious materials or medical wastes.

“Highest Lavful Rate” means, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or on other Secured Obligations under laws applicable to such Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws allow as of the date hereof.

“Hydrocarbon Interests” means all rights, titles, interests and estates now or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, including any reserved or residual interests of whatever nature.

“Hydrocarbons” means oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all constituents, elements or compounds thereof and all products refined or separated therefrom

“Indemnified Taxes” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document and (b) to the extent not otherwise described in clause (a) above, Other Taxes.

“Initial Reserve Report” means the report of the chief engineer of the Borrower with respect to the Oil and Gas Properties of the Loan Parties dated as of July 1, 2016.

“Interest Election Request” means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.04.

“Interest Expense” means, as of any date and for any period of determination thereof, total interest expense (including that attributable to Capital Leases) of the Borrower and its Subsidiaries for such period with respect to all outstanding Debt of the Borrower and its Subsidiaries (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptances and net costs under Swap Agreements in respect of interest rates, to the extent such net costs are allocable to such period in accordance with GAAP), calculated for the Borrower and its Consolidated Subsidiaries on a consolidated basis for such period in accordance with GAAP.



“Interest Payment Date” means (a) with respect to any ABR Loan, the first Business Day of each January, April, July and October and (b) with respect to any Eurodollar Loan, the last Business Day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last Business Day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

“Interest Period” means with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (b) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period and (c) no Interest Period may have a term which would extend beyond the Maturity Date. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“Interim Redetermination” has the meaning assigned such term in Section 2.07(b).

“Investment” means, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of Equity Interests of any other Person or any agreement to make any such acquisition (including any “short sale” or any sale of any securities at a time when such securities are not owned by the Person entering into such short sale); (b) the making of any deposit with, or advance, loan or capital contribution to, assumption of Debt of, purchase or other acquisition of any other Debt of or equity participation or interest in, or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person, but excluding any such advance, loan or extension of credit having a term not exceeding 90 days representing the purchase price of goods or services sold by such Person in the ordinary course of business); (c) the purchase or acquisition (in one or a series of transactions) of Property of another Person that constitutes a business unit or any agreement to make any such acquisition; or (d) the entering into of any guarantee of, or other contingent obligation (including the deposit of any Equity Interests to be sold) with respect to, Debt or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person.

“Issuing Bank” means BBVA Compass, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.08(i).

“January 1 Reserve Report” has the meaning assigned to such term in Section 8.12(a).

“Late Receipts” means, as of any date of determination on any Business Day, any funds received by the Borrower on such Business Day after 10:00 a.m. Houston time, from the sale of Property or otherwise to the extent such funds would cause the Consolidated Cash Balance to exceed the Consolidated Cash Balance Threshold at the end of such Business Day.

“LC Commitment” at any time means $1,500,000.

“LC Disbursement” means a payment made by the Issuing Bank pursuant to a Letter of Credit.



“LC Exposure” means, at any time of determination, the sum of (a) the aggregate amount available to be drawn of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time.

“Lenders” means the Persons listed on Annex I and any Person that shall have become a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.

“Letter of Credit” means any letter of credit issued pursuant to this Agreement.

“Letter of Credit Agreements” means all letter of credit applications and other agreements (including any amendments, modifications or supplements thereto) submitted by the Borrower, or entered into by the Borrower, with the Issuing Bank relating to any Letter of Credit.

“LIBO Rate” for any Interest Period with respect to any Loan the interest on which is determined by reference to the LIBO Rate, the rate appearing on Reuters Screen LIBOR01 Page (or on any successor to or substitute page for such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by the Agent from time to time for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period as the rate for dollar deposits with a maturity comparable to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the “LIBO Rate” shall be the interest rate per annum determined by the Administrative Agent to be the average of the rates per annum at which deposits in dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Administrative Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the beginning of such Interest Period; provided further that if the LIBO Rate shall be less than zero, such rate will be deemed to be zero for purposes of this Agreement. The determination and calculation of the LIBO Rate and each component thereof by the Administrative Agent shall be conclusive and binding, absent manifest error.

“Lier” means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to (a) the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or rent receipt or a lease, consignment or bailment for security purposes or (b) production payments and the like payable out of Oil and Gas Properties. The term “Lien” shall include easements, restrictions, servitudes, permits, conditions, covenants, exceptions or reservations that burden Property to the extent they secure an obligation owed to a Person other than the owner of the Property. For the purposes of this Agreement, the Loan Parties shall be deemed to be the owner of any Property which they have acquired or hold subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing.

“Loan Documents” means this Agreement, the Notes, the Letter of Credit Agreements, the Letters of Credit, the Security Instruments and any other agreement entered into, now or in the future, in connection with this Agreement.

“Loan Party” means the Borrower and each Guarantor.



“Loans” means the loans made by the Lenders to the Borrower pursuant to this Agreement.

“Majority Lenders” means, (a) at any time while no Loans or LC Exposure is outstanding, Lenders having greater than 50% of the Aggregate Maximum Credit Amounts; and (b) at any time while any Loans or LC Exposure is outstanding, Lenders holding greater than 50% of the sum of (i) the outstanding aggregate principal amount of the Loans or participation interests in Letters of Credit (without regard to any sale by a Lender of a participation in any Loan under Section 12.04(c)) and (ii) the aggregate unused Commitments; provided that the Maximum Credit Amounts and Commitments of, and the Loans and participations interests in Letters of Credit held by, the Defaulting Lenders (if any) shall be excluded from the determination of Majority Lenders.

“Material Acquisition” means any acquisition of Property or series of related acquisitions of Property that involves the payment of consideration by the Borrower and its Subsidiaries in excess of $5,000,000.

“Material Adverse Effect” means any event, development or circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the business, operations, Property, assets, liabilities (actual or contingent), condition (financial or otherwise), prospects or material agreements of the Borrower and the other Loan Parties taken as a whole, (b) the ability of the Borrower or any other Loan Party to perform any of its obligations under any Loan Document to which it is a party, (c) the validity or enforceability of any Loan Document, or (d) the rights and remedies of or benefits available to the Administrative Agent, any other Agent, the Issuing Bank or any Lender under any Loan Document.

“Material Disposition” means any sale, transfer or other disposition of Property or series of related sales, transfers or other dispositions of property that yields gross proceeds to the Borrower or any of its Subsidiaries in excess of $5,000,000.

“Material Indebtedness” means Debt (other than the Loans and Letters of Credit), or obligations in respect of one or more Swap Agreements, of any one or more of any Loan Party in an aggregate principal amount exceeding $2,500,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of any Loan Party in respect of any Swap Agreement at any time shall be the Swap Termination Value.

“Maturity Date” means February 15, 2021.

“Maximum Credit Amount” means, as to each Lender, the amount set forth opposite such Lender’s name on Annex I under the caption “Maximum Credit Amounts”, as the same may be (a) reduced or terminated from time to time in connection with a reduction or termination of the Aggregate Maximum Credit Amounts pursuant to Section 2.06 or (b) modified from time to time pursuant to any assignment permitted by Section 12.04(d). As of the Effective Date, the aggregate Maximum Credit Amounts of the Lenders are $300,000,000.

“Minimum Collateral Amount” means, at any time, (a) with respect to Cash Collateral consisting of cash or deposit account balances, an amount equal to 105% of the Fronting Exposure of the Issuing Bank with respect to Letters of Credit issued and outstanding at such time and (b) if the Borrower agrees to deliver Cash Collateral consisting of Property other than cash or deposit account balances, an amount determined by the Issuing Bank in its sole discretion.

“Moody’s” means Moody’s Investors Service, Inc. and any successor thereto that is a nationally recognized rating agency.



“Mortgage” means each of the mortgages or deeds of trust executed by any one or more Loan Parties for the benefit of the Secured Parties as security for the Secured Obligations, together with any assumptions or assignments of the obligations thereunder by any Loan Party, and “Mortgages” shall mean all of such Mortgages collectively.

“Mortgaged Property” means any Property owned by any Loan Party which is subject to the Liens existing and to exist under the terms of the Security Instruments.

“Multiemployer Plan” means a multimployer plan, as defined in section 3(37) or 4001(a)(3) of ERISA, that is subject to Title IV of ERISA and to which the Borrower, a Subsidiary or an ERISA Affiliate is making or accruing an obligation to make contributions or was obligated to make contributions within the last 6 years.

“New Borrowing Base Notice” has the meaning assigned to such term in Section 2.07(d).

“Non-Defaulting Lender” means, at any time, each Lender that is not a Defaulting Lender at such time.

“Notes” means the promissory notes, if any, of the Borrower described in Section 2.02(d) and being substantially in the form of Exhibit A, together with all amendments, modifications, replacements, extensions and rearrangements thereof.

“Oil and Gas Properties” means (a) Hydrocarbon Interests; (b) the Properties now or hereafter pooled or unitized with Hydrocarbon Interests; (c) all presently existing or future unitization agreements, pooling agreements and declarations of pooled units and the units created thereby (including all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests; (d) all operating agreements, contracts and other agreements, including production sharing contracts and agreements, which relate to any of the Hydrocarbon Interests or the production, sale, transportation, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests; (e) all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests; (f) all tenements, hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and (g) all Properties, rights, titles, interests and estates described or referred to above, including any and all Property, real or personal, now owned or hereafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or Property (excluding drilling rigs, automotive equipment, rental equipment or other personal Property which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, sub additions, replacements, accessions and attachments to any and all of the foregoing.

“Organizational Documents” means (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to such corporation’s jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of



formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.

“Other Connection Taxes” means with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to, or enforced, any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

“Other Taxes” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 5.05).

“Participant” has the meaning assigned to such term in Section 12.04(c).

“Participant Register” has the meaning assigned to such term in Section 12.04(c).

“Patriot Act” has the meaning assigned to such term in Section 12.16.

“PBGC” means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto.

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any employee pension benefit plan, as defined in section 3(2) of ERISA but excluding any Multiemployer Plan, which (a) is currently or hereafter sponsored, maintained or contributed to by the Borrower, a Subsidiary or an ERISA Affiliate or (b) was at any time during the six calendar years preceding the date hereof, sponsored, maintained or contributed to by the Borrower or a Subsidiary or an ERISA Affiliate.

“Prime Rate” means the rate of interest per annum publicly announced from time to time by BBVA Compass as its prime rate in effect at its principal office in Houston, Texas; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. Such rate is set by the Administrative Agent as a general reference rate of interest, taking into account such factors as the Administrative Agent may deem appropriate; it being understood that many of the Administrative Agent’s commercial or other loans are priced in relation to such rate, that it is not necessarily the lowest or best rate actually charged to any customer and that the Administrative Agent may make various commercial or other loans at rates of interest having no relationship to such rate.

“Prohibited Transaction” has the meaning assigned to such term in Section 406 of ERISA and Section 4975(c) of the Code.

“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including cash, securities, accounts and contract rights.



“Proposed Borrowing Base” has the meaning assigned to such term in Section 2.07(c)(i).

“Proposed Borrowing Base Notice” has the meaning assigned to such term in Section 2.07(c)(ii).

“Qualified ECP Guarantor” means, in respect of any Swap Obligation, each Loan Party that has total assets exceeding $10,000,000 at the time the relevant Guarantee or grant of the relevant security interest becomes or would become effective with respect to such Swap Obligation or such other person as constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an “eligible contract participant” at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

“RCRA” has the meaning assigned to such term within the definition of “Environmental Laws.”

“Recipient” means, as applicable, (a) the Administrative Agent, (b) any Lender, or (c) the Issuing Bank, or any combination thereof (as the context requires).

“Redemption” means with respect to any Debt, the repurchase, redemption, prepayment, repayment, defeasance or any other acquisition or retirement for value (or the segregation of funds with respect to any of the foregoing) of such Debt. “Redemption” has the correlative meaning thereto.

“Redetermination Date” means, with respect to any Scheduled Redetermination or any Interim Redetermination, the date that the redetermined Borrowing Base related thereto becomes effective pursuant to Section 2.07(d).

“Register” has the meaning assigned to such term in Section 12.04(b)(iv).

“Regulation D” means Regulation D of the Board, as the same may be amended, supplemented or replaced from time to time.

“Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors (including attorneys, accountants and experts) and representatives of such Person and of such Person’s Affiliates.

“Release” means any depositing, spilling, leaking, pumping, pouring, placing, emitting, discarding, abandoning, emptying, discharging, migrating, injecting, escaping, leaching, dumping, or disposing.

“Remedial Work” has the meaning assigned to such term in Section 8.10(a).

“Reportable Event” means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days’ notice to the PBGC is waived under applicable regulations.

“Required Lenders” means, (a) at any time while no Loans or LC Exposure is outstanding, Lenders having at least 66-2/3% of the Aggregate Maximum Credit Amounts; and (b) at any time while any Loans or LC Exposure is outstanding, Lenders holding at least 66-2/3% of the sum of (i) the outstanding aggregate principal amount of the Loans or participation interests in Letters of Credit (without regard to any sale by a Lender of a participation in any Loan under Section 12.04(c)) and (ii) the aggregate unused Commitments; provided that the Maximum Credit Amounts and unused Commitments of, and the Loans and participation interests in Letters of Credit held by, the Defaulting Lenders (if any) shall be excluded from the determination of Required Lenders.



“Reserve Report” means a report, in form and substance reasonably satisfactory to the Administrative Agent, setting forth, as of the dates set forth in Section 8.12(a) (or such other date in the event of an Interim Redetermination), the proved reserves attributable to the Oil and Gas Properties of the Borrower and the other Loan Parties located in the U.S., together with a projection of the rate of production and future net income, taxes, operating expenses and capital expenditures with respect thereto as of such date, based upon economic assumptions consistent with the Administrative Agent’s lending requirements at the time.

“Reserve Report Certificate” has the meaning set forth in Section 8.12(c).

“Responsible Officer” means, as to any Person, the Chief Executive Officer, the President, any Financial Officer or any Vice President of such Person. Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Borrower.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other Property) with respect to any Equity Interests in any Person, or any payment (whether in cash, securities or other Property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, conversion, cancellation or termination of any such Equity Interests or any option, warrant or other right to acquire any such Equity Interests.

“Revolving Credit Exposure” means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender’s Loans and its LC Exposure (excluding all LC Exposure that has been Cash Collateralized) at such time.

“S&P” means Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc., and any successor thereto that is a nationally recognized rating agency.

“Sanctioned Country” means, at any time, a country, region or territory which is itself the subject or target of any Sanctions (at the time of this Agreement, Crimea, Cuba, Iran, North Korea, Sudan and Syria).

“Sanctioned Person” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b).

“Sanctions” means all economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State.

“Scheduled Redetermination” has the meaning assigned to such term in Section 2.07(b).

“Scheduled Redetermination Date” means the date on which a Borrowing Base that has been redetermined pursuant to a Scheduled Redetermination becomes effective as provided in Section 2.07(d).

“SEC” means the Securities and Exchange Commission or any successor Governmental Authority.

“Secured Cash Management Agreement” means an agreement related to Cash Management Services between (x) any Loan Party and (y) a Secured Cash Management Provider.



“Secured Cash Management Provider” means, with respect to any agreement related to Cash Management Services, a Lender, an Affiliate of a Lender, the Administrative Agent or an Affiliate of the Administrative Agent who is the counterparty to any such agreement related to Cash Management Services.

“Secured Obligations” means any and all amounts owing or to be owing by any Loan Party (x) to the Administrative Agent, the Issuing Bank or any Lender under any Loan Document, (y) to any Secured Swap Provider or Secured Cash Management Provider and (z) all renewals, extensions and/or rearrangements of any of the foregoing, in each case, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising (including interest accruing after the maturity of the Loans and LC Disbursements and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding); provided that solely with respect to any Guarantor that is not an “eligible contract participant” under the Commodity Exchange Act, Excluded Swap Obligations of such Guarantor shall in any event be excluded from “Secured Obligations” owing by such Guarantor.

“Secured Parties” means, collectively, the Administrative Agent, each Lender, the Issuing Bank, each Secured Cash Management Provider, each Secured Swap Provider, each Indemnitee, each other Agent, and any other Person owed Secured Obligations and “Secured Party” means any of them individually.

“Secured Swap Agreement” means a Swap Agreement between (x) any Loan Party and (y) a Secured Swap Provider.

“Secured Swap Provider” means, with respect to any Swap Agreement, (a) a Lender or an Affiliate of a Lender who is the counterparty to any such Swap Agreement with a Loan Party and (b) any Person who was a Lender or an Affiliate of a Lender at time when such Person entered into any such Swap Agreement who is a counterparty to any such Swap Agreement with a Loan Party.

“Securities Act” means the Securities Act of 1933.

“Security Agreement” means a security agreement executed by the Guarantors in favor of the Administrative Agent in substantially the form of Exhibit E-3, as the same may be amended, modified or supplemented from time to time.

“Security Instruments” means the Guaranty Agreements, the Security Agreements, the Mortgages, the mortgages, deeds of trust and other agreements, instruments or certificates described or referred to in Exhibit E-1, and any and all other agreements, instruments, consents or certificates now or hereafter executed and delivered by the Borrower, the other Loan Parties or any other Person (other than Swap Agreements with Secured Swap Providers or participation or similar agreements between any Lender and any other lender or creditor with respect to any Secured Obligations pursuant to this Agreement) in connection with, or as security for the payment or performance of the Secured Obligations, the Notes, this Agreement, or reimbursement obligations under the Letters of Credit, as such agreements may be amended, modified, supplemented or restated from time to time.

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject, with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “eurocurrency liabilities” in



Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“Subsidiary” means as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a direct or indirect Subsidiary or Subsidiaries of the Borrower.

“Swap Agreement” means any agreement with respect to any swap, cap, collar, forward, future or derivative transaction or option or similar agreement, whether exchange traded, “over-the-counter” or otherwise, involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions (including any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act); provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of any Loan Party shall be a Swap Agreement.

“Swap Obligation” means, with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act or any rules or regulations promulgated thereunder.

“Swap Termination Value” means, in respect of any one or more Swap Agreements, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Agreements, (a) for any date on or after the date such Swap Agreements have been closed out and termination value(s) determined in accordance therewith, such termination value(s) and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Agreements, as determined by the counterparties to such Swap Agreements.

“Synthetic Leases” means, in respect of any Person, all leases which shall have been, or should have been, in accordance with GAAP, treated as operating leases on the financial statements of the Person liable (whether contingently or otherwise) for the payment of rent thereunder and which were properly treated as indebtedness for borrowed money for purposes of U.S. federal income taxes, if the lessee in respect thereof is obligated to either purchase for an amount in excess of, or pay upon early termination an amount in excess of, 80% of the residual value of the Property subject to such operating lease upon expiration or early termination of such lease.

“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“Termination Date” means the earlier of the Maturity Date and the date of termination of the Commitments.



“Test Period” means, at any time, the four consecutive fiscal quarters of the Borrower then last ended (in each case taken as one accounting period) for which financial statements have been or are required to be delivered pursuant to this Agreement; provided, however, for purposes of the calculation of EBITDAX (i) for the Test Period ending December 31, 2016, such amounts shall be annualized by taking the results of the fiscal quarter ending December 31, 2016, and multiplying them by 4; (ii) for the Test Period ending March 31, 2017, such amounts shall be annualized by taking the results of the two fiscal quarters ending March 31, 2017, and multiplying them by 2; and (iii) for the Test Period ending June 30, 2017, such amounts shall be annualized by taking the results of the three fiscal quarters ending June 30, 2017, and multiplying them by 4/3.

“Total Debt” means, at any date, all Debt of the Borrower and its Consolidated Subsidiaries on a consolidated basis.

“Transactions” means, with respect to (a) the Borrower, the execution, delivery and performance by the Borrower of this Agreement, each other Loan Document to which it is a party, the borrowing of Loans, the use of the proceeds thereof and the issuance of Letters of Credit hereunder, the Borrower’s grant of the security interests and provision of collateral under the Security Instruments and Borrower’s grant of Liens on Mortgaged Properties (if applicable) and other Properties pursuant to the Security Instruments and (b) each other Loan Party, the execution, delivery and performance by such Loan Party of each Loan Document to which it is a party, the guaranteeing of the Secured Obligations and the other obligations under the Guaranty Agreement by such Loan Party and such Loan Party’s grant of the security interests and provision of collateral under the Security Instruments, and the grant of Liens by such Guarantor on Mortgaged Properties (if applicable) and other Properties pursuant to the Security Instruments.

“Type” when used in reference to any Loan or Borrowing, refers to the rate of interest on such Loan, or on the Loans comprising such Borrowing, determined by reference to either the Alternate Base Rate or the Adjusted LIBO Rate.

“U.S” means the United States of America.

“U.S Person” means a Person that is a “United States person” as defined in Section 7701(a)(30) of the Code.

“U.S Tax Compliance Certificate” has the meaning assigned to such term in Section 5.03(g)(ii)(B)(3).

“UCC” means the Uniform Commercial Code as in effect from time to time in the State of Texas or in any other state the laws of which are required to be applied in connection with the issue of perfection of security interests.

“Withholding Agent” means any Loan Party or the Administrative Agent.

“Write-Down and Conversion Powers” means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.

Section 1.03 Types of Loans and Borrowings. For purposes of this Agreement, Loans and Borrowings, respectively, may be classified and referred to by Type (e.g., a "Eurodollar Loan" or a "Eurodollar Borrowing").



Section 1.04 Terms Generally: Rules of Construction. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation", and the word "or" is not exclusive. The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument, certificate, Organizational Document or other document as from time to time amended, supplemented, restated or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth in the Loan Documents), (b) any reference herein to any law shall be construed as referring to such law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, (c) any reference herein to any Person shall be construed to include such Person's successors and assigns (subject to the restrictions contained in the Loan Documents), (d) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (e) with respect to the determination of any time period, the word "from" means "from and including" and the word "to" and "until" means "to but excluding" and the word "through" means "to and including" and (f) any reference herein to Articles, Sections, Annexes, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Annexes, Exhibits and Schedules to, this Agreement. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any Person solely because such Person or its legal representative drafted such provision.

Section 1.05 Accounting Terms and Determinations: GAAP. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Administrative Agent or the Lenders hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent with the initial financial statements delivered under Section 8.01, except for changes in which the Borrower's independent certified public accountants concur and which are disclosed to the Administrative Agent on the next date on which financial statements are required to be delivered to the Lenders pursuant to Section 8.01(a); provided that, unless the Borrower and the Majority Lenders shall otherwise agree in writing, no such change shall modify or affect the manner in which compliance with the covenants contained herein is computed such that all such computations shall be conducted utilizing financial information presented consistently with prior periods.

Section 1.06 Timing of Payment or Performance. When the payment of any obligation or the performance of any covenant, duty or obligation is stated to be due or performance required on a day which is not a Business Day, the date of such payment (other than as described in the definition of Interest Period) or performance shall extend to the immediately succeeding Business Day.

## ARTICLE II
THE CREDITS

Section 2.01 Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Loans to the Borrower during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the total Revolving Credit Exposures exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, repay and reborrow the Loans.



(a) Borrowings: Several Obligations. Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments are several and no Lender shall be responsible for any other Lender's failure to make Loans as required.

(b) Types of Loans. Subject to Section 3.03 and Section 5.05, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

(c) Minimum Amounts: Limitation on Number of Borrowings. At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $1,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $10,000 and not less than $1,000,000; provided that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.08(e); and provided further that an ABR Borrowing may be in a lesser amount such that after giving effect to such Borrowing the Loan Parties shall not have any Excess Cash. Borrowings of more than one Type may be outstanding at the same time, provided that there shall not at any time be more than a total of 6 Eurodollar Borrowings outstanding. Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date.

(d) Notes. If requested by a Lender, the Loans made by such Lender shall be evidenced by a single Note of the Borrower, dated, in the case of (i) any Lender party hereto as of the date of this Agreement, as of the date of this Agreement or (ii) any Lender that becomes a party hereto pursuant to an Assignment and Assumption, as of the effective date of the Assignment and Assumption, payable to such Lender in a principal amount equal to its Maximum Credit Amount as in effect on such date, and otherwise duly completed. Upon request from a Lender, in the event that any such Lender's Maximum Credit Amount increases or decreases for any reason (whether pursuant to Section 2.06, Section 12.04(b) or otherwise), the Borrower shall deliver or cause to be delivered on the effective date of such increase or decrease, a new Note payable to such Lender in a principal amount equal to its Maximum Credit Amount after giving effect to such increase or decrease, and otherwise duly completed. The date, amount, Type, interest rate and, if applicable, Interest Period of each Loan made by such Lender, and all payments made on account of the principal thereof, shall be recorded by such Lender on its books for its Note, and, prior to any transfer, may be recorded by such Lender on a schedule attached to such Note or any continuation thereof or on any separate record maintained by such Lender. Failure to make any such notation or to attach a schedule shall not affect any Lender's or the Borrower's rights or obligations in respect of such Loans or affect the validity of such transfer by any Lender of its Note.

## Section 2.03 Requests for Borrowings.

(a) To request a Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (x) in the case of a Eurodollar Borrowing, not later than 11:00 a.m.,



Houston, Texas time, three Business Days before the date of the proposed Borrowing, or (y) in the case of an ABR Borrowing, not later than 11:00 a.m., Houston, Texas time, one Business Day before the date of the proposed Borrowing; provided that no such notice shall be required for any deemed request of an ABR Borrowing to finance the reimbursement of an LC Disbursement as provided in Section 2.08(e). Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery, facsimile or other electronic communication to the Administrative Agent of a written Borrowing Request in substantially the form of Exhibit B and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:

(i) the aggregate amount of the requested Borrowing;

(ii) the date of such Borrowing, which shall be a Business Day;

(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period";

(v) the amount of the then effective Borrowing Base, the current total Revolving Credit Exposures (without regard to the requested Borrowing) and the pro forma total Revolving Credit Exposures (giving effect to the requested Borrowing);

(vi) the Consolidated Cash Balance (without regard to the requested Loan or any Late Receipts) and the pro forma Consolidated Cash Balance (after giving effect to the requested Loan and the use of proceeds thereof but not any Late Receipts); and

(vii) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.05.

(b) If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Each Borrowing Request shall constitute a representation that (i) the amount of the requested Borrowing shall not cause the total Revolving Credit Exposures to exceed the total Commitments (i.e., the lesser of the Aggregate Maximum Credit Amounts and the then effective Borrowing Base) and (ii) at the time of and immediately after giving effect to the requested Borrowing, the Borrower and its Subsidiaries shall not have any Excess Cash.

(c) Promptly following receipt of a Borrowing Request in accordance with this Section 2.03, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing.

## Section 2.04 Interest Elections.

(a) Conversion and Continuance. Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in



the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section 2.04. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.

(b) Interest Election Requests. To make an election pursuant to this Section 2.04, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery, facsimile or other electronic communication to the Administrative Agent of a written Interest Election Request in substantially the form of Exhibit C and signed by the Borrower.

(c) Information in Interest Election Requests. Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:

(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to Section 2.04(c)(iii) and Section 2.04(c)(iv) shall be specified for each resulting Borrowing);

(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and

(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration.

(d) Notice to the Lenders by the Administrative Agent. Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing.

(e) Effect of Failure to Deliver Timely Interest Election Request and Events of Default and Borrowing Base Deficiencies on Interest Election. If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default or a Borrowing Base Deficiency has occurred and is continuing, (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing (and any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective) and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.



(a) Funding by the Lenders. Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 11:00 a.m., Houston, Texas time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent and designated by the Borrower in the applicable Borrowing Request; provided that ABR Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.08(e) shall be remitted by the Administrative Agent to the Issuing Bank. Nothing herein shall be deemed to obligate any Lender to obtain the funds for its Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for its Loan in any particular place or manner.

(b) Presumption of Funding by the Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.05(a) and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing.

## Section 2.06 Termination and Reduction of Aggregate Maximum Credit Amounts.

(a) Scheduled Termination of Commitments. Unless previously terminated, the Commitments shall terminate on the Maturity Date. If at any time the Aggregate Maximum Credit Amounts are terminated by the Borrower, then the Commitments shall terminate on the effective date of such termination or reduction.

## (b) Optional Termination and Reduction of Aggregate Maximum Credit Amounts.

(i) The Borrower may at any time terminate, or from time to time reduce, the Aggregate Maximum Credit Amounts; provided that (A) each reduction of the Aggregate Maximum Credit Amounts shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (B) the Borrower shall not terminate or reduce the Aggregate Maximum Credit Amounts if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 3.04(b), the total Revolving Credit Exposures would exceed the total Commitments.



(ii) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Aggregate Maximum Credit Amounts under Section 2.06(b)(i) at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Any election by the Borrower to terminate or reduce the Aggregate Maximum Credit Amounts pursuant to a notice delivered by the Borrower pursuant to this Section 2.06(b)(ii) may be made to be contingent upon the consummation of a refinancing or effectiveness of other credit facilities and such notice may otherwise be extended or revoked, in each case, with the requirements of Section 5.02 to apply to any failure of the contingency to occur and any such extension or revocation. Any termination or reduction of the Aggregate Maximum Credit Amounts shall be permanent and may not be reinstated. Each reduction of the Aggregate Maximum Credit Amounts shall be made ratably among the Lenders in accordance with each Lender's Applicable Percentage.

## Section 2.07 Borrowing Base.

(a) Initial Borrowing Base. For the period from and including the Effective Date to but excluding the next Redetermination Date, the amount of the Borrowing Base shall be $75,000,000. Notwithstanding the foregoing, the Borrowing Base may be subject to further adjustments from time to time pursuant to the Borrowing Base Adjustment Provisions.

(b) Scheduled and Interim Redeterminations. The Borrowing Base shall be determined on a semi-annual basis in accordance with this Section 2.07 (each such redetermination, a "Scheduled Redetermination"). Subject to Section 2.07(d), such redetermined Borrowing Base shall become effective and applicable to the Borrower, the Administrative Agent, the Issuing Bank and the Lenders on or about June 1st and December 1st of each year, as applicable. In addition, the Borrower may, by notifying the Administrative Agent thereof, and the Administrative Agent may, at the direction of the Required Lenders, by notifying the Borrower thereof, one time between each Scheduled Redetermination, each elect to cause the Borrowing Base to be redetermined (an "Interim Redetermination") in accordance with this Section 2.07.

(c) Each Scheduled Redetermination and each Interim Redetermination shall be effectuated as follows:

(i) Upon receipt by the Administrative Agent of (A) the applicable Reserve Report and related Reserve Report Certificate, (B) a cover letter by the preparing engineer outlining assumptions and limitations, tabular data showing summary level annual production and operating cash flow data by reserves category and summary results for each property (a online report) and (C) such other reports, data and supplemental information, including, without limitation, the information provided pursuant to Section 8.01 (as applicable) and Section 8.12, as may, from time to time, be reasonably requested by the Administrative Agent or the Majority Lenders (the Reserve Report and other documents, certificates and information described in the foregoing clauses (A) through (C) being the "Engineering Reports"), the Administrative Agent shall evaluate the information contained in the Engineering Reports and shall, in its sole discretion, propose a new Borrowing Base (the "Proposed Borrowing Base") based upon any information and such other information (including, without limitation, the status of title information with respect to the Oil and Gas Properties as described in the Engineering Reports and the existence of any other Debt) as the Administrative Agent deems appropriate in its sole



discretion and consistent with its customary oil and gas lending criteria as it exists at the particular time. In no event shall the Proposed Borrowing Base exceed the Aggregate Maximum Credit Amounts.

(ii) The Administrative Agent shall notify the Borrower and the Lenders of the Proposed Borrowing Base (the "Proposed Borrowing Base Notice"):

(A) in the case of a Scheduled Redetermination (1) if the Administrative Agent shall have received the Engineering Reports required to be delivered by the Borrower pursuant to Section 8.12(a) in a timely and complete manner, then on or before the 15th day following the date of delivery or (2) if the Administrative Agent shall not have received the Engineering Reports required to be delivered by the Borrower pursuant to Section 8.12(a) in a timely and complete manner, then promptly after the Administrative Agent has received complete Engineering Reports from the Borrower and has had a reasonable opportunity to determine the Proposed Borrowing Base in accordance with Section 2.07(c)(i); and

(B) in the case of an Interim Redetermination, on or about the 30th day after the Administrative Agent has received the required Engineering Reports.

(iii) Any Proposed Borrowing Base that would (A) increase the Borrowing Base then in effect must be approved by all Lenders and (B) decrease or maintain the Borrowing Base then in effect must be approved or be deemed to have been approved by the Required Lenders, in each case, as provided in this Section 2.07(c)(iii). Such decisions will be made by each Lender based upon such criteria as such Lender deems appropriate in its sole discretion and in accordance with each Lender's normal and customary standards and practices for determining the value of oil and gas properties based upon its usual and customary criteria for reserve based lending as they exist from time to time (including the assets, liabilities, cash flow, business, properties, prospects, management and ownership of the Borrower and the effect of hedging arrangements). Upon receipt of the Proposed Borrowing Base Notice, each Lender shall have 15 days to agree with the Proposed Borrowing Base or disagree with the Proposed Borrowing Base by proposing an alternate Borrowing Base. If, at the end of such 15-day period, in the case of a Proposed Borrowing Base that would decrease or maintain the Borrowing Base then in effect, a Lender has not communicated its approval or disapproval in writing to the Administrative Agent, such silence shall be deemed to be an approval of such Proposed Borrowing Base. If, at the end of such 15-day period, all of the Lenders, in the case of a Proposed Borrowing Base that would increase the Borrowing Base then in effect, or the Required Lenders, in the case of a Proposed Borrowing Base that would decrease or maintain the Borrowing Base then in effect, have approved or deemed to have approved the Proposed Borrowing Base, as aforesaid, then the Proposed Borrowing Base shall become the Borrowing Base, effective on the date specified in Section 2.07(d). If, however, at the end of such 15-day period, all of the Lenders or the Required Lenders, as applicable, have not approved or deemed to have approved the Proposed Borrowing Base as indicated above, then the Administrative Agent shall promptly thereafter poll the Lenders to ascertain the highest Borrowing Base then acceptable to all of the Lenders (in the case of any increase to the Borrowing Base) or a number of Lenders sufficient to constitute the Required Lenders (in any other case) and such amount shall become the new Borrowing Base, effective on the date specified in Section 2.07(d).



(d) Effectiveness of a Redetermined Borrowing Base. After a redetermined Borrowing Base is approved or is deemed to have been approved by all of the Lenders or the Required Lenders, as applicable, pursuant to Section 2.07(c)(iii), the Administrative Agent shall notify the Borrower and the Lenders of the amount of the redetermined Borrowing Base (the "New Borrowing Base Notice"), and such amount shall become the new Borrowing Base, effective and applicable to the Borrower, the Administrative Agent, the Issuing Bank and the Lenders:

(i) in the case of a Scheduled Redetermination, (A) if the Administrative Agent shall have received the Engineering Reports required to be delivered by the Borrower pursuant to Section 8.12(a) and (c) in a timely and complete manner, then on or about June 1st or December 1st of each year, as applicable, following such notice, or (B) if the Administrative Agent shall not have received the Engineering Reports required to be delivered by the Borrower pursuant to Section 8.12(a) and (c) in a timely and complete manner, then on the Business Day next succeeding delivery of such New Borrowing Base Notice; and

(ii) in the case of an Interim Redetermination, on the Business Day next succeeding delivery of such New Borrowing Base Notice.

Such amount shall then become the Borrowing Base until the next Redetermination Date or the next adjustment to the Borrowing Base under the Borrowing Base Adjustment Provisions, whichever occurs first. Notwithstanding the foregoing, no Scheduled Redetermination or Interim Redetermination shall become effective until the New Borrowing Base Notice related thereto is received by the Borrower.

## Section 2.08 Letters of Credit.

(a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of dollar denominated Letters of Credit for its own account or for the account of any other Loan Party, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the period from the Effective Date until the day which is 10 days prior to the end of the Availability Period; provided that the Borrower may not request the issuance, amendment, renewal or extension of Letters of Credit hereunder if a Borrowing Base Deficiency exists at such time or would exist as a result thereof. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control.

(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or send by facsimile (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (not less than three Business Days in advance of the requested date of issuance, amendment, renewal or extension) a notice:

(i) requesting the issuance of a Letter of Credit or identifying the Letter of Credit to be amended, renewed or extended;

(ii) specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day);



(iii) specifying the date on which such Letter of Credit is to expire (which shall comply with Section 2.08(c));

(iv) specifying the amount of such Letter of Credit;

(v) specifying the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit; and

(vi) specifying the amount of the then effective Borrowing Base and whether a Borrowing Base Deficiency exists at such time, the current total Revolving Credit Exposures (without regard to the requested Letter of Credit or the requested amendment, renewal or extension of an outstanding Letter of Credit) and the pro forma total Revolving Credit Exposures (giving effect to the requested Letter of Credit or the requested amendment, renewal or extension of an outstanding Letter of Credit).

Each notice shall constitute a representation that after giving effect to the requested issuance, amendment, renewal or extension, as applicable, (i) the LC Exposure shall not exceed the LC Commitment and (ii) the total Revolving Credit Exposures shall not exceed the total Commitments (i.e. the lesser of the Aggregate Maximum Credit Amounts and the then effective Borrowing Base).

If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank’s standard form in connection with any request for a Letter of Credit and shall guarantee the reimbursement of any Letter of Credit issued hereunder.

(c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension of a Letter of Credit, one year after such renewal or extension), in each case unless consented to by the Issuing Bank and the Administrative Agent, and (ii) the date that is ten days prior to the Maturity Date.

(d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in Section 2.08(c), or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this Section 2.08(d) in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default, the existence of a Borrowing Base Deficiency or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.



(e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than not later than 11:00 a.m., Houston, Texas time, on (i) the Business Day that the Borrower receives notice of such LC Disbursement, if such notice is received prior to 11:00 a.m., Houston, Texas time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is received after 11:00 a.m., Houston, Texas time, on the day of receipt; provided that, unless the Borrower has notified the Issuing Bank and Administrative Agent that it will, and does, reimburse such LC Disbursement by the required date and time, the Borrower shall, subject to the conditions to Borrowing set forth herein, be deemed to have requested, and the Borrower does hereby request under such circumstances, that such payment be financed with an ABR Borrowing in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Borrowing. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.05 with respect to Loans made by such Lender (and Section 2.05 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this Section 2.08(e), the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this Section 2.08(e) to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear.

(f) Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in Section 2.08(e) shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit, any Letter of Credit Agreement or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not substantially comply with the terms of such Letter of Credit or any Letter of Credit Agreement, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section 2.08(f), constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care.



when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised all requisite care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.

(g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by facsimile or other electronic transmission) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement.

(h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, until the Borrower shall have reimbursed the Issuing Bank for such LC Disbursement (either with its own funds or a Borrowing under Section 2.08(e)), the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Loans. Interest accrued pursuant to this Section 2.08(h) shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to Section 2.08(e) to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment.

(i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and a successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 3.05(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the replaced Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall also be deemed to refer to such successor. After the replacement of the Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit.

## (i) Cash Collateralization.

(i) If any Event of Default shall occur and be continuing and the Borrower receives notice from the Administrative Agent or the Majority Lenders demanding the deposit of cash collateral pursuant to this Section 2.08(i), then the Borrower shall deposit, in an account with the Administrative Agent, in the name of the Administrative Agent



and for the benefit of the Secured Parties, an amount in cash equal to the LC Exposure. If the Borrower is required to pay to the Administrative Agent the excess attributable to an LC Exposure in connection with any prepayment pursuant to Section 3.04(c), the Borrower shall deposit in such an account an amount equal to the amount of such excess as provided in Section 3.04(c), as of such date plus any accrued and unpaid interest thereon. The obligation to deposit such cash collateral pursuant to the two preceding sentences shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower or any Subsidiary described in Section 10.01(h) or Section 10.01(i).

(ii) At any time that there shall exist a Defaulting Lender, within one Business Day following the written request of the Administrative Agent or the Issuing Bank (with a copy to the Administrative Agent) the Borrower shall Cash Collateralize the Issuing Bank's Fronting Exposure with respect to such Defaulting Lender (determined after giving effect to Section 4.05(a)(iv) and any Cash Collateral provided by such Defaulting Lender) in an amount not less than the Minimum Collateral Amount.

(A) Grant of Security Interest. The Borrower, and to the extent provided by any Defaulting Lender, such Defaulting Lender, hereby grants to the Administrative Agent, for the benefit of the Issuing Bank, and agrees to maintain, a first priority security interest in all such Cash Collateral as security for the Defaulting Lenders' LC Exposure, to be applied pursuant to clause (B) below. If at any time the Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than the Administrative Agent and the Issuing Bank as herein provided, or that the total amount of such Cash Collateral is less than the Minimum Collateral Amount, the Borrower will, promptly upon demand by the Administrative Agent, pay or provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency (after giving effect to any Cash Collateral provided by the Defaulting Lender).

(B) Application. Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under this Section 2.08(i) or Section 4.05 in respect of Letters of Credit shall be applied to the satisfaction of the Defaulting Lender's LC Exposure (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) for which the Cash Collateral was so provided, prior to any other application of such property as may otherwise be provided for herein.

(C) Termination of Requirement. Cash Collateral (or the appropriate portion thereof) provided to reduce the Issuing Bank's Fronting Exposure shall no longer be required to be held as Cash Collateral pursuant to this Section 2.08(i) following (1) the elimination of the applicable Fronting Exposure (including by the termination of Defaulting Lender status of the applicable Lender) or (2) the determination by the Administrative Agent and the Issuing Bank that there exists excess Cash Collateral; provided that, subject to Section 4.05 the Person providing Cash Collateral and the Issuing Bank may agree that Cash Collateral shall be held to support future anticipated Fronting Exposure or other obligations and provided further that to the extent that such Cash Collateral was provided by the Borrower, such Cash Collateral shall remain subject to the security interest granted pursuant to the Loan Documents.



# ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES

Section 3.01 Repayment of Loans. The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan on the Termination Date.

## Section 3.02 Interest.

(a) ABR Loans. The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Margin, but in no event to exceed the Highest Lawful Rate.

(b) Eurodollar Loans. The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin, but in no event to exceed the Highest Lawful Rate.

(c) Post-Default Rate. Notwithstanding the foregoing, if (i) any principal of, or interest on, any Loan or any fee or other amount payable by the Borrower or any Guarantor hereunder or under any other Loan Document is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to 2.00% plus the rate applicable to ABR Loans as provided in Section 3.02(a) but in no event to exceed the Highest Lawful Rate, or (ii) an Event of Default has occurred and is continuing, all Loans outstanding at such time shall bear interest, after as well as before judgment, at the rate then applicable to such Loans (including the Applicable Margin) plus an additional 2.00%, but in no event to exceed the Highest Lawful Rate.

(d) Borrowing Base Deficiency Rate. Notwithstanding the foregoing, if a Borrowing Base Deficiency has occurred and is continuing, all Loans outstanding at such time shall bear interest, after as well as before judgment, at the rate then applicable to such Loans (including the Applicable Margin) plus an additional 2.00%, but in no event to exceed the Highest Lawful Rate.

(e) Interest Payment Dates. Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and on the Termination Date; provided that (i) interest accrued pursuant to Section 3.02(c) shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

(f) Interest Rate Computations. All interest hereunder shall be computed on the basis of a year of 360 days unless such computation would exceed the Highest Lawful Rate, in which case interest shall be computed on the basis of a year of 365 days (or 366 days in a leap year), except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error, and be binding upon the parties hereto.



Section 3.03 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate for such Interest Period; or

(b) the Administrative Agent is advised by the Majority Lenders that the Adjusted LIBO Rate or LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or facsimile as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective (and such Borrowing shall be automatically converted into ABR Loans on the last day of the applicable Interest Period), and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made either as an ABR Borrowing or at an alternate rate of interest determined by the Majority Lenders as their cost of funds.

## Section 3.04 Prepayments.

(a) Optional Prepayments. The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with Section 3.04(b).

(b) Notice and Terms of Optional Prepayment. The Borrower shall notify the Administrative Agent by telephone (confirmed by facsimile or other electronic transmission) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., Houston, Texas time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., Houston, Texas time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.06(b), then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.06(b). Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 3.02 and any amounts due under Section 5.02.

## (c) Mandatory Prepayments.

(i) Upon Optional Terminations and Reductions. If, after giving effect to any termination or reduction of the Aggregate Maximum Credit Amounts pursuant to Section 2.06(b), there is a Borrowing Base Deficiency, then the Borrower shall (A) prepay the Borrowings on the date of such termination or reduction in an aggregate



principal amount equal to such Borrowing Base Deficiency, and (B) if any Borrowing Base Deficiency remains after prepaying all of the Borrowings as a result of LC Exposure, Cash Collateralize such remaining deficiency as provided in Section 2.08(j). The Borrower shall be obligated to make such prepayment and/or deposit of Cash Collateral substantially concurrently with the effectiveness of such termination or reduction.

(ii) Upon Redeterminations, Title Related Adjustments, Etc. Upon any redetermination of the Borrowing Base pursuant to Section 2.07(b) or adjustment to the amount of the Borrowing Base in accordance with Section 8.13(c), if there is a Borrowing Base Deficiency, then, after receiving notice from the Administrative Agent by means of (x) a New Borrowing Base Notice or (y) written notice of adjustment pursuant to Section 8.13(c), in each case, of such Borrowing Base Deficiency (such date of receipt of notice, the "Deficiency Notification Date"), the Borrower shall, within 10 days of the Deficiency Notification Date inform the Administrative Agent of the Borrower's election to:

(A) within 30 days of the date such election is made, (1) prepay the Loans in an aggregate principal amount equal to such Borrowing Base Deficiency and (2) if any Borrowing Base Deficiency remains after prepaying all of the Loans as a result of any LC Exposure, Cash Collateralize such excess as provided in Section 2.08(j).

(B) prepay the Loans in five equal monthly installments, commencing on the 30th day following the Deficiency Notification Date with each payment being equal to 1/5 of the aggregate principal amount of such excess (as such Borrowing Base Deficiency may be reduced during such 5-month period as a result of a Borrowing Base re-determination or other adjustment of the Borrowing Base described herein),

(C) within 30 days of the date such election is made, provide additional collateral in the form of additional Oil and Gas Properties not evaluated in the most recently delivered Reserve Report or other collateral reasonably acceptable to the Administrative Agent having a Borrowing Base Value (as proposed by the Administrative Agent and approved by the Required Lenders) sufficient, after giving effect to any other actions taken pursuant to this Section 3.04(c) to eliminate any such excess, or

(D) undertake a combination of clauses (A), (B) and (C);

provided that, notwithstanding the options set forth above, in all cases, the Borrowing Base Deficiency must be eliminated on or prior to the Termination Date. If, because of LC Exposure, a Borrowing Base Deficiency remains after prepaying all of the Loans, the Borrower shall Cash Collateralize such remaining Borrowing Base Deficiency as provided in Section 2.08(j).

(iii) Upon Dispositions and Hedge Unwinds. Upon (A) any adjustment to the Borrowing Base pursuant to Section 9.10 and/or (B) any Disposition of Borrowing Base Properties at any time when an Event of Default or Borrowing Base Deficiency exists, the Borrower shall prepay the Borrowings in an aggregate principal amount equal to (1) with respect to clause (A), the Borrowing Base Value of such Borrowing Base Properties so disposed, and (2) with respect to clause (B), 100% of the cash proceeds received by the Borrower or such other Loan Party from such Disposition.



(iv) Upon Determination of Excess Cash. If, on any Business Day, (A) there are outstanding Loans or LC Exposure and (B) the Borrower has any Excess Cash as of the close of business on such day, then the Borrower shall, on the next succeeding Business Day, to the extent it then has Excess Cash, prepay the Borrowings in an aggregate principal amount equal to the amount of such Excess Cash and, if any Excess Cash remains after prepaying all of the Borrowings and there is LC Exposure, Cash Collateralize such LC Exposure in an amount equal to the remaining Excess Cash in accordance with Section 2.08(i).

(v) Application of Prepayments to Types of Borrowings. Each prepayment of Borrowings pursuant to this Section 3.04(c) shall be applied, first, ratably to any ABR Borrowings then outstanding, and, second, ratably to any Eurodollar Borrowings then outstanding, and if more than one Eurodollar Borrowing is then outstanding, to each such Eurodollar Borrowing in order of priority beginning with the Eurodollar Borrowing with the least number of days remaining in the Interest Period applicable thereto and ending with the Eurodollar Borrowing with the most number of days remaining in the Interest Period applicable thereto.

(vi) Interest to be Paid with Prepayments. Prepayments pursuant to this Section 3.04(c) shall be accompanied by accrued interest to the extent required by Section 3.02.

(d) No Premium or Penalty. Prepayments permitted or required under this Section 3.04 shall be without premium or penalty, except as required under Section 5.02.

## Section 3.05 Fees.

(a) Commitment Fees. The Borrower agrees to pay to the Administrative Agent for the account of each Lender (other than a Defaulting Lender to the extent set forth in Section 4.05) a commitment fee, which shall accrue at the applicable Commitment Fee Rate on the average daily amount of the unused amount of the Commitment of such Lender (determined taking into account both Loans and LC Exposure) during the period from and including the date of this Agreement to but excluding the Termination Date. Accrued commitment fees shall be payable in arrears on the first Business Day of January, April, July and October of each year and on the Termination Date, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days, unless such computation would exceed the Highest Lawful Rate, in which case interest shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

(b) Letter of Credit Fees. The Borrower agrees to pay (i) to the Administrative Agent for the account of each Lender (other than a Defaulting Lender to the extent set forth in Section 4.05) a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Margin used to determine the interest rate applicable to Eurodollar Loans (as such rate may be increased pursuant to Section 3.02(c)) on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements that has been funded by such Lender) during the period from and including the date of this Agreement to but excluding the later of the date on which such



Lender’s Commitment terminates and the date on which such Lender ceases to have any LC Exposure, (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate per annum agreed to in the Fee Letter on the average daily amount of the LC Exposure attributable to the Issuing Bank (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the date of this Agreement to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure and (iii) to the Issuing Bank, for its own account, its standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees accrued through and including the last Business Day of March, June, September and December of each year shall be payable on the first Business Day of the immediately following January, April, July and October, commencing on the first such date to occur after the date of this Agreement; provided that all such fees shall be payable on the Termination Date and any such fees accruing after the Termination Date shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to Section 3.05(b)(iii) shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days, unless such computation would exceed the Highest Lawful Rate, in which case interest shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

(c) Administrative Agent Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times specified in the Fee Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.

## ARTICLE

## PAYMENTS: PRO RATA TREATMENT: SHARING OF SET-OFFS

Section 4.01 Payments Generally: Pro Rata Treatment: Sharing of Set-offs.

(a) Payments by the Borrower. The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 5.01, Section 5.02, Section 5.03 or otherwise) prior to 11:00 a.m., Houston, Texas time, on the date when due, in immediately available funds, without defense, deduction, recoupment, set-off or counterclaim. Fees, once paid, shall be fully earned and shall not be refundable under any circumstances. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices specified in Section 12.01, except payments to be made directly to the Issuing Bank as expressly provided herein and except that payments pursuant to Section 5.01, Section 5.02, Section 5.03 and Section 12.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars.

(b) Application of Insufficient Payments. If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal,



unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties.

(c) Sharing of Payments by Lenders. If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or participations in LC Disbursements resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and participations in LC Disbursements and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans and participations in LC Disbursements of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and participations in LC Disbursements; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this Section 4.01(c) shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this Section 4.01(c) shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

Section 4.02 Presumption of Payment by the Borrower. Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders and/or the Issuing Bank that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders and/or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders and/or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or the Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

Section 4.03 Certain Deductions by the Administrative Agent. If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.05(a), Section 2.08(d), Section 2.08(e) or Section 4.02 then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. After acceleration or maturity of the Loans, all principal will be paid ratably as provided in Section 10.02(c).



Section 4.04 Disposition of Proceeds. The Security Instruments contain an assignment by the Borrower and/or the Guarantors unto and in favor of the Administrative Agent for the benefit of the Secured Parties of all of the Borrower's or each Guarantor's interest in and to production and all proceeds attributable thereto which may be produced from or allocated to the Mortgaged Property. The Security Instruments further provide in general for the application of such proceeds to the satisfaction of the Secured Obligations and other obligations described therein and secured thereby. Notwithstanding the assignment contained in such Security Instruments, until the occurrence of an Event of Default, (a) the Administrative Agent and the Lenders agree that they will neither notify the purchaser or purchasers of such production nor take any other action to cause such proceeds to be remitted to the Administrative Agent or the Lenders, but the Lenders will instead permit such proceeds to be paid to the Borrower and its Subsidiaries and (b) the Lenders hereby authorize the Administrative Agent to take such actions as may be necessary to cause such proceeds to be paid to the Borrower and/or such Subsidiaries.

## Section 4.05 Defaulting Lenders.

(a) Defaulting Lender Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by applicable law:

(i) Waivers and Amendments. Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definitions of Majority Lenders and Required Lenders.

(ii) Defaulting Lender Waterfall. Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article X or otherwise) or received by the Administrative Agent from a Defaulting Lender pursuant to Section 12.08 shall be applied at such time or times as may be determined by the Administrative Agent as follows: first, to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder; second, to the payment on a pro rata basis of any amounts owing by such Defaulting Lender to the Issuing Bank hereunder; third, to Cash Collateralize the Issuing Bank's Fronting Exposure with respect to such Defaulting Lender in accordance with Section 2.08(i); fourth, as the Borrower may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; fifth, if so determined by the Administrative Agent and the Borrower, to be held in a deposit account and released pro rata in order to (x) satisfy such Defaulting Lender's potential future funding obligations with respect to Loans under this Agreement and (y) Cash Collateralize the Issuing Bank's future Fronting Exposure with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement, in accordance with Section 2.08(j); sixth, to the payment of any amounts owing to the Lenders or the Issuing Bank as a result of any judgment of a court of competent jurisdiction obtained by any Lender or the Issuing Banks against such Defaulting Lender as a result of such Defaulting Lender's breach of its obligations under this Agreement; seventh, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against such Defaulting Lender as a result of such Defaulting Lender's breach of its obligations under this Agreement; and eighth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Loans or LC Disbursements in respect of which such Defaulting Lender has not fully funded its appropriate share, and



(y) such Loans were made or the related Letters of Credit were issued at a time when the conditions set forth in Section 6.02 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and LC Disbursements owed to, all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or LC Disbursements owed to, such Defaulting Lender until such time as all Loans and LC Exposure is held by the Lenders pro rata in accordance with the Commitments without giving effect to Section 4.05(a)(iv). Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 4.05(a)(ii) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.

## (iii) Certain Fees.

(A) No Defaulting Lender shall be entitled to receive any commitment fee pursuant to Section 3.05(a) for any period during which that Lender is a Defaulting Lender (and the Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).

(B) Each Defaulting Lender shall be entitled to receive letter of credit fees pursuant to Section 3.05(b) for any period during which that Lender is a Defaulting Lender only to the extent allocable to its LC Exposure for which it has provided Cash Collateral pursuant to Section 2.08(j).

(C) With respect to any fee not required to be paid to any Defaulting Lender pursuant to clause (A) or (B) above, the Borrower shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender's LC Exposure that has been reallocated to such Non-Defaulting Lender pursuant to clause (iv) below, (y) pay to the Issuing Bank the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to the Issuing Bank's Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.

(iv) Reallocation of Participations to Reduce Fronting Exposure. All or any part of such Defaulting Lender's LC Exposure shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Applicable Percentages (calculated without regard to such Defaulting Lender's Commitment) but only to the extent that (x) the conditions set forth in Section 6.02 are satisfied at the time of such reallocation (and, unless the Borrower shall have otherwise notified the Administrative Agent at such time, the Borrower shall be deemed to have represented and warranted that such conditions are satisfied at such time), and (y) such reallocation does not cause the aggregate Revolving Credit Exposure of any Non-Defaulting Lender to exceed such Non-Defaulting Lender's Commitment. Subject to Section 12.19, no reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender's increased exposure following such reallocation.

(v) Cash Collateral. If the reallocation described in clause (iv) above cannot,



or can only partially, be effected, the Borrower shall, without prejudice to any right or remedy available to it hereunder or under law, Cash Collateralize the Issuing Bank's Fronting Exposure in accordance with the procedures set forth in Section 2.08(j).

(b) Defaulting Lender Cure. If the Borrower, the Administrative Agent and the Issuing Bank agree in writing that a Lender is no longer a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit to be held pro rata by the Lenders in accordance with their Commitments (without giving effect to Section 4.05(a)(iv)), whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender's having been a Defaulting Lender.

(c) New Letters of Credit. So long as any Lender is a Defaulting Lender, the Issuing Bank shall not be required to issue, extend, renew or increase any Letter of Credit unless it is satisfied that it will have no Fronting Exposure after giving effect thereto.

## ARTICLE V
INCREASED COSTS; BREAKFUNDING PAYMENTS; TAXES

## Section 5.01 Increased Costs.

(a) Increased Costs Generally. If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank;

(ii) subject any Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or

(iii) impose on any Lender or the Issuing Bank or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or Loans made by such Lender or any Letter of Credit or participation therein;

and the result of any of the foregoing shall be to increase the cost to such Lender or such other Recipient of making, converting to, continuing or maintaining any Loan or of maintaining its obligation to make any such Loan, or to increase the cost to such Lender, the Issuing Bank or such other Recipient of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the



amount of any sum received or receivable by such Lender, the Issuing Bank or other Recipient hereunder (whether of principal, interest or any other amount), then, upon request of such Lender, the Issuing Bank or such other Recipient, the Borrower will pay to such Lender, the Issuing Bank or such other Recipient such additional amount or amounts as will compensate such Lender, the Issuing Bank or such other Recipient for such additional costs incurred or reduction suffered.

(b) Capital and Liquidity Requirements. If any Lender or the Issuing Bank determines that any Change in Law affecting such Lender or the Issuing Bank or any lending office of such Lender or such Lender's or the Issuing Bank's holding company, if any, regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy or liquidity), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered.

(c) Certificates for Reimbursement. A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in Section 5.01(a) or (b) shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 30 days after receipt thereof.

(d) Delay in Requests. Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section 5.01 shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section 5.01 for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine month period referred to above shall be extended to include the period of retroactive effect thereof).

Section 5.02 Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan into an ABR Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant thereto, or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 5.04 then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been



applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market.

A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section 5.02 and demonstrating, in reasonable detail, the computation of such amount or amounts shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

## Section 5.03 Taxes.

(a) Defined Terms. For purposes of this Section 5.03, Section 5.04 and Section 5.05, the term “Lender” includes the Issuing Bank and the term “applicable law” includes FATCA.

(b) Payments Free of Taxes. Any and all payments by or on account of any obligation of any Loan Party under any Loan Document shall be made without deduction or withholding for any Taxes, except as required by applicable law. If any applicable law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Loan Party shall be increased as necessary so that, after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 5.03), the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.

(c) Payment of Other Taxes by the Loan Parties. The Loan Parties shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of the Administrative Agent timely reimburse it for the payment of, any Other Taxes.

(d) Indemnification by the Loan Parties. The Loan Parties shall jointly and severally indemnify each Recipient, within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 5.03) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

(e) Indemnification by the Lenders. Each Lender shall severally indemnify the Administrative Agent, within 10 days after demand therefor, for (i) any Taxes attributable to such Lender (but only to the extent that any Loan Party has not already indemnified the Administrative Agent for such Taxes and without limiting the obligation of the Loan Parties to



do so), (ii) any Taxes attributable to such Lender's failure to comply with the provisions of Section 12.04(c) relating to the maintenance of a Participant Register, and (iii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by the Administrative Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by the Administrative Agent to the Lender from any other source against any amount due to the Administrative Agent under this paragraph (e).

(f) Evidence of Payments. As soon as practicable after any payment of Taxes by any Loan Party to a Governmental Authority pursuant to this Section 5.03, such Loan Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfying to the Administrative Agent.

## (g) Status of Lenders.

(i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to the Borrower and the Administrative Agent, at the time or times reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 5.03(g)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lender's reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.

(ii) Without limiting the generality of the foregoing, in the event that the Borrower is a U.S. Person,

(A) any Lender that is a U.S. Person shall deliver to the Borrower and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed copies of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;

(B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to



time thereafter upon the reasonable request of the Borrower or the Administrative Agent), whichever of the following is applicable:

(1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed copies of IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;

(2) executed copies of IRS Form W-8ECI;

(3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit G-1 to the effect that such Non-U.S. Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (y) executed copies of IRS Form W-8BEN; or

(4) to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, a U.S. Tax Compliance Certificate substantially in the form of Exhibit G-2 or Exhibit G-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit G-4 on behalf of each such direct and indirect partner;

(C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed copies of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made; and

(D) if a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as



applicable), such Lender shall deliver to the Borrower and the Administrative Agent, such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower and the Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender's obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), "FATCA" shall include any amendments made to FATCA after the date of this Agreement.

Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower and the Administrative Agent in writing of its legal inability to do so.

(h) Treatment of Certain Refunds. If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 5.03 (including by the payment of additional amounts pursuant to this Section 5.03), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 5.03 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (h) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (h), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph (h) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

(i) Survival. Each party’s obligations under this Section 5.03 shall survive the resignation or replacement of the Administrative Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under any Loan Documents.

Section 5.04 Designation of Different Lending Office. If any Lender requests compensation under Section 5.01, or requires the Borrower to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 5.03, then such Lender shall (at the request of the Borrower) use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 5.01 or Section 5.03, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.



Section 5.05 Replacement of Lenders. If any Lender requests compensation under Section 5.01, or if the Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 5.03, and, in each case, such Lender has declined or is unable to designate a different lending office in accordance with Section 5.04, or if any Lender is a Defaulting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 12.04(b)), all of its interests, rights (other than its existing rights to payments pursuant to Section 5.01 or Section 5.03) and obligations under this Agreement and the related Loan Documents to an Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have paid to the Administrative Agent the assignment fee (if any) specified in Section 12.04, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, and under the other Loan Documents (including any amounts under Section 5.02), from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts), (iii) in the case of any such assignment resulting from a claim for compensation under Section 5.01 or payments required to be made pursuant to Section 5.03, such assignment will result in a reduction in such compensation or payments, and (iv) such assignment does not conflict with applicable law. A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

Section 5.06 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its applicable lending office to honor its obligation to make or maintain Eurodollar Loans either generally or having a particular Interest Period hereunder, then (a) such Lender shall promptly notify the Borrower and the Administrative Agent thereof and such Lender's obligation to make such Eurodollar Loans shall be suspended (the "Affected Loans") until such time as such Lender may again make and maintain such Eurodollar Loans and (b) all Affected Loans which would otherwise be made by such Lender shall be made instead as ABR Loans (and, if such Lender so requests by notice to the Borrower and the Administrative Agent, all Affected Loans of such Lender then outstanding shall be automatically converted into ABR Loans on the date specified by such Lender in such notice) and, to the extent that Affected Loans are so made as (or converted into) ABR Loans, all payments of principal which would otherwise be applied to such Lender's Affected Loans shall be applied instead to its ABR Loans.

## ARTICLE VI
CONDITIONS PRECEDENT

Section 6.01 Effective Date. The obligations of the Lenders to make Loans and of the Issuing Banks to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 12.02):

(a) The Administrative Agent shall have received from each party hereto counterparts (in such number as may be requested by the Administrative Agent) of this Agreement signed on behalf of such party.

(b) The Administrative Agent shall have received duly executed Notes payable to the order of each Lender requesting a Note dated as of the date hereof.



(c) The Administrative Agent shall have received from each party thereto duly executed counterparts (in such number as may be requested by the Administrative Agent) of the Security Instruments, and except in cases where no signature is required, the other Security Instruments described on Exhibit E-1.

(d) The Administrative Agent shall have received a certificate of the Secretary or an Assistant Secretary of each Loan Party setting forth (i) resolutions of its board of directors or other appropriate governing body with respect to the authorization of such Loan Party to execute and deliver the Loan Documents to which it is a party and to enter into the transactions contemplated in those documents, (ii) the officers of such Loan Party (y) who are authorized to sign the Loan Documents to which such Loan Party is a party and (z) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with this Agreement and the transactions contemplated hereby, (iii) specimen signatures of such authorized officers, and (iv) the articles or certificate of incorporation and by-laws or other applicable Organizational Documents of such Loan Party, certified as being true and complete. The Administrative Agent and the Lenders may conclusively rely on such certificate until the Administrative Agent receives notice in writing from such Loan Party to the contrary.

(e) The Administrative Agent shall have received certificates of the appropriate state agencies, as requested by the Administrative Agent, with respect to the existence, qualification and good standing of each Loan Party in each jurisdiction where any such Loan Party is organized or owns Borrowing Base Properties.

(f) The Administrative Agent shall have received a certificate of a Responsible Officer of the Borrower in form and substance reasonably satisfactory to the Administrative Agent certifying that (i) the Loan Parties have received all consents and approvals required by Section 7.03, (ii) attached thereto is a true, correct and complete copy of each Swap Agreement set forth on Schedule 7.22, (iii) as of the Effective Date, the conditions specified in Sections 6.02(a), 6.02(b) and 6.02(c) have been satisfied, and (iv) that there has been no event or circumstance since December 31, 2015 that has had or could be reasonably expected to have, either individually or in the aggregate, a Material Adverse Effect.

(g) The Administrative Agent shall have received certificates of insurance coverage of the Loan Parties in form and substance reasonably satisfactory to the Administrative Agent evidencing that the Loan Parties are carrying insurance in accordance with Section 7.12.

(h) The Administrative Agent shall have received, at least 5 days prior to the Effective Date, all documentation and other information previously requested and required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act.

(i) The Administrative Agent shall have received an opinion of Ewing & Jones, PLLC, special counsel for the Loan Parties, in form and of substance reasonably acceptable to the Administrative Agent.

(j) The Administrative Agent, the Arranger, and the Lenders shall have received all fees and other amounts due and payable on or prior to the Effective Date and, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.



(k) The Administrative Agent shall have received appropriate UCC search certificates reflecting no prior Liens encumbering the Properties of the Borrower and the other Loan Parties other than those being released on or prior to the Effective Date or Liens permitted by Section 9.03.

(l) The Administrative Agent shall have received title information as the Administrative Agent may reasonably require satisfactory to the Administrative Agent setting forth the status of title to at least 80% of the total value of the Borrowing Base Properties.

(m) The Administrative Agent shall have received such other certificates, documents, instruments and agreements as the Administrative Agent shall reasonably request in connection with the transactions contemplated by this Agreement and the other Loan Documents.

The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 12.02) at or prior to 4:00 p.m., Houston, Texas time, on February 15, 2017 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

Section 6.02 Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing (including the initial funding), and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions:

(a) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default, Event of Default or Borrowing Base Deficiency shall exist.

(b) The representations and warranties of the Borrower and the Guarantors set forth in this Agreement and in the other Loan Documents shall be true and correct in all material respects (unless already qualified by materiality in which case such applicable representation and warranty shall be true and correct) on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable, except to the extent any such representations and warranties are expressly limited to an earlier date, in which case, on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable, such representations and warranties shall continue to be true and correct in all material respects (unless already qualified by materiality in which case such applicable representation and warranty shall be true and correct) as of such specified earlier date.

(c) At the time of and immediately after giving effect to such Borrowing, the Borrower and its Subsidiaries do not have any Excess Cash.

(d) The receipt by the Administrative Agent of a Borrowing Request in accordance with Section 2.03 or a request for a Letter of Credit (or an amendment, extension or renewal of a Letter of Credit) in accordance with Section 2.08(b), as applicable.

Each request for a Borrowing and each request for the issuance, amendment, renewal or extension of any Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower and the other Loan Parties on the date thereof as to the matters specified in Section 6.02(a) through (c).



# ARTICLE VII
REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lenders that:

Section 7.01 Organization: Powers. Each Loan Party and each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted, and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

Section 7.02 Authority: Enforceability. The Transactions are within each Loan Party’s organizational powers and have been duly authorized by all necessary organizational action and, if required, action by equity holders. Each Loan Document to which each Loan Party is a party has been duly executed and delivered by such Loan Party and constitutes a legal, valid and binding obligation of such Loan Party, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

Section 7.03 Approvals: No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority or any other third Person, nor is any such consent, approval, registration, filing or other action necessary for the validity or enforceability of any Loan Document or the consummation of the transactions contemplated thereby, except such as have been obtained or made and are in full force and effect and except for filings necessary to perfect Liens created pursuant to the Loan Documents, (b) will not violate (i) any Governmental Requirement applicable to any Loan Party or any Subsidiary or (ii) the Organizational Documents of any Loan Party or any Subsidiary, (c) will not violate or result in a default under any indenture, note, credit agreement or other similar instrument binding upon any Loan Party or any Subsidiary or the assets of any Loan Party or any Subsidiary, or give rise to a right thereunder to require any payment to be made by any Loan Party or any Subsidiary, and (d) will not result in the creation or imposition of any Lien on any Property of any Loan Party or any Subsidiary (other than the Liens created by the Loan Documents).

## Section 7.04 Financial Condition: No Material Adverse Change.

(a) Since December 31, 2015 and after giving effect to the Transactions (i) there has been no event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect and (ii) the business of the Borrower and the other Loan Parties has been conducted only in the ordinary course consistent with past business practices.

(b) Neither the Borrower nor any other Loan Party has on the date of this Agreement, after giving effect to the Transactions, any material Debt (including Disqualified Capital Stock) other than the Secured Obligations or any contingent liabilities, off-balance sheet liabilities or partnerships, liabilities for taxes, or unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments.



(a) Except as set forth on Schedule 7.05, there are no actions, suits, investigations or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened in writing against, any Loan Party that (i) are not fully covered by insurance (except for normal deductibles) as to which there is a reasonable possibility of an adverse determination that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or (ii) involve any Loan Document or the Transactions.

(b) Since the date of this Agreement, there has been no change in the status of the matters disclosed in Schedule 7.05 that, individually or in the aggregate, has resulted in a Material Adverse Effect.

Section 7.06 Environmental Matters. Except for such matters as set forth on Schedule 7.06 or that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect:

(a) the Group Members and each of their respective Properties and operations thereon are, and within all applicable statute of limitation periods have been, in compliance with all applicable Environmental Laws;

(b) the Group Members have obtained all Environmental Permits required for their respective operations and each of their Properties, with all such Environmental Permits being currently in full force and effect, and no Group Member has received any written notice or otherwise has knowledge that any such existing Environmental Permit will be revoked or that any application for any new Environmental Permit or renewal of any existing Environmental Permit will be denied;

(c) there are no claims, demands, suits, orders, inquiries, or proceedings concerning any violation of, or any liability (including as a potentially responsible party) under, any applicable Environmental Laws that is pending or, to the Borrower's knowledge, threatened against any Group Member or any of their respective Properties or as a result of any operations at the Properties;

(d) none of the Properties of the Group Members contain or, to the Borrower's knowledge, have contained any: (i) underground storage tanks; (ii) asbestos-containing materials; (iii) landfills or dumps; (iv) hazardous waste management units as defined pursuant to RCRA or any comparable state law; or (v) sites on or nominated for the National Priority List promulgated pursuant to CERCLA or any state remedial priority list promulgated or published pursuant to any comparable state law;

(e) except as permitted under applicable laws, there has been no Release or, to the Borrower's knowledge, threatened Release, of Hazardous Materials attributable to the operations of any Group Member at, on, under or from any Group Member's Properties and there are no investigations, remediations, abatements, removals of Hazardous Materials required under applicable Environmental Laws relating to such Releases or threatened Releases or at such Properties and, to the knowledge of the Borrower, none of such Properties are adversely affected by any Release or threatened Release of a Hazardous Material originating or emanating from any other real property;



(f) no Group Member has received any written notice asserting an alleged liability or obligation under any Environmental Laws with respect to the investigation, remediation, abatement, removal, or monitoring of any Hazardous Materials, including at, under, or Released or threatened to be Released from any real properties offsite the Group Member's Properties and there are no conditions or circumstances that would reasonably be expected to result in the receipt of such written notice;

(g) there has been no exposure of any Person or Property to any Hazardous Materials as a result of or in connection with the operations and businesses of any Group Member or relating to any of their Properties that would reasonably be expected to form the basis for a claim against any Group Member for damages or compensation and, to the Borrower's knowledge, there are no conditions or circumstances that would reasonably be expected to result in the receipt of notice regarding such exposure; and

(h) the Group Members have provided to the Lenders complete and correct copies of all environmental site assessment reports, investigations, studies, analyses, and correspondence on environmental matters (including matters relating to any alleged non-compliance with or liability under Environmental Laws) that are in any Group Member's possession or control and relating to their respective Properties or operations thereon.

## Section 7.07 Compliance with the Laws and Agreements; No Defaults.

(a) Each Loan Party is in compliance with all Governmental Requirements applicable to it or its Property and all agreements, indentures and other instruments binding upon it or its Property, and possesses all licenses, permits, franchises, exemptions, approvals and other governmental authorizations necessary for the ownership of its Property and the conduct of its business, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

(b) No Loan Party is in default nor has any event or circumstance occurred which, but for the expiration of any applicable grace period or the giving of notice, or both, would constitute a default or would require such Loan Party to Redeem or make any offer to Redeem all or any portion of any Debt outstanding under any indenture, note, credit agreement or other similar instrument pursuant to which any Material Indebtedness is outstanding or by which the Loan Parties or any of their Properties is bound.

(c) No Default has occurred and is continuing.

Section 7.08 Investment Company Status. No Loan Party or any Subsidiary is an “investment company” or a company “controlled” by an “investment company,” within the meaning of, or subject to regulation under, the Investment Company Act of 1940, as amended.

Section 7.09 Taxes. Each Loan Party and each Subsidiary has timely filed or caused to be filed all tax returns and reports required to have been filed and has paid or caused to be paid all taxes required to have been paid by it, except (a) taxes that are being contested in good faith by appropriate proceedings and for which such Loan Party or such Subsidiary, as applicable, has set aside on its books adequate reserves in accordance with GAAP or (b) to the extent that the failure to do so could not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect. No tax liens have been filed and no claims are being asserted with respect to any such taxes.



(a) Each Plan is, and has been, operated, administered and maintained in substantial compliance with, and the Borrower and each ERISA Affiliate have complied in all material respects with, ERISA, the terms of the applicable Plan and, where applicable, the Code.

(b) No act, omission or transaction has occurred which would result in imposition on any the Borrower or any ERISA Affiliate (whether directly or indirectly) of (i) either a civil penalty assessed pursuant to subsections (c), (i) or (l) of section 502 of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under section 409 of ERISA.

(c) No liability to the PBGC (other than for the payment of current premiums which are not past due) by the Borrower or any ERISA Affiliate has been or is reasonably expected by any Loan Party or any ERISA Affiliate to be incurred with respect to any Plan. No ERISA Event with respect to any Plan has occurred.

(d) The actuarial present value of the benefit liabilities under each Plan which is subject to Title IV of ERISA does not, as of the end of the Borrower's most recently ended fiscal year, exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities by an amount that could reasonably be expected to have a Material Adverse Effect. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in section 4041 of ERISA.

(e) Neither the Borrower nor any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the six-year period preceding the date hereof sponsored, maintained or contributed to, or had any actual or contingent liability to any Multiemployer Plan.

Section 7.11 Disclosure: No Material Misstatements. The Borrower has disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which it or any other Loan Party or any Subsidiary is subject, and all other existing facts and circumstances applicable to the Loan Parties known to the Borrower, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party or any Subsidiary to the Administrative Agent or any Lender or any of their Affiliates in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or under any other Loan Document (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Loan Parties represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. There is no fact peculiar to the Borrower or any other Loan Party which could reasonably be expected to have a Material Adverse Effect or in the future is reasonably likely to have a Material Adverse Effect and which has not been set forth in this Agreement or the Loan Documents or the other documents, certificates and statements furnished to the Administrative Agent or the Lenders by or on behalf of the Borrower or any other Loan Party prior to, or on, the date hereof in connection with the transactions contemplated hereby. There are no statements or conclusions in any Reserve Report which are based upon or include misleading information or fail to take into account material information regarding the matters reported therein, it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each Reserve Report are necessarily based upon professional opinions, estimates and projections and the Loan Parties do not warrant that such opinions, estimates and projections will ultimately prove to have been accurate.



Section 7.12 Insurance. For the benefit of each Loan Party, the Borrower has (a) all insurance policies sufficient for the compliance by the Loan Parties with all material Governmental Requirements and all material agreements and (b) insurance coverage, or self-insurance, in at least such amounts and against such risk (including public liability) that are usually insured against by companies similarly situated and engaged in the same or a similar business for the assets and operations of the Loan Parties. Schedule 7.12, as of the date hereof, sets forth a list of all insurance maintained by the Borrower. The Administrative Agent, as agent for the benefit of the Secured Parties, has been named as additional insureds in respect of such liability insurance policies and the Administrative Agent, as agent for the benefit of the Secured Parties, has been named as loss payee with respect to Property loss insurance.

Section 7.13 Restriction on Liens. Neither the Borrower nor any Loan Party is a party to any material agreement or arrangement (other than Capital Leases creating Liens permitted by Section 9.03(c), but then only on the Property subject of such Capital Lease), or subject to any order, judgment, writ or decree, which either restricts or purports to restrict its ability to grant Liens to the Administrative Agent and the Lenders on or in respect of their Properties to secure the Secured Obligations and the Loan Documents.

Section 7.14 Group Members. Except as set forth on Schedule 7.14 or as disclosed in writing to the Administrative Agent (which shall promptly furnish a copy to the Lenders), which shall be a supplement to Schedule 7.14, there are no other Group Members.

Section 7.15 Foreign Operations. The Borrower and the other Loan Parties do not own any Oil and Gas Properties not located within the geographical boundaries of the United States.

Section 7.16 Location of Business and Offices. The Borrower's jurisdiction of organization is Delaware; the name of the Borrower as listed in the public records of its jurisdiction of organization is PrimeEnergy Corporation; and the organizational identification number of the Borrower in its jurisdiction of organization is 790016 (or, in each case, as set forth in a notice delivered to the Administrative Agent pursuant to Section 8.01(l) in accordance with Section 12.01). The Borrower's principal place of business and chief executive office are located at the address specified in Section 12.01 (or as set forth in a notice delivered pursuant to Section 8.01(l) and Section 12.01(c)). Each Group Member's jurisdiction of organization, name as listed in the public records of its jurisdiction of organization, organizational identification number in its jurisdiction of organization, and the location of its principal place of business and chief executive office is stated on Schedule 7.14 (or as set forth in a notice delivered pursuant to Section 8.01(l)).

## Section 7.17 Properties; Defensible Title, Etc.

(a) Each Loan Party has good and defensible title to the Oil and Gas Properties evaluated in the most recently delivered Reserve Report and good title to all its personal Properties other than Properties sold in compliance with Section 9.10 from time to time, in each case, free and clear of all Liens except Liens permitted by Section 9.03. After giving full effect to the Excepted Liens, the Loan Party specified as the owner owns the net interests in production attributable to the Hydrocarbon Interests as reflected in the most recently delivered Reserve Report, and except as otherwise provided by statute, regulation or the standard and customary provisions of any applicable joint operating agreement, the ownership of such Properties shall not in any material respect obligate the Loan Party to bear the costs and expenses relating to the maintenance, development and operations of each such Property in an amount in excess of the working interest of each Property set forth in the most recently delivered Reserve Report that is not offset by a corresponding proportionate increase in the Loan Party's net revenue interest in such Property.



(b) All material leases and agreements necessary for the conduct of the business of the Loan Parties are valid and subsisting, in full force and effect, and there exists no default or event or circumstance which with the giving of notice or the passage of time or both would give rise to a default under any such lease or leases, which could reasonably be expected to have a Material Adverse Effect.

(c) The rights and Properties presently owned, leased or licensed by the Loan Parties including all easements and rights of way, include all rights and Properties necessary to permit the Loan Parties to conduct their business in all material respects in the same manner as its business is conducted on the date hereof.

(d) Except for Properties being repaired, all of the Properties of the Loan Parties which are reasonably necessary for the operation of their businesses are in good working condition in all material respects and are maintained in accordance with prudent business standards.

(e) Each Loan Party owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual Property material to its business, and the use thereof by the Loan Party does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. The Loan Parties either own or have valid licenses or other rights to use all databases, geological data, geophysical data, engineering data, seismic data, maps, interpretations and other technical information used in their businesses as presently conducted, subject to the limitations contained in the agreements governing the use of the same, which limitations are customary for companies engaged in the business of the exploration and production of Hydrocarbons, with such exceptions as could not reasonably be expected to have a Material Adverse Effect.

Section 7.18 Maintenance of Properties. Except for such acts or failures to act as could not be reasonably expected to have a Material Adverse Effect, the Oil and Gas Properties (and Properties unitized therewith) of the Loan Parties have been maintained, operated and developed in a good and workmanlike manner and in conformity with all Governmental Requirements and in conformity with the provisions of all leases, subleases or other contracts comprising a part of the Hydrocarbon Interests and other contracts and agreements forming a part of the Oil and Gas Properties of the Loan Parties. Specifically in connection with the foregoing, except for those as could not be reasonably expected to have a Material Adverse Effect, (i) no Oil and Gas Property of the Loan Parties is subject to having allowable production reduced below the full and regular allowable (including the maximum permissible tolerance) because of any overproduction (whether or not the same was permissible at the time) and (ii) none of the wells comprising a part of the Oil and Gas Properties (or Properties unitized therewith) of the Loan Parties is deviated from the vertical more than the maximum permitted by Governmental Requirements, and such wells are bottomed under and are producing from, and the well bores are wholly within, the Oil and Gas Properties (or in the case of wells located on Properties unitized therewith, such unitized Properties) of the Loan Parties. All pipelines, wells, gas processing plants, platforms and other material improvements, fixtures and equipment owned in whole or in part by the Loan Parties that are necessary to conduct normal operations are being maintained in a state adequate to conduct normal operations, and with respect to such of the foregoing which are operated by the Loan Parties, in a manner consistent with the Loan Parties' past practices (other than those the failure of which to maintain in accordance with this Section 7.18 could not reasonably be expected to have a Material Adverse Effect).



Section 7.19 Gas Imbalances; Prepayments. Except as set forth on Schedule 7.19 or on the most recent certificate delivered pursuant to Section 8.12(c), on a net basis there are no gas imbalances which would require any Loan Party to deliver Hydrocarbons produced from their Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor exceeding 2.0% of the aggregate volumes of natural gas (on an Mcf basis) listed in the most recent Reserve Report.

Section 7.20 Marketing of Production. Except for contracts listed and in effect on the date hereof on Schedule 7.20, and thereafter either disclosed in writing to the Administrative Agent or included in the most recently delivered Reserve Report, (a) the Loan Parties are receiving a price for all production sold thereunder which is computed substantially in accordance with the terms of the relevant contract and are not having deliveries curtailed substantially below the subject Property's delivery capacity and (b) no material agreements exist which are not cancelable on 60 days' notice or less without penalty or detriment for the sale of production from the Loan Parties' Hydrocarbons (including calls on or other rights to purchase, production, whether or not the same are currently being exercised) that (i) pertain to the sale of production at a fixed price and (ii) have a maturity or expiry date of longer than 6 months from the date hereof.

Section 7.21 Security Documents. The Security Instruments are effective to create in favor of the Administrative Agent, for the benefit of the Secured Parties, a legal, valid and enforceable security interest in the Mortgaged Property and Collateral and proceeds thereof. The Secured Obligations are and shall be at all times secured by a legal, valid and enforceablely perfected first priority Liens in favor of the Administrative Agent, covering and encumbering the Mortgaged Properties and other Collateral, to the extent perfection has occurred or will occur, by the recording of a mortgage, the filing of a UCC financing statement or, with respect to Equity Interests represented by certificates, by possession (in each case, to the extent available in the applicable jurisdiction); provided that, except in the case of pledged Equity Interests or as otherwise provided herein, Liens permitted by Section 9.03 may exist.

Section 7.22 Swap Agreements and Eligible Contract Participant. Schedule 7.22, as of the date hereof, and after the date hereof, each report required to be delivered by the Borrower pursuant to Section 8.01(d), sets forth, a true and complete list of all Swap Agreements of the Loan Parties, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the estimated net mark to market value thereof, all credit support agreements relating thereto (including any margin required or supplied, but excluding the Security Instruments) and the counterparty to each such agreement. The Borrower is a Qualified ECP Guarantor.

Section 7.23 Use of Loans and Letters of Credit. The proceeds of the Loans and the Letters of Credit shall be used to provide working capital for exploration and production operations, for acquisitions of Oil and Gas Properties permitted hereunder, and for general corporate purposes of the Borrower and its Subsidiaries. No Loan Party is engaged principally, or as one of its or their important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying margin stock (within the meaning of Regulation T, U or X of the Board). No part of the proceeds of any Loan or Letter of Credit has been used or will be used, whether directly or indirectly, for any purpose which violates the provisions of Regulations T, U or X of the Board.

Section 7.24 Solvency. After giving effect to the Transactions and the other transactions contemplated hereby, (a) the aggregate assets (after giving effect to amounts that could reasonably be received by reason of indemnity, offset, insurance or any similar arrangement), at a fair valuation, of the Loan Parties, taken as a whole, will exceed the aggregate Debt of the Loan Parties on a consolidated



basis, as the Debt becomes absolute and matures, (b) each Loan Party will not have incurred or intended to incur, and will not believe that it will incur, Debt beyond its ability to pay such Debt (after taking into account the timing and amounts of cash to be received by it and the amounts to be payable on or in respect of its liabilities, and giving effect to amounts that could reasonably be received by reason of indemnity, offset, insurance or any similar arrangement) as such Debt becomes absolute and matures and (c) each Loan Party will not have (and will have no reason to believe that it will have thereafter) unreasonably small capital for the conduct of its business.

Section 7.25 Anti-Corruption Laws and Sanctions. Each Loan Party has implemented and maintains in effect policies and procedures designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and such Loan Party, its Subsidiaries and their respective officers and employees and to the knowledge of such Loan Party its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. None of (a) any Loan Party, any Subsidiary or any of their respective directors, officers or employees, or (b) to the knowledge of any such Loan Party or Subsidiary, any agent of such Loan Party or any Subsidiary that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. No Borrowing or Letter of Credit, use of proceeds, Transaction or other transaction contemplated by this Agreement or the other Loan Documents will violate Anti-Corruption Laws or applicable Sanctions.

Section 7.26 EEA Financial Institutions. No Loan Party is an EEA Financial Institution

## ARTICLE VIII
AFFIRMATIVE COVENANTS

Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder and all other amounts payable under the Loan Documents shall have been paid in full and all Letters of Credit shall have expired or terminated (or are Cash Collateralized) and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

Section 8.01 Financial Statements: Other Information. The Borrower will furnish to the Administrative Agent and each Lender:

(a) Annual Financial Statements. As soon as available, but in any event in accordance with then applicable law and not later than 105 days after the end of each fiscal year of the Borrower, the audited consolidated and consolidating balance sheet for the Borrower and its Consolidated Subsidiaries and related statements of operations, stockholders' equity, and cash flows as of the end of and for such year, in each case, setting forth in comparative form the figures for the previous fiscal year, all reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification, commentary or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated and consolidating financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries on a consolidated and consolidating basis in accordance with GAAP consistently applied.

(b) Quarterly Financial Statements. As soon as available, but in any event in accordance with then applicable law and not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the unaudited consolidated and consolidating balance sheet for the Borrower and its Consolidated Subsidiaries and related



statements of operations, stockholders' equity, and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of such fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of Borrower and its Consolidated Subsidiaries on a consolidated and consolidating basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes.

(c) Certificate of Financial Officer – Compliance. Concurrently with any delivery of financial statements under Section 8.01(a) or Section 8.01(b), a certificate of a Financial Officer of the Borrower in substantially the form of Exhibit D hereto (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 9.01 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the most recently delivered financial statements referred to in Section 8.01(a) and (b) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate.

(d) Certificate of Financial Officer – Swap Agreements. So long as any Loan Party is a party to any Swap Agreement, then as soon as available, but in any event not later than 60 days after the end of each fiscal quarter of each fiscal year of the Borrower, a certificate of a Financial Officer, in form and substance satisfactory to the Administrative Agent, setting forth as of the last Business Day of such fiscal quarter a true and complete list of all Swap Agreements of each Loan Party, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), any new credit support agreements relating thereto (other than Security Instruments) not listed on Schedule 7.22, any margin required or supplied under any credit support document, and the counterparty to each such agreement.

(e) Certificate of Insurer – Insurance Coverage. Concurrently with any delivery of financial statements under Section 8.01(a), and within 10 Business Days following each change in the insurance maintained in accordance with Section 8.07, certificates of insurance coverage with respect to the insurance required by Section 8.07, in form and substance satisfactory to the Administrative Agent, and, if requested by the Administrative Agent or any Lender, all copies of the applicable policies.

(f) Other Accounting Reports. Promptly upon receipt thereof, a copy of each other report or letter submitted to any Loan Party by independent accountants in connection with any annual, interim or special audit made by them of the books of any such Person, and a copy of any response by such Person, or the board of directors or other appropriate governing body of such Person, to such letter or report.

(g) SEC and Other Filings; Reports to Shareholders. Promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by any Loan Party or any Subsidiary with the SEC, or any Governmental Authority succeeding to any or all of the functions of the SEC, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be.

(h) Notices Under Material Instruments. Promptly after the furnishing thereof, copies of any financial statement, report or notice furnished to or by any Person pursuant to the



terms of any preferred stock designation, indenture, loan or credit or other similar agreement, other than this Agreement, and not otherwise required to be furnished to the Lenders pursuant to any other provision of this Section 8.01.

(i) Lists of Purchasers. Concurrently with the delivery of any Reserve Report to the Administrative Agent pursuant to Section 8.12, a list of all Persons purchasing Hydrocarbons from any Loan Party (or, with respect to Oil and Gas Properties that are not operated by a Loan Party, a list of the operators of such properties).

(j) Notice of Sales of Oil and Gas Properties and Unwinds of Swap Agreements. In the event the Borrower or any other Loan Party intends to (x) Dispose of any Oil and Gas Properties (or any Equity Interests of any Loan Party that owns Oil and Gas Properties) or (y) terminate, unwind, cancel or otherwise dispose of Swap Agreements, prompt, and in any event not less than 10 Business Days prior thereto (or such shorter period as the Administrative Agent may agree), written notice thereof, specifying (i) the price thereof, in the case of Oil and Gas Properties (or any Equity Interests of any Subsidiary that owns Oil and Gas Properties), and/or the anticipated decline in the mark-to-market value thereof or net cash proceeds therefrom, in the case of Swap Agreements, (ii) the anticipated date of closing and (iii) any other details thereof reasonably requested by the Administrative Agent or any Lender.

(k) Notice of Casualty Events. Prompt written notice, and in any event within three Business Days, of the occurrence of any Casualty Event or the commencement of any action or proceeding that could reasonably be expected to result in a Casualty Event.

(l) Information Regarding Borrower and Guarantors. Prompt written notice of (and in any event within 10 days prior thereto) any change (i) in a Loan Party’s corporate name or in any trade name used to identify such Person in the conduct of its business or in the ownership of its Properties, (ii) in the location of a Loan Party’s chief executive office or principal place of business, (iii) in a Loan Party’s identity or corporate structure in the jurisdiction in which such Person is incorporated or formed, (iv) in a Loan Party’s jurisdiction of organization or such Person’s organizational identification number in such jurisdiction of organization, and (v) in a Loan Party’s federal taxpayer identification number.

(m) Production Report and Lease Operating Statements. In connection with each Reserve Report delivered pursuant to Section 8.12(a), a report setting forth, for each calendar month during the then current fiscal year to date, the volume of production and sales attributable to production (and the prices at which such sales were made and the revenues derived from such sales) for each such calendar month from the Oil and Gas Properties, and setting forth the related ad valorem, severance and production taxes and lease operating expenses attributable thereto and incurred for each such calendar month.

(n) Patriot Act. Promptly upon request, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA Patriot Act.

(o) Other Requested Information. Promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary (including any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA), or compliance with the terms of this Agreement or any other Loan Document, as the Administrative Agent or any Lender may reasonably request.



Section 8.02 Notices of Material Events. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following:

(a) the occurrence of any Default;

(b) the filing or commencement of, or the threat in writing of, any action, suit, proceeding, investigation or arbitration by or before any arbitrator or Governmental Authority against or affecting the Group Members thereof not previously disclosed in writing to the Lenders or any material adverse development in any action, suit, proceeding, investigation or arbitration (whether or not previously disclosed to the Lenders) that, in either case, if adversely determined, could reasonably be expected to result in a Material Adverse Effect;

(c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower or any other Loan Party in an aggregate amount exceeding $1,000,000; and

(d) the occurrence of any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect.

Each notice delivered under this Section 8.02 shall be accompanied by a statement of a Responsible Officer setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

Section 8.03 Existence: Conduct of Business. Each Loan Party will, and will cause each Subsidiary to, (a) do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, qualifications, licenses, permits, franchises, governmental authorizations, intellectual property rights, licenses and permits material to the conduct of its business, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 9.10 and (b) carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted.

Section 8.04 Payment of Obligations. Each Loan Party will, and will cause each Subsidiary to, pay or discharge all Material Indebtedness and all other material liabilities and obligations, including Taxes, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such other Loan Party has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect; provided, however, that each Loan Party will, and will cause each Subsidiary to, remit withholding taxes and other payroll taxes to appropriate Governmental Authorities as and when claimed to be due, notwithstanding the foregoing exceptions.

Section 8.05 Performance of Obligations under Loan Documents. The Borrower will pay the Loans according to the reading, tenor and effect thereof and will, and will cause each other Loan Party to, do and perform every act and discharge all of the obligations to be performed and discharged by them under the Loan Documents, including this Agreement, at the time or times and in the manner specified.

Section 8.06 Operation and Maintenance of Properties. The Borrower, at its own expense, will, and will cause each other Loan Party to:

(a) operate its Oil and Gas Properties and other material Properties or cause such



Oil and Gas Properties and other material Properties to be operated in a careful and efficient manner in accordance with the practices of the industry and in compliance with all applicable contracts and agreements and in compliance with all applicable Governmental Requirements, including applicable pro ration requirements and Environmental Laws, and all applicable laws, rules and regulations of every other Governmental Authority from time to time constituted to regulate the development and operation of its Oil and Gas Properties and the production and sale of Hydrocarbons and other minerals therefrom, except, in each case, where the failure to comply could not reasonably be expected to have a Material Adverse Effect;

(b) maintain and keep in good repair, working order and efficiency (ordinary wear and tear excepted) all of its material Oil and Gas Properties and other Properties material to the conduct of its business, including all equipment, machinery and facilities;

(c) promptly pay and discharge, or use commercially reasonable efforts to cause to be paid and discharged, all material delay rentals, royalties, expenses and indebtedness accruing under the leases or other agreements affecting or pertaining to its Oil and Gas Properties and will do all other things necessary, in accordance with industry standards, to keep unimpaired their rights with respect thereto and prevent any forfeiture thereof or default thereunder;

(d) promptly perform or use commercially reasonable efforts to cause to be performed, in accordance with industry standards, the obligations required by each and all of the assignments, deeds, leases, sub-leases, contracts and agreements affecting its interests in its Oil and Gas Properties and other material Properties; and

(e) operate its Oil and Gas Properties and other material Properties or use commercially reasonable efforts to cause such Oil and Gas Properties and other material Properties to be operated in accordance with the practices of the industry and in material compliance with all applicable contracts and agreements and in compliance in all material respects with all Governmental Requirements.

Section 8.07 Insurance. The Borrower will, and will cause each Subsidiary to, maintain, with financially sound and reputable insurance companies, insurance, in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. The loss payable clauses or provisions in the applicable insurance policy or policies insuring any of the collateral for the Loans shall be endorsed in favor of and made payable to the Administrative Agent as a "lender loss payee" or other formulation acceptable to the Administrative Agent and such liability policies shall name the Administrative Agent, as agent for the benefit of the Secured Parties, as "additional insured". Such policies will also provide that the insurer will endeavor to give at least 30 days' prior notice of any cancellation to the Administrative Agent.

Section 8.08 Books and Records: Inspection Rights. The Borrower will, and will cause each Subsidiary to, keep proper books of record and account in accordance with GAAP. The Borrower will, and will cause each Subsidiary to, permit any representatives designated by the Administrative Agent or any Lender (including employees of the Administrative Agent, any Lender or any consultants, accountants, lawyers, agents and appraisers retained by the Administrative Agent), upon reasonable prior notice, to visit and inspect its Properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.

Section 8.09 Compliance with Laws and Material Contractual Obligations. Each Loan Party will, and will cause each Subsidiary to, (a) comply with each Governmental Requirement applicable to it



or its Property and (b) perform in all material respects its obligations under material agreements to which it is a party, except, in each case, where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. Each Loan Party will maintain in effect and enforce policies and procedures designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions.

## Section 8.10 Environmental Matters.

(a) The Borrower shall: (i) comply, and shall cause its Properties and operations and each other Group Member and each other Group Member's Properties and operations to comply, with all applicable Environmental Laws, except to the extent any breach thereof could not be reasonably expected to have a Material Adverse Effect; (ii) not dispose of or otherwise Release, and shall cause each other Group Member not to dispose of or otherwise Release, any Hazardous Material or solid waste on, under, about or from any of the Borrower's or the other Group Members' Properties or any other Property to the extent caused by the Borrower's or any of the other Group Members' operations except in compliance with applicable Environmental Laws, the disposal or Release of which could reasonably be expected to have a Material Adverse Effect; (iii) timely obtain or file, and shall cause each other Group Member to timely obtain or file, all notices, and Environmental Permits, if any, required under applicable Environmental Laws to be obtained or filed in connection with the operation or use of the Borrower's or the other Group Members' Properties, which failure to obtain or file could reasonably be expected to have a Material Adverse Effect; (iv) promptly commence and diligently prosecute to completion, and shall cause each of other Group Member to promptly commence and diligently prosecute to completion, any assessment, evaluation, investigation, monitoring, containment, cleanup, removal, repair, restoration, remediation or other remedial obligations (collectively, the "Remedial Work") in the event any Remedial Work is required or reasonably necessary under applicable Environmental Laws because of or in connection with the actual or suspected past, present or future disposal or other Release of any Hazardous Materials on, under, about or from any of the Borrower's or the other Group Members' Properties, which failure to commence and diligently prosecute to completion could reasonably be expected to have a Material Adverse Effect; (v) conduct, and cause each other Group Member to conduct, their respective operations and businesses in a manner that will not expose any Property or Person to Hazardous Materials that could reasonably be expected to form the basis for a claim for damages or compensation; and (vi) establish and implement, and shall cause each other Group Member to establish and implement, such procedures as may be necessary to continuously determine and assure that the Borrower's and the other Group Members' obligations under this Section 8.10(a) are timely and fully satisfied, which failure to establish and implement could reasonably be expected to have a Material Adverse Effect.

(b) The Borrower will promptly, but in no event later than five Business Days of the Borrower becoming aware thereof, notify the Administrative Agent and the Lenders in writing of any threatened action, investigation or inquiry by any Governmental Authority or any demand or lawsuit by any landowner or other third party threatened in writing against the Borrower or the other Group Members or their Properties of which the Borrower has knowledge in connection with any Environmental Laws (excluding routine testing and corrective action) if the Borrower reasonably anticipates that such action will result in liability (whether individually or in the aggregate) in excess of $500,000, not fully covered by insurance, subject to normal deductibles.



(c) If an Event of Default has occurred and is continuing, the Administrative Agent may (but shall not be obligated to), at the expense of the Borrower and to the extent that the Borrower has the right to do so, conduct such Remedial Work as it deems appropriate to determine the nature and extent of any noncompliance with applicable Environmental Laws, the nature and extent of the presence of any Hazardous Material and the nature and extent of any other environmental conditions that may exist at or affect any of the Mortgaged Properties, and the Group Members shall cooperate with the Administrative Agent in conducting such Remedial Work. Such Remedial Work may include a detailed visual inspection of the Mortgaged Properties, including all storage areas, storage tanks, drains and dry wells and other structures and locations, as well as the taking of soil samples, surface water samples, and ground water samples and such other investigations or analyses as the Administrative Agent deems appropriate. The Administrative Agent and its officers, employees, agents and contractors shall have and are hereby granted the right to enter upon the Mortgaged Properties for the foregoing purposes.

## Section 8.11 Further Assurances.

(a) The Borrower at its sole expense will, and will cause each other Loan Party to, promptly execute and deliver to the Administrative Agent all such other documents, agreements and instruments reasonably requested by the Administrative Agent to comply with, cure any defects or accomplish the conditions precedent, covenants and agreements of any Loan Party, as the case may be, in the Loan Documents or to further evidence and more fully describe the collateral intended as security for the Secured Obligations, or to correct any omissions in this Agreement or the Security Instruments, or to state more fully the obligations secured therein, or to perfect, protect or preserve any Liens created pursuant to this Agreement or any of the Security Instruments or the priority thereof, or to make any recordings, file any notices or obtain any consents, all as may be reasonably necessary or appropriate, in the sole discretion of the Administrative Agent, in connection therewith.

(b) The Borrower hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Mortgaged Property without the signature of the Borrower or any other Loan Party where permitted by law. A carbon, photographic or other reproduction of the Security Instruments or any financing statement covering the Mortgaged Property or any part thereof shall be sufficient as a financing statement where permitted by law.

## Section 8.12 Reserve Reports.

(a) On or before May 1st and November 1st of each year, commencing May 1, 2017, the Borrower shall furnish to the Administrative Agent and the Lenders a Reserve Report evaluating the Borrowing Base Properties of the Borrower and the other Loan Parties as of the immediately preceding January 1st or July 1st, as applicable. The Reserve Report as of January 1st and delivered on or before May 1st of each year (the "January 1 Reserve Report") shall be prepared by one or more Approved Petroleum Engineers, and each other Reserve Report of each year may be prepared by one or more Approved Petroleum Engineers or internally under the supervision of the chief engineer of the Borrower who shall certify such Reserve Report to be true and accurate in all material respects and, except as otherwise specified therein, to have been prepared in all material respects in accordance with the procedures used in the immediately preceding January 1 Reserve Report.

(b) In the event of an Interim Redetermination, the Borrower shall furnish to the Administrative Agent and the Lenders a Reserve Report prepared by or under the supervision of



the chief engineer of the Borrower who shall certify such Reserve Report to be true and accurate in all material respects and, except as otherwise specified therein, to have been prepared in all material respects in accordance with the procedures used in the immediately preceding January 1 Reserve Report. For any Interim Redetermination requested by the Administrative Agent or the Borrower pursuant to Section 2.07(b), the Borrower shall provide such Reserve Report with an "as of" date as required by the Administrative Agent as soon as possible, but in any event no later than 30 days following the receipt of such request.

(c) With the delivery of each Reserve Report, the Borrower shall provide to the Administrative Agent and the Lenders a certificate from a Responsible Officer certifying that in all material respects: (i) the information contained in the Reserve Report and any other information delivered in connection therewith is true and correct, (ii) the Borrower or the other Loan Parties own good and defensible title to the Borrowing Base Properties evaluated in such Reserve Report and such Properties are free of all Liens except for Liens permitted by Section 9.03, (iii) except as set forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take or pay or other prepayments in excess of the volume specified in Section 7.19 with respect to its Oil and Gas Properties evaluated in such Reserve Report which would require the Borrower or any other Loan Party to deliver Hydrocarbons either generally or produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor, (iv) none of their Borrowing Base Properties have been sold since the date of the last Borrowing Base determination except as set forth on an exhibit to the certificate, which exhibit shall list all of its Borrowing Base Properties sold and in such detail as reasonably required by the Administrative Agent, (v) attached to the certificate is a list of all marketing agreements entered into by a Loan Party subsequent to the later of the date hereof or the most recently delivered Reserve Report which the Borrower could reasonably be expected to have been obligated to list on Schedule 7.20 had such agreement been in effect on the date hereof and (vi) attached thereto is a schedule of the Borrowing Base Properties evaluated by such Reserve Report that are Mortgaged Properties or, with respect to Borrowing Base Partnership Properties, are Collateral and demonstrating the percentage of the total value of the Properties listed in such Reserve Report that the value of such Properties represent and that such percentage is in compliance with Section 8.14(a).

## Section 8.13 Title Information.

(a) On or before the delivery to the Administrative Agent and the Lenders of each Reserve Report required by Section 8.12(a), the Borrower will make available to the Administrative Agent title information in form and substance acceptable to the Administrative Agent covering enough of the Borrowing Base Oil and Gas Properties evaluated by such Reserve Report that were not included in the immediately preceding Reserve Report, so that the Administrative Agent shall have had the opportunity to review (including title information previously made available to the Administrative Agent), satisfactory title information on Hydrocarbon Interests constituting at least 80% of the total value of the Borrowing Base Oil and Gas Properties evaluated by such Reserve Report.

(b) If the Borrower has provided title information for additional Properties under Section 8.13(a), the Borrower shall, within 60 days of notice from the Administrative Agent that title defects or exceptions exist with respect to such additional Properties, either (i) cure any such title defects or exceptions (including defects or exceptions as to priority) which are not permitted by Section 9.03 raised by such information, (ii) substitute acceptable Mortgaged Properties with no title defects or exceptions except for Excepted Liens (other than Excepted Liens described in clauses (e), (g) and (h) of such definition) having an equivalent value or (iii)



deliver title information in form and substance acceptable to the Administrative Agent so that the Administrative Agent shall have received, together with title information previously delivered to the Administrative Agent, satisfactory title information on Hydrocarbon Interests constituting at least 80% of the total value of the Borrowing Base Oil and Gas Properties evaluated by such Reserve Report.

(c) If the Borrower is unable to cure any title defect requested by the Administrative Agent or the Lenders to be cured within the 60-day period or the Borrower does not comply with the requirements to provide acceptable title information covering 80% of the total value of the Borrowing Base Oil and Gas Properties evaluated in the most recent Reserve Report, such default shall not be a Default, but instead the Administrative Agent and/or the Majority Lenders shall have the right to exercise the following remedy in their sole discretion from time to time, and any failure to so exercise this remedy at any time shall not be a waiver as to future exercise of the remedy by the Administrative Agent or the Lenders. To the extent that the Administrative Agent or the Majority Lenders are not satisfied with title to any Mortgaged Property after the 60-day period has elapsed, such unacceptable Mortgaged Property shall not count towards the 80% requirement, and the Administrative Agent may send a notice to the Borrower and the Lenders that the then outstanding Borrowing Base shall be reduced by an amount as determined by the Required Lenders to cause the Borrower to be in compliance with the requirement to provide acceptable title information on Hydrocarbon Interests constituting 80% of the total value of the Borrowing Base Oil and Gas Properties evaluated by such Reserve Report. This new Borrowing Base shall become effective immediately after receipt of such notice.

## Section 8.14 Additional Collateral: Additional Guarantors.

(a) In connection with each redetermination of the Borrowing Base, the Borrower shall review the Reserve Report and the list of current Mortgaged Properties (as described in Section 8.12(c)(vi)) to ascertain whether the Mortgaged Properties represent at least 85% of the Borrowing Base Value of the Oil and Gas Properties evaluated in the most recently completed Reserve Report after giving effect to exploration and production activities, acquisitions, dispositions and production. In the event that the Mortgaged Properties do not represent at least 85% of such Borrowing Base Value, then the Borrower shall, and shall cause the other Loan Parties to, grant, within 30 days of delivery of the certificate required under Section 8.12(c), to the Administrative Agent as security for the Secured Obligations a first-priority Lien interest (provided that Excepted Liens of the type described in clauses (a) to (d) and (f) of the definition thereof may exist, but subject to the provisions at the end of such definition) on additional Oil and Gas Properties not already subject to a Lien of the Security Instruments such that after giving effect thereto, the Mortgaged Properties will represent at least 85% of the Borrowing Base Value of the Oil and Gas Properties evaluated in the most recently completed Reserve Report. All such Liens will be created and perfected by and in accordance with the provisions of deeds of trust, security agreements and financing statements or other Security Instruments, all in form and substance reasonably satisfactory to the Administrative Agent and in sufficient executed (and acknowledged where necessary or appropriate) counterparts for recording purposes. In order to comply with the foregoing, if any Subsidiary grants a Lien on its Oil and Gas Properties pursuant to Section 8.14(a) and such Subsidiary is not a Guarantor, then it shall become a Guarantor and comply with Section 8.14(b).

(b) Each Loan Party will cause each of its Domestic Subsidiaries formed or acquired after the date of this Agreement to become a Loan Party by executing a Guaranty Agreement and a Security Agreement (or a supplement or joinder to an existing Guaranty Agreement or Security Agreement, as applicable). Upon execution and delivery thereof, each



such Person (i) shall automatically become a Guarantor and thereupon shall have all of the rights, benefits, duties, and obligations in such capacity under the Loan Documents and (ii) will grant Liens to the Administrative Agent, for the benefit of the Administrative Agent and the other Secured Parties, in any property of such Loan Party which constitutes Collateral.

(c) Each Loan Party will cause (i) 100% of the issued and outstanding Equity Interests of each of its Domestic Subsidiaries and (ii) 65% of the issued and outstanding Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of the issued and outstanding Equity Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) in each Foreign Subsidiary directly owned by the Borrower or any Domestic Subsidiary to be subject at all times to a first priority, perfected Lien in favor of the Administrative Agent for the benefit of the Administrative Agent and the other Secured Parties, pursuant to the terms and conditions of the Loan Documents or other security documents as the Administrative Agent shall reasonably request.

(d) Without limiting the foregoing, each Loan Party will, and will cause each Subsidiary to, execute and deliver, or cause to be executed and delivered, to the Administrative Agent such documents, agreements and instruments, and will take or cause to be taken such further actions (including the filing and recording of financing statements, mortgages, deeds of trust and other documents and such other actions or deliveries of the type required by Section 6.01, as applicable), which may be required by any Governmental Requirement or which the Administrative Agent may, from time to time, reasonably request to carry out the terms and conditions of this Agreement and the other Loan Documents and to ensure perfection and priority of the Liens created or intended to be created by the Security Instruments, all at the expense of the Loan Parties.

(e) The Borrower hereby guarantees the payment of all Secured Obligations of each Loan Party (other than the Borrower) and absolutely, unconditionally and irrevocably undertakes to provide such funds or other support as may be needed from time to time to each Loan Party (other than the Borrower) in order for such Loan Party to honor its obligations under the Loan Documents to which it is a party, including obligations with respect to Swap Agreements (provided, however, that the Borrower shall only be liable under this Section 8.14(e) for the maximum amount of such liability that can be hereby incurred without rendering its obligations under this Section 8.14(e), or otherwise under this Agreement or any Loan Document, as it relates to such other Loan Parties, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer; and not for any greater amount). The obligations of the Borrower under this Section 8.14(e) shall remain in full force and effect until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder and all other amounts payable under the Loan Documents have been paid in full and all Letters of Credit have expired or terminated (or are Cash Collateralized) and all LC Disbursements shall have been reimbursed. The Borrower intends that this Section 8.14(e) constitute, and this Section 8.14(e) shall be deemed to constitute, a "keepwell, support, or other agreement" for the benefit of each Loan Party (other than the Borrower) for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

Section 8.15 ERISA Compliance. The Borrower will promptly furnish and will cause each other Group Member and any ERISA Affiliate to promptly furnish to the Administrative Agent (i) upon becoming aware of the occurrence of any ERISA Event or of any Prohibited Transaction, which could reasonably be expected to result in liability of the Borrower or such other Group Member in an aggregate amount exceeding $1,000,000, in connection with any Plan or any trust created thereunder, a written notice of the Borrower or Subsidiary of the Borrower, as the case may be, specifying the nature thereof,



what action such Person is taking or proposes to take with respect thereto, and, when known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto, and (ii) upon receipt thereof, copies of any notice of the PBGC's intention to terminate or to have a trustee appointed to administer any Plan. Promptly following receipt thereof, the Borrower will furnish and will cause each Subsidiary to promptly furnish to the Administrative Agent copies of any documents described in Sections 101(k) or 101(l) of ERISA that any Group Member may request with respect to any Multiemployer Plan for which the Borrower, any Group Member or any of their ERISA Affiliates may be subject to any current or future liability; provided, that if the Group Members have not requested such documents or notices from the administrator or sponsor of the applicable Multiemployer Plan, then, upon reasonable request of the Administrative Agent, the Group Members shall promptly make a request for such documents or notices from such administrator or sponsor and the Borrower shall provide copies of such documents and notices to the Administrative Agent promptly after receipt thereof.

Section 8.16 Marketing Activities. The Borrower will not, and will not permit any of the other Loan Parties to, engage in marketing activities for any Hydrocarbons or enter into any contracts related thereto other than (a) contracts for the sale of Hydrocarbons scheduled or reasonably estimated to be produced from their proved Oil and Gas Properties during the period of such contract, (b) contracts for the sale of Hydrocarbons scheduled or reasonably estimated to be produced from proved Oil and Gas Properties of third parties during the period of such contract associated with the Oil and Gas Properties of the Borrower and the other Loan Parties that the Borrower or one of the other Loan Parties has the right to market pursuant to joint operating agreements, unitization agreements or other similar contracts that are usual and customary in the oil and gas business and (c) other contracts for the purchase and/or sale of Hydrocarbons of third parties (i) which have generally offsetting provisions (i.e. corresponding pricing mechanics, delivery dates and points and volumes) such that no “position” is taken and (ii) for which appropriate credit support has been taken to alleviate the material credit risks of the counterparty thereto.

## Section 8.17 Use of Proceeds.

(a) The proceeds of the Loans and the Letters of Credit will be used only for working capital for exploration and production operations, for acquisitions of Oil and Gas Properties permitted hereunder, and for general corporate purposes of the Borrower and its Subsidiaries. No part of the proceeds of any Loan and no Letter of Credit will be used, whether directly or indirectly, for any purpose that entails a violation of Regulations T, U or X of the Board.

(b) The Borrower will not request any Borrowing or Letter of Credit, and the Borrower shall not use, and shall procure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Borrowing or Letter of Credit (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (ii) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, to the extent that such activities, businesses or transaction would be prohibited by Sanctions if conducted by a corporation incorporated in the United States or the European Union, or (iii) in any manner that would result in the violation of any Sanctions applicable to any party hereto.

Section 8.18 Consolidated Cash Balance Information. If there are any outstanding Loans or LC Exposure, then (a) upon the request of the Administrative Agent (within one Business Day of such request or such longer period as the Administrative Agent may agree in its sole discretion) or (b) on any Business Day on which the Borrower has any Excess Cash, provide to the Administrative Agent summary and balance statements for each deposit account, securities account, commodity account or other account in which any Consolidated Cash Balance is held or to which any Consolidated Cash Balance is credited, together with an officer's certificate of the Borrower including the amount of Excess Cash on such day.



(a) From and after the Effective Date, the Borrower shall not open, nor allow any of its Subsidiaries to open, any deposit or security account (other than an Excluded Account) unless such deposit or security account is subject to a Control Agreement.

(b) The Borrower will, and will cause each of its Subsidiaries to, until the proceeds of any Loans are used or transferred in accordance with the Loan Documents, hold the proceeds of any Loans made under this Agreement in a deposit account and/or a securities account that is a Controlled Account.

Section 8.20 Swap Agreements. The Borrower shall, or shall cause a Subsidiary to, enter into and maintain in effect, with one or more Approved Counterparties, a commodity price hedge position establishing minimum fixed prices acceptable to the Administrative Agent on a volume of Hydrocarbons equal to not less than 50% of the reasonably projected production from proved, developed, producing Oil and Gas Properties of the Borrower and its Subsidiaries on a rolling 24-month basis; provided that, the Borrower may proportionally reduce its hedge position through the termination or unwinding of Swap Agreements in connection with the sale of Oil and Gas Properties permitted pursuant to Section 9.10 such that the Borrower's hedge position following such sale of Oil and Gas Properties and corresponding reduction in hedge position shall cover a substantially similar percentage of the total volume of Hydrocarbons produced by the Borrower for the applicable periods as did the Borrower's hedge position prior to the sale of such Oil and Gas Properties and corresponding reduction in hedge position.

Section 8.21 Post-Closing Covenant. On or before the date that is 60 days after the date hereof, the Borrower shall, or shall cause a Subsidiary to, (a) execute and deliver such Security Instruments as the Administrative Agent shall reasonably require, such that the Administrative Agent shall be reasonably satisfied that such Security Instruments create first priority Liens that may be perfected upon recordation of properly completed financing statements and the Security Instruments in the appropriate filing offices therefor (except that Excepted Liens identified in clauses (a) to (d) and (f) of the definition thereof, but subject to the provisos at the end of such definition) on at least 85% of the Borrowing Base Value of the Borrowing Base Oil and Gas Properties evaluated in the Initial Reserve Report, and (b) deliver to the Administrative Agent such further documents and instruments as the Administrative Agent may request in accordance with Section 8.14, including, without limitation, opinions of local counsel for the Loan Parties in form and substance reasonably satisfactory to the Administrative Agent.

## ARTICLE
NEGATIVE COVENANTS

Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder and all other amounts payable under the Loan Documents have been paid in full and all Letters of Credit have expired or terminated (or are Cash Collateralized) and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

## Section 9.01 Financial Covenants.

(a) Ratio of Total Debt to EBITDAX. The Borrower will not, as of the last day of any fiscal quarter, commencing with the fiscal quarter ending December 31, 2016, permit its ratio of (i) Total Debt as of such date to (ii) EBITDAX for the Test Period ending on such date to be greater than 3.5 to 1.0.



(b) Ratio of EBITDAX to Interest Expense. The Borrower will not, as of the last day of any fiscal quarter, commencing with the fiscal quarter ending December 31, 2016, permit its ratio of (i) EBITDAX to (ii) Interest Expense, in each case, for the Test Period ending on such date, to be less than 3.0 to 1.0.

(c) Current Ratio. The Borrower will not, as of the last day of any fiscal quarter, commencing with the quarter ending December 31, 2016, permit its ratio of (i) consolidated current assets (including the unused amount of the total Commitments, but excluding non-cash assets under ASC 815) to (ii) consolidated current liabilities (excluding non-cash obligations under ASC 815, reclamation obligations to the extent classified as current liabilities under GAAP, and current maturities under this Agreement) to be less than 1.0 to 1.0.

Section 9.02 Debt. The Borrower will not, and will not permit any Subsidiary to, incur, create, assume or suffer to exist any Debt, except:

(a) the Loans or other Secured Obligations arising under the Loan Documents or any guaranty of or suretyship arrangement for the Loans or other Secured Obligations arising under the Loan Documents;

(b) Debt existing on the date hereof and set forth in Schedule 9.02;

(c) Debt associated with worker’s compensation claims, bonds or surety obligations required by Governmental Requirements or by third parties in the ordinary course of business in connection with the operation of, or provision for the abandonment and remediation of, the Oil and Gas Properties;

(d) Debt of the Borrower or any other Loan Party owing to the Borrower or any other Loan Party; provided that (i) such Debt is not held, assigned, transferred, negotiated or pledged to any Person other than a Loan Party, and (ii) any such Debt owed by either the Borrower or a Guarantor shall be subordinated to the Secured Obligations on terms set forth in the Security Instruments;

(e) endorsements of negotiable instruments for collection in the ordinary course of business;

(f) Debt in respect of Cash Management Services;

(g) other unsecured Debt not to exceed $1,500,000 in the aggregate at any one time outstanding; and

(h) any Guarantee of any other Debt permitted to be incurred hereunder.

Section 9.03 Liens. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any of its Properties (now owned or hereafter acquired), except:

(a) Liens securing the payment of any Secured Obligations;

(b) Excepted Liens;



(c) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 9.03; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof.

## Section 9.04 Restricted Payments: Certain Debt Payments.

(a) The Borrower will not, and will not permit any of the other Loan Party to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except

(i) the Borrower may make Restricted Payments with respect to its Equity Interests with or by issuing additional shares of its Equity Interests (other than Disqualified Capital Stock);

(ii) Subsidiaries may declare and pay dividends and other Restricted Payments to the Borrower and any other Loan Party; and

(iii) the Borrower may redeem, retire, or repurchase its Equity Interests so long as (A) the aggregate amount of cash paid in respect of all such Equity Interests redeemed, retired or repurchased in any calendar year does not exceed $5,000,000, (B) no Default, Event of Default or Borrowing Base Deficiency exists or would result therefrom, and (C) the Borrowing Base Utilization Percentage is less than 80%.

(b) No Loan Party will, nor will it permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other Property) of or in respect of principal of or interest on any Debt, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Debt, except:

(i) payment of the Secured Obligations;

(ii) payment of regularly scheduled interest and principal payments as and when due in respect of any Debt permitted under Section 9.02, other than payments in respect of any subordinated Debt prohibited by the subordination provisions thereof; and

(iii) payment of secured Debt that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Debt to the extent such sale or transfer is permitted by the terms of Section 9.10.

Section 9.05 Investments, Loans and Advances. The Borrower will not, and will not permit any other Loan Party to, make or permit to remain outstanding any Investments in or to any Person, except that the foregoing restriction shall not apply to:

(a) Investments which are disclosed to the Lenders in Schedule 9.05;

(b) accounts receivable arising in the ordinary course of business;

(c) direct obligations of the U.S. or any agency thereof, or obligations guaranteed by the United States or any agency thereof, in each case maturing within one year from the date of acquisition thereof;



(d) commercial paper maturing within one year from the date of acquisition thereof of rated in one of the two highest grades by S&P or Moody’s;

(e) deposits maturing within one year from the date of creation thereof with, including certificates of deposit issued by, any Lender or any office located in the United States of any other bank or trust company which is organized under the laws of the United States or any state thereof, has capital, surplus and undivided profits aggregating at least $500,000,000 (as of the date of such bank or trust company’s most recent financial reports) and has a short term deposit rating of no lower than A2 or P2, as such rating is set forth from time to time, by S&P or Moody’s, respectively;

(f) Investments in money market or similar funds with assets of at least $1,000,000,000 and rated Aaa by Moody’s or AAA by S&P;

(g) Investments (i) made by the Borrower in or to its Subsidiaries which are Loan Parties or (ii) made by Loan Parties to each other or the Borrower;

(h) Investments in direct ownership interests in additional Oil and Gas Properties and gas gathering systems related thereto or related to farm-out, farm-in, joint operating, joint venture or area of mutual interest agreements, gathering systems, pipelines or other similar arrangements which are usual and customary in the oil and gas exploration and production business located within the geographic boundaries of the U.S.;

(i) Investments received in connection with the Disposition of assets permitted by Section 9.10;

(j) Investments pursuant to Swap Agreements or hedging agreements otherwise permitted under this Agreement; and

(k) other Investments (including Investments consisting of the purchase of additional Equity Interests in those partnerships listed on Schedule 9.05) not to exceed $5,000,000 in the aggregate at any one time outstanding.

Section 9.06 Nature of Business; No International Operations. The Borrower will not allow any material change to be made in the character of its business as an independent oil and gas exploration and production company. The Loan Parties will not (a) acquire or make any other expenditures (whether such expenditure is capital, operating or otherwise) in or related to, any Oil and Gas Properties not located within the geographical boundaries of the U.S. or (b) acquire or create any Foreign Subsidiary.

Section 9.07 ERISA Compliance. Except as could not reasonably be expected to result in liability to the Borrower or any other Loan Party in an aggregate amount exceeding $1,000,000, the Borrower will not, and will not permit any other Group Member to, at any time:

(a) allow any ERISA event to occur;

(b) contribute to or assume an obligation to contribute to, or permit any Subsidiary to contribute to or assume an obligation to contribute to, any Multiemployer Plan; or



(c) acquire, or permit any Subsidiary to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to any Subsidiary if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, any Multiemployer Plan.

Section 9.08 Sale or Discount of Receivables. Except for receivables obtained by the Loan Parties out of the ordinary course of business or the settlement of joint interest billing accounts in the ordinary course of business or discounts granted to settle collection of accounts receivable or the sale of defaulted accounts arising in the ordinary course of business in connection with the compromise or collection thereof and not in connection with any financing transaction, the Borrower will not, and will not permit any other Loan Party to, discount or sell (with or without recourse) any of its notes receivable or accounts receivable.

Section 9.09 Mergers, Etc. Neither the Borrower nor any other Loan Party will merge into or with or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its Property to any other Person, (whether now owned or hereafter acquired) (any such transaction, a “consolidation”), or liquidate or dissolve, except that (a) any Loan Party may consolidate with or into the Borrower (provided the Borrower shall be the continuing or surviving entity); (b) any Loan Party (other than the Borrower) may consolidate with any other Loan Party; and (c) the Borrower may dissolve Southwest Oilfield Construction Company so long as (i) all of the assets of such Person are transferred to the Borrower or another Loan Party and (ii) at the time of such dissolution and after giving effect thereto, no Default or Event of Default exists.

Section 9.10 Sale of Properties and Termination of Hedging Transactions. The Borrower will not, and will not permit any other Loan Party to, Dispose, farmout, or otherwise transfer any Property (subject to Section 9.09) except for:

(a) the sale of Hydrocarbons in the ordinary course of business;

(b) farms out in the ordinary course of business of undeveloped acreage or undrilled depths and assignments in connection with such farms;

(c) the Disposition of equipment that is no longer necessary for the business of the Borrower or such other Loan Party or are replaced by equipment of at least comparable value and use;

(d) other Dispositions of equipment so long as the gross sales proceeds from such Dispositions made pursuant to this clause (d) do not, individually or in the aggregate, exceed $2,500,000 in any fiscal year of the Borrower;

(e) the Disposition of any Oil and Gas Property to which no proved reserves are attributed and the pooling or unitization of Oil and Gas Properties to which no material proved reserves are attributed, so long as, after giving pro forma effect to any concurrent repayment of the Loans with the cash proceeds of such disposition, no Event of Default or Borrowing Base Deficiency would exist or result therefrom;

(f) the Disposition (including Casualty Events) of any Oil and Gas Property or any interest therein (including any Equity Interest in any Loan Party that owns Oil and Gas Property), or the termination, unwinding, cancellation or other disposition of Swap Agreements; provided that:

(i) 100% of the consideration received in respect of such Disposition of any such Oil and Gas Property (or such Equity Interest) shall be cash,



(ii) other than in respect of Casualty Events, the consideration received in respect of a Disposition of such Oil and Gas Property or interest therein (or such Equity Interest) shall be equal to or greater than the fair market value of such Oil and Gas Property or interest therein (or such Equity Interest) that is the subject of such Disposition (as reasonably determined by a Responsible Officer of the Borrower and if requested by the Administrative Agent, the Borrower shall deliver a certificate of a Responsible Officer of the Borrower certifying to the foregoing),

(iii) if the Borrowing Base Value of such Oil and Gas Property or interest therein (or such Equity Interest) or such Swap Agreement, during any period between two successive Scheduled Redetermination Dates, is in excess of 5% of the Borrowing Base as then in effect (as determined by the Administrative Agent), individually or in the aggregate, then, the Administrative Agent may send a notice to the Borrower and the Lenders that the then effective Borrowing Base shall be reduced by the Borrowing Base Value of the Oil and Gas Property subject to such Disposition or the Swap Agreement subject to such termination or other disposition (which new Borrowing Base shall become effective immediately after receipt of such notice);

(g) transfers of Properties from any Loan Party to the Borrower or any other Loan Party; and

(h) Casualty Events with respect to Properties that are not Oil and Gas Properties.

Section 9.11 Sales and Leasebacks. The Borrower will not, and will not permit any other Loan Party to, enter into any arrangement with any Person providing for the leasing by any Loan Party of real or personal property that has been or is to be sold or transferred by such Loan Party to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of such Loan Party.

Section 9.12 Environmental Matters. The Borrower will not, and will not permit any other Group Member to, (a) cause or knowingly permit any of its Property to be in violation of, or (b) do anything or knowingly permit anything to be done which will subject any such Property to any Remedial Work (other than Remedial Work done in the ordinary course of business) under, any Environmental Laws that could reasonably be expected to have a Material Adverse Effect; it being understood that clause (b) above will not be deemed as limiting or otherwise restricting any obligation to disclose any relevant facts, conditions and circumstances pertaining to such Property to the appropriate Governmental Authority.

Section 9.13 Transactions with Affiliates. Except for payment of Restricted Payments permitted by Section 9.04, the Borrower will not, and will not permit any other Loan Party to, enter into any transaction, including any purchase, sale, lease or exchange of Property or the rendering of any service, with any Affiliate (other than between Borrower and other Loan Parties) unless such transactions are otherwise permitted under this Agreement and are upon fair and reasonable terms no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not an Affiliate.

Section 9.14 Negative Pledge Agreements; Dividend Restrictions. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any contract, agreement or understanding which in any way prohibits or restricts (a) the granting, conveying, creation or imposition



of any Lien on any of its Property to secure the Secured Obligations or which requires the consent of other Persons in connection therewith or (b) the Borrower or any other Loan Party from paying dividends or making distributions to any Loan Party or receiving any money in respect of Debt or other obligations owed to it, or which requires the consent of or notice to other Persons in connection therewith; provided that (i) the foregoing shall not apply to restrictions and conditions under the Loan Documents, (ii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of any asset or another Loan Party pending such sale; provided such restrictions and conditions apply only to the asset or other Loan Party that is to be sold and such sale is permitted hereunder, and (iii) clause (a) of the foregoing shall not apply to (A) restrictions or conditions imposed by any agreement relating to Capital Leases permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Capital Leases and (B) customary provisions in leases restricting the assignment thereof.

Section 9.15 Take-or-Pay or Other Prepayments. The Borrower will not, and will not permit any other Loan Party to, allow take-or-pay or other prepayments with respect to the Oil and Gas Properties of the Borrower or any other Loan Party that would require the Borrower or such other Loan Party to deliver Hydrocarbons at some future time without then or thereafter receiving full payment therefor.

Section 9.16 Swap Agreements. The Borrower will not, and will not permit any other Loan Party to, enter into any Swap Agreements with any Person other than:

(a) Swap Agreements in respect of commodities (i) with an Approved Counterparty, (ii) which have a tenor not greater than (A) with respect to crude oil and natural gas, 5 years and (B) with respect to natural gas liquids, 3 years, and (iii) the notional volumes for which (when aggregated with other commodity Swap Agreements then in effect other than basis differential swaps on volumes already hedged pursuant to other Swap Agreements) do not exceed, as of the date such Swap Agreement is entered into, the percentage, as set forth in the table below for each month during which such Swap Agreement is in effect, of the reasonably anticipated production of crude oil, natural gas liquids and natural gas, calculated separately, from proved, developed producing Oil and Gas Properties of the Loan Parties, as set forth on the most recent Reserve Report delivered pursuant to the terms of this Agreement:

<table><tr><td colspan="3">Percentage Limitation</td></tr><tr><td>Oil/Gas</td><td>NGL&#x27;s</td><td></td></tr><tr><td>90%</td><td>80%</td><td></td></tr><tr><td>90%</td><td>N/A</td><td></td></tr><tr><td>70%</td><td>N/A</td><td></td></tr></table>

(b) Swap Agreements in respect of interest rates with an Approved Counterparty which do not exceed 75% of the then outstanding principal amount of the Borrower's Debt for borrowed money and do not have a tenor beyond the maturity date of the relevant Debt;

provided that (A) in no event shall any Swap Agreement contain any requirement, agreement or covenant for any Loan Party to post collateral or margin to secure their obligations under such Swap Agreement or to cover market exposures (other than under the Security Instruments), (B) Swap Agreements shall only be entered into in the ordinary course of business (and not for speculative purposes), and (C) no Swap Agreement in respect of commodities shall be terminated, unwound, cancelled or otherwise disposed of except to the extent permitted by Section 9.10.



Section 9.17 Amendments to Organizational Documents and Material Contracts. The Borrower shall not, and shall not permit any other Subsidiary to, (a) amend, supplement or otherwise modify (or permit to be amended, supplemented or modified) its Organizational Documents in any material respect that could reasonably be expected to be adverse to the interests of the Administrative Agent or the Lenders, (b) amend, supplement or otherwise modify (or permit to be amended, supplemented or modified) any agreement to which it is a party, (c) terminate, replace or assign any of the Loan Party's interests in any agreement or (d) permit any agreement not to be in full force and effect and binding upon and enforceable against the parties thereto, in each case, in the cases of clauses (b), (c) and (d) if such occurrence could be reasonably expected to result in a Material Adverse Effect.

Section 9.18 Changes in Fiscal Periods. The Borrower shall not, and shall not permit any other Loan Party to have its fiscal year end on a date other than December 31 or change the its method of determining fiscal quarters.

Section 9.19 Debt of Borrowing Base Partnerships. None of the Borrower or any of its Subsidiaries will permit any Borrowing Base Partnership to, incur, create, assume or suffer to exist any Debt.

## ARTICLE X
EVENTS OF DEFAULT; REMEDIES

Section 10.01 Events of Default. One or more of the following events shall constitute an “Event of Default”:

(a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof, by acceleration or otherwise;

(b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in Section 10.01(a)) payable under any Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of 3 days;

(c) any representation or warranty made or deemed made by or on behalf of the Borrower or any other Loan Party in or in connection with any Loan Document or any amendment or modification of any Loan Document or waiver under such Loan Document, or in any report, notice, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made (or, to the extent that any such representation and warranty is qualified by materiality, such representation and warranty (as so qualified) shall prove to have been incorrect in any respect when made or deemed made);

(d) the Borrower or any other Loan Party shall fail to observe or perform any covenant, condition or agreement contained in Section 8.02, Section 8.03, Section 8.11, Section 8.12, Section 8.14, Section 8.15, Section 8.17, Section 8.19, Section 8.20 or in Article IX;

(e) the Borrower or any other Loan Party shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in Section 10.01(a), Section 10.01(b), Section 10.01(c) or Section 10.01(d)) or any other Loan



Document and such failure shall continue unremedied for a period of 30 days after the earlier to occur of (i) notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender) or (ii) a Responsible Officer of the Borrower or such other Loan Party otherwise becoming aware of such default;

(f) the Borrower or any other Loan Party shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable after giving effect to any grace periods applicable thereto;

(g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of such Material Indebtedness or any trustee or agent on its or their behalf to cause such Material Indebtedness to become due, or to require the Redemption thereof or any offer to Redeem to be made in respect thereof, prior to its scheduled maturity or require the Borrower or any other Loan Party to make an offer in respect thereof;

(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of any Loan Party, or its or their debts, or of a substantial part of its or their assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any other Loan Party or for a substantial part of its or their assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(i) the Borrower or any other Loan Party shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in Section 10.01(h), (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any other Loan Party or for a substantial part of its or their assets, (iv) file an answer admitting the material allegations of a petition filed against it or them in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) take any action for the purpose of effecting any of the foregoing; or (vii) become unable, admit in writing its inability or fail generally to pay its debts as they become due;

(j) one or more judgments for the payment of money in an aggregate amount in excess of $500,000 (to the extent not covered by independent third party insurance as to which the insurer does not dispute coverage and is not subject to an insolvency proceeding) shall be rendered against any Loan Party or any combination thereof and the same shall remain undershcharged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of any Loan Party to enforce any such judgment;

(k) the Loan Documents after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable in accordance with their terms against the Borrower or a Loan Party thereto or shall be repudiated by any of them, except to the extent permitted by the terms of this Agreement, or the Borrower or any other Loan Party or any of their Affiliates shall so state in writing; or



(l) a Change in Control shall occur.

## Section 10.02 Remedies.

(a) In the case of an Event of Default (other than one described in Section 10.01(h) or Section 10.01(i)), at any time thereafter during the continuance of such Event of Default, the Administrative Agent may with the consent of the Majority Lenders or shall at the request of the Majority Lenders, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) by written notice to the Borrower, declare the Notes and the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Loan Parties accrued hereunder and under the Notes and the other Loan Documents (including the payment of cash collateral to secure the LC Exposure as provided in Section 2.08(i)), shall become due and payable immediately, without presentment, demand (other than written notice), protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which are hereby waived by each Loan Party; and in the case of an Event of Default described in Section 10.01(h) or Section 10.01(i), the Commitments shall automatically terminate and the Notes and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and the other obligations of the Borrower and the other Loan Parties accrued hereunder and under the Notes and the other Loan Documents (including the payment of cash collateral to secure the LC Exposure as provided in Section 2.08(i)), shall automatically and immediately become due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration, or other notice of any kind, all of which are hereby waived by each Loan Party.

(b) In the case of the occurrence of an Event of Default, the Administrative Agent and the Lenders will have all other rights and remedies available at law and equity.

(c) All proceeds realized from the liquidation or other disposition of collateral or otherwise received after maturity of the Loans, whether by acceleration or otherwise, shall be applied:

(i) first, to payment or reimbursement of that portion of the Secured Obligations constituting fees, expenses and indemnities payable to the Administrative Agent in its capacity as such;

(ii) second, pro rata to payment or reimbursement of that portion of the Secured Obligations constituting fees, expenses and indemnities payable to the Lenders;

(iii) third, pro rata to payment of accrued interest on the Loans;

(iv) fourth, pro rata to payment of principal outstanding on the Loans and Secured Obligations referred to in clause (y) of the definition of Secured Obligations in respect of Secured Cash Management Agreements and Secured Swap Agreements;

(v) fifth, pro rata to any other Secured Obligations;



(vi) sixth, to serve as Cash Collateral to be held by the Administrative Agent to secure the LC Exposure; and

(vii) seventh, any excess, after all of the Secured Obligations shall have been indefeasibly paid in full in cash, shall be paid to the Borrower or as otherwise required by any Governmental Requirement.

Notwithstanding the foregoing, amounts received from the Borrower or any Guarantor that is not an ECP shall not be applied to any Excluded Swap Obligations (it being understood, that in the event that any amount is applied to Secured Obligations other than Excluded Swap Obligations as a result of this clause, the Administrative Agent shall make such adjustments as it determines are appropriate to distributions pursuant to clause fourth above from amounts received from ECPs to ensure, as nearly as possible, that the proportional aggregate recoveries with respect to Secured Obligations described in clause fourth above by the holders of any Excluded Swap Obligations are the same as the proportional aggregate recoveries with respect to other Secured Obligations pursuant to clause fourth above).

## ARTICLE XI
THE ADMINISTRATIVE AGENT

Section 11.01 Appointment: Powers. Each of the Lender and the Issuing Bank hereby irrevocably appoints the Administrative Agent as its agent and authorized the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof and the other Loan Documents, together with such actions and powers as are reasonably incidental thereto.

Section 11.02 Duties and Obligations of Administrative Agent. The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing (the use of the term "agent" herein and in the other Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law; rather, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties), (b) the Administrative Agent shall have no duty to take any discretionary action or exercise any discretionary powers, except as provided in Section 11.03, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any Loan Party that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or under any other Loan Document or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or in any other Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, (v) the satisfaction of any condition set forth in Article VI or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent or as to those conditions precedent expressly required to be to the Administrative Agent's satisfaction, (vi) the existence, value, perfection or priority of any collateral security or the financial or other condition of the Borrower and the other Group Members or any other obligor or guarantor, or (vii) any failure by the Borrower or any other Person (other



than itself) to perform any of its obligations hereunder or under any other Loan Document or the performance or observance of any covenants, agreements or other terms or conditions set forth herein or therein. For purposes of determining compliance with the conditions specified in Article VI, each Lender and the Issuing Bank shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender or the Issuing Bank unless the Administrative Agent shall have received written notice from such Lender prior to the Effective Date specifying its objection thereto.

Section 11.03 Action by Administrative Agent. The Administrative Agent shall have no duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise in writing as directed by the Majority Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 12.02) and in all cases the Administrative Agent shall be fully justified in failing or refusing to act hereunder or under any other Loan Documents unless it shall (a) receive written instructions from the Majority Lenders or the Lenders, as applicable, (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 12.02) specifying the action to be taken and (b) be indemnified to its satisfaction by the Lenders against any and all liability and expenses which may be incurred by it by reason of taking or continuing to take any such action. The instructions as aforesaid and any action taken or failure to act pursuant thereto by the Administrative Agent shall be binding on all of the Lenders. If a Default has occurred and is continuing, then the Administrative Agent shall take such action with respect to such Default as shall be directed by the requisite Lenders in the written instructions (with indemnities) described in this Section 11.03, provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders. In no event, however, shall the Administrative Agent be required to take any action which, in its opinion, or the opinion of its counsel, exposes the Administrative Agent to liability or which is contrary to this Agreement, the Loan Documents or applicable law, including, for the avoidance of doubt, any action that may be in violation of the automatic stay under any debtor relief law or that may effect a forfeiture, modification or termination property of a Defaulting Lender in violation of any debtor relief law. If a Default has occurred and is continuing, no Agent shall have any obligation to perform any act in respect thereof. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Majority Lenders or the Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 12.02), and otherwise the Administrative Agent shall not be liable for any action taken or not taken by it hereunder or under any other Loan Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith INCLUDING ITS OWN ORDINARY NEGLIGENCE, except for its own gross negligence or willful misconduct.

Section 11.04 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon and each of the Borrower and the Lenders and the Issuing Bank hereby waives the right to dispute the Administrative Agent's record of such statement, except in the case of gross negligence or willful misconduct by the Administrative Agent. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof permitted hereunder shall have been filed with the Administrative Agent.



Section 11.05 Subagents. The Administrative Agent may perform any and all of its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of this Article XI shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

Section 11.06 Resignation of Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this Section 11.06, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Majority Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and the Issuing Bank, appoint a qualified financial institution as successor Administrative Agent. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article XI and Section 12.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent.

Section 11.07 Administrative Agent as Lender. The Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any other Group Member or other Affiliate thereof as if it were not the Administrative Agent hereunder.

Section 11.08 No Reliance. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, any other Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and each other Loan Document to which it is a party. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, any other Lender or any other Lender, and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document, any related agreement or any document furnished hereunder or thereunder. The Agents shall not be required to keep themselves informed as to the performance or observance by the Borrower, or any of the other Group Members of this Agreement, the Loan Documents or any other document referred to or provided for herein or to inspect the Properties or books of any such Person. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder, no Agent nor any Arranger shall have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower or any Group Member (or any of their Affiliates) which may come into the possession of such Agent or any of its Affiliates. In this regard, each Lender acknowledges that Winsted PC is acting in this transaction as special counsel to the Administrative



Agent only, except to the extent otherwise expressly stated in any legal opinion or any Loan Document. Each other party hereto will consult with its own legal counsel to the extent that it deems necessary in connection with the Loan Documents and the matters contemplated therein.

Section 11.09 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower or any of the other Group Members, the Administrative Agent (irrespective of whether the principal of any Loan or LC Disbursement shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, LC Disbursements and all other Secured Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders, the Issuing Bank and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Section 2.08, Section 3.05 and Section 12.03) allowed in such judicial proceeding; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and the Issuing Bank to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders and the Issuing Bank, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Section 3.05 and Section 12.03.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender or the Issuing Bank any plan of reorganization, arrangement, adjustment or composition affecting the Secured Obligations or the rights of any Lender or the Issuing Bank or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

Section 11.10 Authority of Administrative Agent to Release Collateral and Liens. The Lenders and the Issuing Bank, and by accepting the benefits of the Collateral, each Secured Swap Provider and each Secured Cash Management Provider:

(a) irrevocably authorize the Administrative Agent to comply with the provisions of Section 12.18; and

(b) authorize the Administrative Agent to execute and deliver to the Loan Parties, at the Borrower's sole cost and expense, any and all releases of Liens, termination statements, assignments or other documents as reasonably requested by such Loan Party in connection with any Disposition of Property to the extent such Disposition is permitted by the terms of Section 9.10 or is otherwise authorized by the terms of the Loan Documents.



Upon request by the Administrative Agent at any time, the Majority Lenders will confirm in writing the Administrative Agent’s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the applicable Guaranty Agreement pursuant to this Section 11.10 or Section 12.18.

Section 11.11 Duties of the Arranger. The Arranger shall not have any duties, responsibilities or liabilities under this Agreement and the other Loan Documents.

## ARTICLE XII
MISCELLANEOUS

Section 12.01 Notices.

(a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to Section 12.01(b)), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile, as follows:

(i) if to the Borrower, to it at 9821 Katy Freeway, Suite 1050, Houston, Texas 77024 (Facsimile No. (713) 735-0090);

(ii) if to the Administrative Agent or BBVA Compass as the Issuing Bank, to it at 2200 Post Oak Boulevard, 17th Floor, Houston, Texas 77056, Attention: Energy Division (Facsimile No. (713) 499-8722); and

(iii) if to any other Lender, to it at its address (or facsimile number) set forth in its Administrative Questionnaire.

All such notices and other communications (x) sent by hand or overnight courier service, or mailed by certified or registered mail shall be deemed to have been given when received, (y) sent by fax shall be deemed to have been given when sent, provided that if not given during normal business hours for the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day of the recipient, or (z) delivered by electronic communications to the extent provided in paragraph (b) below shall be effective as provided in such paragraph.

(b) Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Article II, Article III, Article IV and Article V unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, all such notices and other communications (i) sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient, at its e-mail address as



described in the foregoing clause (i), of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such notice, e-mail or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day of the recipient.

(c) Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto.

## (d) Electronic Systems.

(i) Each Loan Party agrees that the Administrative Agent may, but shall not be obligated to, make Communications (as defined below) available to the Issuing Bank and the other Lenders by posting the Communications on Debt Domain, Intralinks, Syndtrak, ClearPar or a substantially similar Electronic System.

(ii) Any Electronic System used by the Administrative Agent is provided “as is” and “as available.” The Agent Parties (as defined below) do not warrant the adequacy of such Electronic Systems and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or any Electronic System. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to the Borrower or the other Loan Parties, any Lender, the Issuing Bank or any other Person for damages of any kind, including direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the Borrower’s, any other Loan Party’s or the Administrative Agent’s transmission of communications through an Electronic System. “Communications” means, collectively, any notice, demand, communication, information, document or other material provided by or on behalf of any Loan Party pursuant to any Loan Document or the transactions contemplated therein which is distributed by the Administrative Agent, any Lender or the Issuing Bank by means of electronic communications pursuant to this Section, including through an Electronic System.

## Section 12.02 Waivers; Amendments.

(a) No failure on the part of the Administrative Agent, any other Agent, the Issuing Bank or Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege, or any abandonment or discontinuance of steps to enforce such right, power or privilege, under any of the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any of the Loan Documents preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Administrative Agent, each other Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by Section 12.02(b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the



making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any other Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time.

(b) Neither this Agreement nor any provision hereof nor any Loan Document nor any provision thereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and/or the other applicable Loan Parties and the Majority Lenders or by the Borrower and/or the other applicable Loan Parties and the Administrative Agent with the consent of the Majority Lenders; provided that no such agreement shall (i) increase the Maximum Credit Amount of any Lender without the written consent of such Lender, (ii) except as otherwise provided in Section 2.07, increase the Borrowing Base without the written consent of each non-Defaulting Lender, or decrease or maintain the Borrowing Base without the consent of the Required Lenders (other than Defaulting Lenders); provided that a Scheduled Redetermination may be postponed by the Required Lenders, (iii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, or reduce any other Secured Obligations hereunder or under any other Loan Document, without the written consent of each Lender directly affected thereby, (iv) postpone the scheduled date of payment or prepayment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, or any other Secured Obligations hereunder or under any other Loan Document, or reduce the amount of, waive or excuse any such payment, or postpone or extend the Maturity Date or the Termination Date without the written consent of each Lender directly affected thereby, (v) change Section 4.01(b) or Section 4.01(c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (vi) waive or amend Section 3.04(c), Section 6.01, Section 10.02(c) or Section 12.18 without the written consent of each Lender directly affected thereby (other than any Defaulting Lender), (vii) release any Guarantor (except as set forth in Section 11.10 or the Guaranty Agreement), release all or substantially all of the Collateral (other than as provided in Section 11.10), or reduce the percentages set forth in Section 8.14(a), without the written consent of each Lender (other than any Defaulting Lender), (viii) change any of the provisions of this Section 12.02(b) or the definitions of "Majority Lenders" or "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or under any other Loan Documents or make any determination or grant any consent hereunder or any other Loan Documents, without the written consent of each Lender (other than any Defaulting Lender); (ix) change Section 10.02(c) without the consent of each Person to whom a Secured Obligation is owed; or (x) contractually subordinate the payment of all the Secured Obligations to any other Debt or contractually subordinate the priority of any of the Administrative Agent's Liens to the Liens securing any other Debt, in each case, without the written consent of each Person to whom a Secured Obligation is owed (other than any Defaulting Lender); provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or Issuing Bank hereunder or under any other Loan Document without the prior written consent of the Administrative Agent or Issuing Bank, as the case may be. Notwithstanding the foregoing, any supplement to any Schedule shall be effective simply by delivering to the Administrative Agent a supplemental schedule clearly marked as such and, upon receipt, the Administrative Agent will promptly deliver a copy thereof to the Lenders. Notwithstanding the foregoing, the Borrower and the Administrative Agent may amend this Agreement or any other Loan Document without the consent of the Lenders in order to correct, amend or cure any ambiguity, inconsistency or defect or correct any typographical error or other manifest error in any Loan Document.



(a) The Borrower shall pay (i) all out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent and its Affiliates and to the extent necessary as determined by the Administrative Agent, other outside consultants for the Administrative Agent, the travel, photocopy, mailing, courier, telephone and other similar expenses, and the cost of environmental invasive and non-invasive assessments and audits and surveys and appraisals, in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration (both before and after the execution hereof and including advice of counsel to the Administrative Agent as to the rights and duties of the Administrative Agent and the Lenders with respect thereto) of this Agreement and the other Loan Documents and any amendments, modifications or waivers of or consents related to the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all costs, expenses, Taxes, assessments and other charges incurred by the Administrative Agent in connection with any filing, registration, recording or perfection of any security interest contemplated by this Agreement or any Security Instrument or any other document referred to therein, (iii) all out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder, (iv) all out-of-pocket expenses incurred by the Administrative Agent, any other Agent, the Issuing Bank or any Lender, including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent, any other Agent, the Issuing Bank or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement or any other Loan Document, including its rights under this Section 12.03, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.

(b) THE BORROWER SHALL INDEMNIFY EACH AGENT, THE ARRANGER, THE ISSUING BANK AND EACH LENDER, AND EACH RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN "INDEMNITE") AGAINST, AND DEFEND AND HOLD EACH INDEMNITE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, PENALTIES, LIABILITIES AND RELATED EXPENSES, INCLUDING THE REASONABLE FEES, CHARGES AND DISBURSEMENTS OF ANY OUTSIDE COUNSEL FOR ANY INDEMNITE, INCURRED BY OR ASSERTED AGAINST ANY INDEMNITE ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (i) THE EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT COMPLETAPLED HEREBY OR THEREBY, (ii) THE PERFORMANCE BY THE PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN DOCUMENT OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER OR THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR BY ANY OTHER LOAN DOCUMENT, (iii) THE FAILURE OF THE BORROWER OR ANY GROUP MEMBER TO COMPLY WITH THE TERMS OF ANY LOAN DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (iv) ANY INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OR COVENANT OF THE BORROWER OR ANY GROUP MEMBERS SET FORTH IN ANY OF THE LOAN DOCUMENTS OR ANY INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (v) ANY LOAN OR LETTER OF CREDIT OR THE USE OF THE PROCEEDS THEREFROM, INCLUDING (A) ANY REFUSAL BY THE ISSUING BANK TO HONOR A DEMAND FOR PAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION WITH SUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS OF SUCH



LETTER OF CREDIT, OR (B) THE PAYMENT OF A DRAWING UNDER ANY LETTER OF CREDIT NOTWITHSTANDING THE NON-COMPLIANCE, NON-DELIVERY OR OTHER IMPROPER PRESENTATION OF THE DOCUMENTS PRESENTED IN CONNECTION THEREWITH, (vi) ANY OTHER ASPECT OF THE LOAN DOCUMENTS, (vii) THE OPERATIONS OF THE BUSINESS OF THE BORROWER OR ANY OTHER GROUP MEMBER BY SUCH PERSONS, (viii) ANY ASSERTION THAT THE LENDERS WERE NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY INSTRUMENTS, (ix) ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY OTHER GROUP MEMBER OR ANY OTHER GROUP MEMBER OR ANY OF THEIR PROPERTIES OR OPERATIONS, INCLUDING THE PRESENCE, GENERATION, STORAGE, RELEASE, THREATENED RELEASE, USE, TRANSPORT, DISPOSAL, ARRANGEMENT OF DISPOSAL OR TREATMENT OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS MATERIALS ON OR AT ANY OF THEIR PROPERTIES, (x) THE BREACH OR NON-COMPLIANCE BY THE BORROWER OR ANY OTHER GROUP MEMBER WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY OTHER GROUP MEMBER, (xi) THE PAST OWNERSHIP BY THE BORROWER OR ANY OTHER GROUP MEMBER OF ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (xi) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT, DISPOSAL, GENERATION, THREATENED RELEASE, TRANSPORT, ARRANGEMENT FOR TRANSPORT OR ARRANGEMENT FOR DISPOSAL OF OIL, OIL AND GAS WASTES, SOLID WASTES OR HAZARDOUS MATERIALS ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE BORROWER OR ANY OTHER GROUP MEMBER OR ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED OR OPERATED BY THE BORROWER OR ANY OTHER GROUP MEMBER, (xii) ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OTHER GROUP MEMBER, (xiv) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS, OR (xv) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATED TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY ANY LOAN PARTY, AND REGARDLESS OF WHETHER ANY INDEMNITE IS A PARTY THERETO, AND SUCH INDEMNITY SHALL EXTEND TO EACH INDEMNITE NON-WITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNITES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNITEES INCLUDING ORDINARY NEGLIGENCE; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO (X) HAVE RESULTED FROM (I) THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITE OR (2) THE MATERIAL BREACH OF SUCH INDEMNITE'S OBLIGATIONS UNDER THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR (Y) RELATE TO TAXES, WHICH SHALL BE SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION 5.03.



(c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, any Agent, any Arranger or the Issuing Bank under Section 12.03(a) or (b), each Lender severally agrees to pay to the Administrative Agent, such Agent, such Arranger or the Issuing Bank, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, such Agent, such Arranger or the Issuing Bank in its capacity as such.

(d) To the extent permitted by applicable law, the Borrower shall not, and shall cause each Group Member not to, assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.

(e) All amounts due under this Section 12.03 shall be payable not later than 10 days after written demand therefor.

## Section 12.04 Successors and Assigns.

(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section 12.04. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), Participants (to the extent provided in Section 12.04(c)) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

## (b) Assignments.

(i) Subject to the conditions set forth in Section 12.04(b)(ii), any Lender may assign to one or more assignees (each, an “Assignee”) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent of:

(A) the Borrower (such consent not to be unreasonably withheld), provided that no consent of the Borrower shall be required if (1) an Event of Default has occurred and is continuing or (2) at any other time, such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; provided further, that the Borrower shall be deemed to have consented to any such assignment unless the Borrower shall object thereto by written notice to the Administrative Agent with 5 Business Days after having received written notice thereof;

(B) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment to an assignee that is a Lender immediately prior to giving effect to such assignment; and



(C) the Issuing Bank, provided that no consent of the Issuing Bank shall be required for an assignment to an assignee that is a Lender immediately prior to giving effect to such assignment.

(ii) Assignments shall be subject to the following additional conditions:

(A) except in the case of an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or an assignment of the entire remaining amount of the assigning Lender's Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, provided that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing;

(B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement;

(C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $4,000; and

(D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and

(E) the assignee must not be a natural person, a Defaulting Lender or an Affiliate or Subsidiary of the Borrower.

(iii) Subject to Section 12.04(b)(iv) and the acceptance and recording thereof, from and after the effective date specified in each Assignment and Assumption the Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Section 5.01, Section 5.02, Section 5.03 and Section 12.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 12.04 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 12.04(c).

(iv) The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Maximum Credit Amount of, and principal amount (and stated



interest) of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. In connection with any changes to the Register, if necessary, the Administrative Agent will reflect the revisions on Annex I and forward a copy of such revised Annex I to the Borrower, the Issuing Bank and each Lender.

(v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the Assignee's completed Administrative Questionnaire and, if required hereunder, applicable tax forms (unless the Assignee shall already be a Lender hereunder), the processing and recordation fee referred to in this Section 12.04(b) and any written consent to such assignment required by this Section 12.04(b), the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this Section 12.04(b).

(vi) Notwithstanding the foregoing, no assignment or participation shall be made to any Loan Party or any Affiliate of a Loan Party.

## (c) Participations.

(i) Any Lender may at any time, without the consent of, or notice to, the Borrower, the Administrative Agent, Issuing Bank or any other Person, sell participations to any Person (other than a natural Person or the Borrower or any of the Borrower's Affiliates or Subsidiaries) (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender's obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (C) the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and (D) the selling Lender shall maintain the Participant Register. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 12.02(b) that affects such Participant. In addition such agreement must provide that the Participant be bound by the provisions of Section 12.03. Subject to Section 12.04(c)(ii), the Borrower agrees that each Participant shall be entitled to the benefits of Section 5.01, Section 5.02 and Section 5.03 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 12.04(b). To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 12.08 as though it were a Lender, provided such Participant agrees to be subject to Section 4.01(c) as though it were a Lender. Each Lender that sells a participation shall, acting solely for this purpose as an agent of the



Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant's interest in the Loans or other obligations under the Loan Documents (the "Participant Register"); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participant's interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered former under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.

(ii) A Participant shall not be entitled to receive any greater payment under Section 5.01 or Section 5.03 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 5.03 such Participant agrees, for the benefit of the Borrower, to comply with Section 5.03(f) as though it were a Lender (it being understood the documentation required under Section 5.03(f) shall be provided only to the selling Lender).

(d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank or a central bank, and this Section 12.04(d) shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledge or Assignee for such Lender as a party hereto.

(e) Notwithstanding any other provisions of this Section 12.04, no transfer or assignment of the interests or obligations of any Lender or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Borrower and the other Loan Parties to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any state.

## Section 12.05 Survival; Revival; Reinstatement.

(a) All covenants, agreements, representations and warranties made by the Loan Parties herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the other Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, any other Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under



this Agreement is outstanding and unpaid or any Letter of Credit or other Secured Obligations are outstanding and so long as the Commitments have not expired or been terminated. The provisions of Section 5.01, Section 5.02, Section 5.03 and Section 12.03 and ARTICLE XI shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement, any other Loan Document or any provision hereof or thereof.

(b) To the extent that any payments on the Secured Obligations or proceeds of any collateral are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or other Person under any bankruptcy law, common law or equitable cause, then to such extent, the Secured Obligations shall be revived and continue as if such payment or proceeds had not been received and the Administrative Agent's and the Lenders' Liens, security interests, rights, powers and remedies under this Agreement and each Loan Document shall continue in full force and effect. In such event, each Loan Document shall be automatically reinstated and the Borrower shall, and shall cause each other Loan Party to, take such action as may be reasonably requested by the Administrative Agent and the Lenders to effect such reinstatement.

## Section 12.06 Counterparts: Integration: Effectiveness.

(a) This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.

(b) This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and thereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof and thereof. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

(c) Except as provided in Section 6.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy, facsimile or other similar electronic means shall be effective as delivery of a manually executed counterpart of this Agreement.

Section 12.07 Severability. Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, legality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

Section 12.08 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest



exent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations (of whatsoever kind, including obligations under Swap Agreements) at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower or any other Loan Party against any of and all the obligations of the Borrower or any other Loan Party owed to such Lender now or thereafter existing under this Agreement or any other Loan Document, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 12.08 are in addition to other rights and remedies (including other rights of setoff) which such Lender or its Affiliates may have.

## Section 12.09 GOVERNING LAW: JURISDICTION: CONSENT TO SERVICE OF PROCESS.

(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT THAT UNITED STATES FEDERAL LAW PERMITS ANY LENDER TO CONTRACT FOR, CHARGE, RECEIVE, RESERVE OR TAKE INTEREST AT THE RATE ALLOWED BY THE LAWS OF THE STATE WHERE SUCH LENDER IS LOCATED. CHAPTER 346 OF THE TEXAS FINANCE CODE (RELATING TO REVOLVING LOAN AND REVOLVING TRIPARTY ACCOUNTS), SHALL NOT APPLY TO THIS AGREEMENT OR ANY LOANS OR THE TRANSACTIONS CONTEMPLATED HEREBY.

(b) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: SUBMITS (AND THE BORROWER SHALL CAUSE EACH GROUP MEMBER TO SUBMIT) FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE EXCLUSIVE JURISDICTION OF THE STATE DISTRICT COURTS OF HARRIS COUNTY, TEXAS AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS AND APPELLATE COURTS FROM ANY THEREOF; PROVIDED, THAT NOTHING CONTAINED HEREIN OR IN ANY OTHER LOAN DOCUMENT WILL PREVENT ANY PARTY FROM BRINGING ANY ACTION TO ENFORCE ANY AWARD OR JUDGMENT OR EXERCISE ANY RIGHT UNDER THE LOAN DOCUMENTS IN ANY OTHER FORM IN WHICH JURISDICTION CAN BE ESTABLISHED. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.

(c) EACH PARTY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT THE ADDRESS SPECIFIED IN SECTION 12.01 OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO SECTION 12.01 (OR ITS ASSIGNMENT AND ASSUMPTION), SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING NOTHING HEREIN SHALL AFFECT THE RIGHT OF A PARTY OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANOTHER PARTY IN ANY OTHER JURISDICTION.



(d) EACH PARTY HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (iii) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (iv) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 12.09.

Section 12.10 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

Section 12.11 Confidentiality. Each of the Administrative Agent, the Issuing Bank and the Lenders (severally and not jointly) agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and required to keep such Information confidential), (b) to the extent requested by any regulatory authority having authority over the Administrative Agent or any Lender, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement or any other Loan Document, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section 12.11, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement (provided that such Person agrees to be bound by the provisions of this Section 12.11) or (ii) any actual or prospective counterparty (or its advisors) to any Swap Agreement relating to the Borrower and its obligations (provided that such Person agrees to be bound by the provisions of this Section 12.11), (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 12.11 or (ii) becomes available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section 12.11, "Information" means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary and their businesses, other than any such information that is available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower or a Subsidiary; provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section 12.11 shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.



Section 12.12 Interest Rate Limitation. It is the intention of the parties hereto that each Lender and the Issuing Bank shall conform strictly to usury laws applicable to it. Accordingly, if the transactions contemplated hereby would be usurious as to any Lender or the Issuing Bank under laws applicable to it (including the laws of the United States of America and the State of Texas or any other jurisdiction whose laws may be mandatorily applicable to such Lender or the Issuing Bank notwithstanding the other provisions of this Agreement), then, in that event, notwithstanding anything to the contrary in any of the Loan Documents or any agreement entered into in connection with or as security for the Notes, it is agreed as follows: (a) the aggregate of all consideration which constitutes interest under law applicable to any Lender that is contracted for, taken, reserved, charged or received by such Lender or the Issuing Bank under any of the Loan Documents or agreements or otherwise in connection with the Loans or Notes shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be canceled automatically and if theretofore paid shall be credited by such Lender on the principal amount of the Secured Obligations (or, to the extent that the principal amount of the Secured Obligations shall have been or would thereby be paid in full, refunded by such Lender or the Issuing Bank to the Borrower); and (b) in the event that the maturity of the Loans or Notes is accelerated by reason of an election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to any Lender or the Issuing Bank may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically by such Lender or the Issuing Bank as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by such Lender or the Issuing Bank on the principal amount of the Debt (or, to the extent that the principal amount of the Debt shall have been or would thereby be paid in full, refunded by such Lender to the Borrower). All sums paid or agreed to be paid to any Lender for the use, forbearance or detention of sums due hereunder shall, to the extent permitted by law applicable to such Lender or the Issuing Bank, be amortized, prorated, allocated and spread throughout the stated term of the Loans until payment in full so that the rate or amount of interest on account of any Loans hereunder does not exceed the maximum amount allowed by such applicable law. If at any time and from time to time (i) the amount of interest payable to any Lender or the Issuing Bank on any date shall be computed at the Highest Lawful Rate applicable to such Lender or the Issuing Bank pursuant to this Section 12.12 and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to such Lender or the Issuing Bank would be less than the amount of interest payable to such Lender computed at the Highest Lawful Rate applicable to such Lender or the Issuing Bank, then the amount of interest payable to such Lender or the Issuing Bank in respect of such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate applicable to such Lender or the Issuing Bank until the total amount of interest payable to such Lender shall equal the total amount of interest which would have been payable to such Lender or the Issuing Bank if the total amount of interest had been computed without giving effect to this Section 12.12. To the extent that Chapter 303 of the Texas Finance Code is relevant for the purpose of determining the Highest Lawful Rate applicable to any Lender or the Issuing Bank, such Lender or the Issuing Bank elects to determine the applicable rate ceiling under such Chapter by the weekly ceiling from time to time in effect. Chapter 346 of the Texas Finance Code does not apply to the Borrower's obligations hereunder.

Section 12.13 Collateral Matters; Swap Agreements. The benefit of the Security Instruments and of the provisions of this Agreement relating to any collateral securing the Secured Obligations shall also extend to and be available to the Secured Swap Providers in respect of the Secured Swap Agreements as set forth herein. Except as set forth in Section 12.02(b)(v), no Lender or any Affiliate of a Lender shall have any voting rights under any Loan Document as a result of the existence of obligations owed to it under any such Swap Agreements.

Section 12.14 No Third Party Beneficiaries. This Agreement, the other Loan Documents, and the agreement of the Lenders to make Loans and the Issuing Bank to issue, amend, renew or extend



Letters of Credit hereunder are solely for the benefit of the Borrower, and no other Person (including any other Loan Party of the Borrower, any obligor, contractor, subcontractor, supplier or materialman) shall have any rights, claims, remedies or privileges hereunder or under any other Loan Document against the Administrative Agent, the Issuing Bank or any Lender for any reason whatsoever. There are no third party beneficiaries.

Section 12.15 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXECULPATORY PROVISION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

Section 12.16 USA Patriot Act Notice. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Patriot Act"), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.

Section 12.17 Flood Insurance Provisions. Notwithstanding any provision in this Agreement or any other Loan Document to the contrary, in no event is any Building (as defined in the applicable Flood Insurance Regulation) or Manufactured (Mobile) Home (as defined in the applicable Flood Insurance Regulation) included in the definition of "Mortgaged Property" and no Building or Manufactured (Mobile) Home is hereby encumbered by this Agreement or any other Loan Document.

## Section 12.18 Releases.

(a) Release Upon Payment in Full. Upon the complete payment of the Secured Obligations (other than (A) indemnity obligations not yet due and payable of which the Borrower has not received a notice of potential claim, (B) obligations arising under a Secured Swap Agreement and (C) obligations under Secured Cash Management Agreements not yet due and payable) and the termination of the Letters of Credit (other than Letters of Credit as to which other arrangements satisfy to the Administrative Agent and the Issuing Bank shall have been made), this Agreement and the Commitments, the Administrative Agent, at the written request and expense of the Borrower, will promptly release, reassign and transfer the Collateral to the Loan Parties.

(b) Further Assurances. If any of the Collateral shall be sold, transferred or otherwise disposed of by any Loan Party in a transaction permitted by the Loan Documents, then



the Administrative Agent, at the request and sole expense of the applicable Loan Party, shall promptly execute and deliver to such Loan Party all releases or other documents reasonably necessary or desirable for the release of the Liens created by the applicable Security Instrument on such Collateral. At the request and sole expense of the Borrower, a Loan Party shall be released from its obligations under the Loan Documents in the event that all the capital stock or other Equity Interests of such Loan Party shall be sold, transferred or otherwise disposed of in a transaction permitted by the Loan Documents; provided that the Borrower shall have delivered to the Administrative Agent, at least five Business Days prior to the date of the proposed release, a written request for release identifying the relevant Loan Party and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by the Borrower stating that such transaction is in compliance with this Agreement and the other Loan Documents.

Section 12.19 Acknowledgement and Consent to Bail-In of EEA Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:

(a) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and

(b) the effects of any Bail-In Action on any such liability, including, if applicable:

(i) a reduction in full or in part or cancellation of any such liability;

(ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or

(iii) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.

Section 12.20 Amendment and Restatement. This Agreement is an amendment and restatement of the Existing Credit Agreement and supersedes the Existing Credit Agreement in its entirety. This Agreement is not in any way intended to constitute a novation of the obligations and liabilities existing under the Existing Credit Agreement or evidence payment of all or any portion of such obligations and liabilities.



The parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

BORROWER:

PRIME ENERGY CORPORATION

By: /s/ Beverly A. Cummings

Name: Beverly A. Cummings

Title: Executive Vice President, Treasurer & Chief Financial Officer

THIRD AMENDED AND RESTATED CREDIT AGREEMENT – Signature Page



ADMINISTRATIVE AGENT:

ISSUING BANK:

THIRD AMENDED AND RESTATED CREDIT AGREEMENT – Signature Page

COMPASS BANK,
as Administrative Agent

By: /s/ Kathleen J. Bowen
Name: Kathleen J. Bowen
Title: Managing Director

COMPASS BANK,
as Issuing Bank

By: /s/ Kathleen J. Bowen
Name: Kathleen J. Bowen
Title: Managing Director



THIRD AMENDED AND RESTATED CREDIT AGREEMENT – Signature Page

as a Lender

By: /s/ Kathleen J. Bowen

Name: Kathleen J. Bowen

Title: Managing Director



ANNEX I
LIST OF MAXIMUM CREDIT AMOUNTS 

Aggregate Maximum Credit Amounts 

<table><tr><td>Name of Lender</td><td>Applicable Percentage</td><td>Maximum Credit Amount</td></tr><tr><td>Compass Bank</td><td>40.000000000%</td><td>$ 120,000,000.00</td></tr><tr><td>Wells Fargo Bank, National Association</td><td>33.333333333%</td><td>$ 100,000,000.00</td></tr><tr><td>Citibank, N.A.</td><td>26.666666667%</td><td>$ 80,000,000.00</td></tr><tr><td>TOTAL:</td><td>100.000000000%</td><td>$ 300,000,000.00</td></tr></table>



# AMENDED, RESTATED AND CONSOLIDATED GUARANTY

THIS AMENDED, RESTATED AND CONSOLIDATED GUARANTY (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, this “Guaranty”), dated as of February 15, 2017, is made by each of the undersigned Subsidiaries of PRIMENERGY CORPORATION, a Delaware corporation (the “Borrower”), whether as an original signatory hereto or as an Additional Guarantor (together with each such Person’s respective heirs, executors, personal representatives, permitted successors and permitted assigns, collectively, “Guarantors” and each, individually, a “Guarantor”), in favor of COMPASS BANK, as Administrative Agent for the Lenders, as hereinafter defined (in such capacity, “Administrative Agent”).

WHEREAS, Borrower, the financial institutions from time to time party thereto (the "Lenders"), and Compass Bank, as Administrative Agent and the Issuing Bank, are parties to that certain Third Amended and Restated Credit Agreement, dated as of the date hereof (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), which amends and restates the Existing Credit Agreement (as defined in the Credit Agreement); and

WHEREAS, in connection with the Existing Credit Agreement, certain Guarantors previously executed and delivered to Administrative Agent (i) that certain Guaranty dated as of July 30, 2010 and (ii) that certain Guaranty dated as of June 25, 2012 (each, as amended, supplemented or otherwise modified from time to time prior to the date hereof, an "Existing Guaranty", and collectively, the "Existing Guaranties"); and

WHEREAS, each Guarantor (i) is a Subsidiary of Borrower, (ii) desires that the Guaranteed Parties (as hereinafter defined) extend or continue to extend credit and other financial accommodations to Borrower as contemplated by the Credit Agreement, the Secured Swap Agreements and the agreements related to Cash Management Services, (iii) will directly or indirectly benefit from the use by Borrower of the extensions of credit and financial accommodations for the purposes described in the Credit Agreement, the Secured Swap Agreements and the agreements related to Cash Management Services, and (iv) by and through the action of its governing body, has determined that it may reasonably be expected to benefit, directly or indirectly, from guarantying the Guaranteed Obligations, all as hereinafter provided; and

WHEREAS, each Guarantor desires to guarantee or confirm its continuing guarantee of the obligations and indebtedness owing by the Loan Parties under the Loan Documents, Secured Swap Agreements, and agreements related to Cash Management Services, to amend and consolidate the Existing Guaranties to reflect the foregoing, and, for purposes of clarity and ease of administration, to do so by means of this Guaranty;

NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Guaranteed Parties to make and/or continue to make the Loans and other credit extensions under the Credit Agreement and the other Loan Documents and to make and/or continue to make financial accommodations under Secured Swap Agreements and agreements related to Cash Management

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 1



Services Agreements, each Guarantor hereby agrees with Administrative Agent, for the benefit of the Guaranteed Parties, as follows and that the Existing Guaranties shall be amended, restated and consolidated in their entirety to read as follows:

1. Definitions. Capitalized terms used herein and not otherwise defined have the meanings given such terms in the Credit Agreement. As used herein, the following terms have the following meanings:

“Guaranteed Obligations” means, collectively, (a) the Secured Obligations (as defined in the Credit Agreement), (b) any and all out-of-pocket expenses (including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent or any other Guaranteed Party) in connection with the enforcement or protection of any of its rights under this Guaranty, and (c) all present and future amounts that would become due but for the operation of any provision of Debtor Relief Laws, and all present and future accrued and unpaid interest, including, without limitation, all post-petition interest if any Borrower or any other Loan Party voluntarily or involuntarily becomes subject to any Debtor Relief Laws.

“Guaranteed Parties” means, collectively, Administrative Agent, each Lender, the Issuing Bank, each Secured Swap Provider and each Secured Cash Management Provider.

2. Guaranty. Each Guarantor hereby jointly and severally, unconditionally, absolutely and irrevocably guarantees the full and prompt payment when due, whether at stated maturity, by acceleration or otherwise, of, and the performance of, the Guaranteed Obligations. Each Guarantor is jointly and severally liable for the full payment and performance of the Guaranteed Obligations as a primary obligor.

3. Payment. If any of the Guaranteed Obligations is not punctually paid when due, whether by its terms or as a result of the exercise of any power to accelerate or otherwise, Guarantors shall, immediately on demand and without presentment, protest, notice of protest, notice of nonpayment, notice of intent to accelerate, notice of acceleration or any other notice whatsoever (all of which are expressly waived in accordance with Section 4 hereof), pay the amount due and payable thereon to Administrative Agent at its office specified in the Credit Agreement. It is not necessary for Administrative Agent, in order to enforce such payment by Guarantors, first to institute suit or exhaust its remedies against Borrower or any other Loan Party, or to enforce its rights against any security given to secure the Guaranteed Obligations. Administrative Agent is not required to mitigate damages or take any other action to reduce, collect or enforce the Guaranteed Obligations. No setoff, counterclaim, reduction or diminution of any obligation, or any defense of any kind that any Guarantor has or may have against Borrower or Administrative Agent, shall be available hereunder to Guarantors. No payment by any Guarantor shall discharge the liability of Guarantors hereunder until the Guaranteed Obligations have been fully and finally satisfied. If Administrative Agent must rescind or restore any payment, or any part thereof, received by Administrative Agent on any part of the Guaranteed Obligations, any prior release or discharge from the terms of this Guaranty given Guarantors by Administrative Agent or any reduction of any Guarantor's liability hereunder shall be without effect, and this Guaranty shall remain in full force and effect.

## 4. Agreements and Waivers. Each Guarantor:

(a) agrees to all terms and agreements heretofore or hereafter made by Borrower with Administrative Agent and/or the Lenders;

(b) agrees that Administrative Agent may without impairing its rights or the obligations of such Guarantor hereunder (i) waive or delay the exercise of any of its rights or remedies against or release the Borrower or any other Person, including, without limitation, any other party who is personally or whose property is liable with respect to the Guaranteed Obligations or any part thereof (Guarantors and any such other Person or Persons are hereafter collectively called the "Sureties" and each individually called a "Surety"); (ii) take or accept any other security, collateral or guaranty, or other assurance of the payment of all or any part of the Guaranteed Obligations; (iii) release, surrender, exchange, subordinate or permit or suffer to exist any deterioration, waste, loss or impairment (including without limitation negligent, willful, unreasonable or unjustified impairment) of any collateral, property or security at any time existing in connection with, or assuring or securing payment of, all or any part of

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 2



the Guaranteed Obligations or the liability of such Guarantor or any other Surety; (iv) increase, renew, extend, or modify the terms of any of the Guaranteed Obligations or any instrument or agreement evidencing the same; (v) apply payments by the Borrower, any Surety, or any other Person to any of the Guaranteed Obligations; (vi) bring suit against any one or more Sureties without joining any other Surety or the Borrower in such proceeding; (vii) compromise or settle with any one or more Sureties in whole or in part for such consideration or no consideration as Administrative Agent may reasonably deem appropriate; or (viii) partially or fully release one or more of any Guarantor or any other Surety from liability hereunder;

(c) agrees that the obligations of such Guarantor under this Guaranty shall not be released, diminished, or adversely affected by any of the following: (i) the insolvency, bankruptcy, rearrangement, adjustment, composition, liquidation, disability, dissolution or lack of power of the Borrower or any Surety; (ii) the invalidity, illegality or unenforceability of all or any part of the Guaranteed Obligations or any document or agreement executed in connection with the Guaranteed Obligations, for any reason, or the fact that any debt included in the Guaranteed Obligations exceeds the amount permitted by law; (iii) the failure of Administrative Agent or any other Person to exercise diligence or reasonable care or to act in a commercially reasonable manner in the preservation, protection, enforcement, sale or other handling or treatment of all or any part of such collateral, property or security; (iv) the fact that any collateral, security, security interest or lien contemplated or intended to be given, created or granted as security for the repayment of the Guaranteed Obligations is not properly perfected or created, or proves to be unenforceable or subordinate to any other security interest or lien; (v) the fact that the Borrower has any defense to the payment of all or any part of the Guaranteed Obligations; (vi) any payment by the Borrower or any Surety to Administrative Agent and/or the other Guaranteed Parties is a preference under applicable bankruptcy laws, or for any reason Administrative Agent and/or any other Guaranteed Party is required to refund such payment or pay such amounts to the Borrower, any such Surety, or someone else; (vii) any defenses that the Borrower could assert on the Guaranteed Obligations, including but not limited to failure of consideration, breach of warranty, fraud, payment, accord and satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy, statute of limitations, lender liability and usury; or (viii) any other action taken or omitted to be taken with respect to the Credit Agreement, the other Loan Documents, the Guaranteed Obligations, the security and collateral therefor whether or not such action or omission prejudices such Guarantor or any Surety, or increases the likelihood that such Guarantor will be required to pay the Guaranteed Obligations pursuant to the terms hereof;

(d) agrees that such Guarantor is obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, act or omission whatsoever, whether or not particularly described herein, except for the full and final payment and satisfaction of the Guaranteed Obligations;

(e) to the extent allowed by applicable law, waives all rights and remedies now or hereafter accorded by applicable law to guarantors or sureties, including without limitation any defense, right of offset or other claim that such Guarantor may have against Borrower or that Borrower may have against Administrative Agent and/or any other Guaranteed Party;

(f) waives all notices whatsoever with respect to this Guaranty or with respect to the Guaranteed Obligations, including, without limitation, notice of (i) Administrative Agent's and/or the Guaranteed Parties' acceptance hereof or its or their intention to act, or its or their action, in reliance herein; (ii) the present existence, future incurrence, or any amendment of any of the Guaranteed Obligations or any terms or amounts thereof or any change therein in the rate of interest thereon; (iii) any default by the Borrower or any Surety; (iv) the obtaining, enforcing, or releasing of any guaranty or surety agreement (in addition hereto), pledge, assignment, or other security for any of the Guaranteed Obligations;

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 3



(g) waives notice of presentment for payment, notice of protest, protest, demand, notice of intent to accelerate, notice of acceleration and notice of nonpayment, protest in relation to any instrument evidencing any of the Guaranteed Obligations, and any demands and notices required by law, except as such waiver may be expressly prohibited by law, and diligence in bringing suits against any Surety; and

(h) waives each right to which any of them may be entitled by virtue of the laws of the State of Texas governing or relating to suretyship and guaranties, including, without limitation, any rights under Rule 31, Texas Rules of Civil Procedure, Chapter 51 of the Texas Property Code, Section 17.001 of the Texas Civil Practice and Remedies Code, Section 3.605 of the Uniform Commercial Code, and Chapter 43 of the Texas Civil Practice and Remedies Code, as any or all of the same may be amended or construed from time to time, or the common law of the State of Texas at all relevant times.

5. Liability. The liability of each Guarantor under this Guaranty is irrevocable, absolute and unconditional, without regard to the liability of any other Person, and shall not in any manner be affected by reason of any action taken or not taken by Administrative Agent and/or the other Guaranteed Parties, which action or inaction is herein consented and agreed to, nor by the partial or complete unenforceability or invalidity of any other guaranty or surety agreement, pledge, assignment or other security for any of the Guaranteed Obligations. No delay in making demand on Sureties or any of them for satisfaction of the liability hereunder shall prejudice Administrative Agent's right to enforce such satisfaction. All of Administrative Agent's rights and remedies shall be cumulative and any failure of Administrative Agent to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time, and from time to time, thereafter. This is a continuing guaranty of payment, not a guaranty of collection, and this Guaranty shall be binding upon Guarantors regardless of how long before or after the date hereof any of the Guaranteed Obligations were or are incurred.

6. Subordination. If the Borrower is now or hereafter becomes indebted to one or more Guarantors (such indebtedness and all interest thereon is referred to as the "Affiliated Debt"), such Affiliated Debt shall be subordinate in all respects to Borrower's full payment and performance of the Guaranteed Obligations, and no Guarantor shall be entitled to enforce or receive payment thereof until all of the Guaranteed Obligations have been paid. Each Guarantor agrees that any Liens upon the Borrower's assets securing the payment of the Affiliated Debt shall be and remain subordinate and inferior to any Liens upon Borrower's assets securing the payment of the Guaranteed Obligations, and without the prior written consent of Administrative Agent, such Guarantor shall not exercise or enforce any creditor's rights of any nature against the Borrower to collect the Affiliated Debt (other than demand payment thereof). In the event of the receivership, bankruptcy, reorganization, arrangement, debtor's relief or other insolvency proceedings involving the Borrower as a debtor, Administrative Agent has the right and authority, either in its own name or as attorney-in-fact for any Guarantor, to file such proof of debt, claim, petition or other documents and to take such other steps as are necessary to prove its rights hereunder and receive directly from the receiver, trustee or other court custodian, payments, distributions or other dividends that would otherwise be payable upon the Affiliated Debt. Each Guarantor hereby assigns such payments, distributions and dividends to Administrative Agent, and irrevocably appoints Administrative Agent as its true and lawful attorney-in-fact with authority to make and file in the name of such Guarantor any proof of debt, claim, petition or other document in such proceedings and to receive payment of any sums becoming distributable on account of the Affiliated Debt, and to execute such other documents and to give acquittances therefor and to do and perform all such other acts and things for and on behalf of such Guarantor as may be necessary in the opinion of Administrative Agent in order to have the Affiliated Debt allowed in any such proceeding and to receive payments, distributions or dividends of or on account of the Affiliated Debt.

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 4



7. Subrogation. No Guarantor waives or releases any rights of subrogation, reimbursement or contribution that such Guarantor may have, after full and final payment of the Guaranteed Obligations, against others liable on the Guaranteed Obligations. Each Guarantor's rights of subrogation and reimbursement are subordinate in all respects to the rights and claims of Administrative Agent and the other Guaranteed Parties, and no Guarantor may exercise any rights it may acquire by way of subrogation under this Guaranty, by payment made hereunder or otherwise until all of the Guaranteed Obligations have been fully and finally paid. If any amount is paid to any Guarantor on account of such subrogation rights at any time prior to the full and final payment and performance of the the Guaranteed Obligations, such amount shall be held in trust for the benefit of Administrative Agent, on behalf of the Guaranteed Parties, to be credited and applied on the Guaranteed Obligations, whether matured or unmatured.

8. Other Indebtedness or Secured Obligations of Guarantors. If any Guarantor is or becomes liable for any indebtedness owed by Borrower to the Guaranteed Parties by endorsement or otherwise than under this Guaranty, such liability shall not be affected by this Guaranty, and the rights of Administrative Agent and the Guaranteed Parties hereunder shall be cumulative of all other rights that Administrative Agent or any other Guaranteed Party may have against such Guarantor. The exercise by Administrative Agent of any right or remedy hereunder, under any other instrument or at law or in equity shall not preclude the concurrent or subsequent exercise of any right or remedy under any other instrument or at law or in equity and shall not preclude the concurrent or subsequent exercise of any other right or remedy. Further, without limiting the generality of the foregoing, this Guaranty is given by Guarantors in addition to all guarantees heretofore or hereafter executed and delivered to Administrative Agent and/or the other Guaranteed Parties by any Guarantor in connection with the Guaranteed Obligations, and nothing herein shall be deemed to replace or be in lieu of any other of such previous or subsequent guarantees.

9. Representations and Warranties. Each Guarantor represents and warrants as follows:

(a) the representations and warranties set forth in Article VII of the Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party are true and correct in all material respects (or if such representation or warranty is qualified by materiality or reference to Material Adverse Effect, in all respects) and the Guaranteed Parties shall be entitled to rely on each of them as if they were fully set forth herein;

(b) such Guarantor has received, or will receive, direct or indirect benefit from the making of this Guaranty and the Guaranteed Obligations;

(c) such Guarantor is familiar with, and has independently reviewed the books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be created as security for the payment of the Guaranteed Obligations, but such Guarantor is not relying on such financial condition, the collateral, or the agreement of any other party to become a Surety as an inducement to enter into this Guaranty;

(d) none of Administrative Agent, any other Guaranteed Party, any Surety, or any other Person has made any representation, warranty or statement to such Guarantor in order to induce such Guarantor to execute this Guaranty;

(e) as of the date hereof, and after giving effect to this Guaranty and the contingent obligations evidenced hereby, such Guarantor (i) is and will be solvent, (ii) will not have incurred or intended to incur, and will not believe that it will incur, Debt beyond its ability to pay such Debt (after taking into account the timing and amounts of cash to be received by it and the amounts to be payable on or in respect of its liabilities, and giving effect to amounts that could reasonably be received by reason of

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 5



indemnity, offset, insurance or any similar arrangement) as such Debt becomes absolute and matures and (iii) will not have (and will have no reason to believe that it will have thereafter) unreasonably small capital for the conduct of its business and has and will have assets which, fairly valued, exceed its obligations, liabilities and debts, and has and will have property and assets sufficient to satisfy and repay its obligations and liabilities;

(f) the execution, delivery and performance of this Guaranty and any other Loan Documents to which such Guarantor is a party (i) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority or any other third Person, nor is any such consent, approval, registration, filing or other action necessary for the validity or enforceability of any Loan Document or the consummation of the transactions contemplated thereby, except such as have been obtained or made and are in full force and effect and except for filings necessary to perfect Liens created pursuant to the Loan Documents, (ii) will not violate (A) any Governmental Requirement applicable to such Guarantor or any of its Subsidiaries or (B) the Organizational Documents of such Guarantor or any of its Subsidiaries, (iii) will not violate or result in a default under any indenture, note, credit agreement or other similar instrument binding upon such Guarantor or any of its Subsidiaries or the assets of such Guarantor or any of its Subsidiaries, or give rise to a right thereunder to require any payment to be made by such Guarantor or any of its Subsidiaries, and (iv) will not result in the creation or imposition of any Lien on any Property of such Guarantor or any of its Subsidiaries (other than the Liens created by the Loan Documents);

(g) the execution, delivery and performance of this Guaranty and any other Loan Documents to which such Guarantor is a party are within such Guarantor's organizational powers and have been duly authorized by all necessary organizational action and, if required, action by equity holders;

(h) this Guaranty and each other Loan Document to which such Guarantor is a party has been duly executed and delivered by such Guarantor and constitutes a legal, valid and binding obligation of such Guarantor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law; and

(i) such Guarantor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted, and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

10. Covenants of Guarantors. So long as the Credit Agreement and/or this Guaranty are in effect and until all Guaranteed Obligations are paid and performed in full, each Guarantor covenants and agrees with Administrative Agent and the other Guaranteed Parties that such Guarantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its Subsidiaries.

11. Right of Offset. In addition to any rights and remedies of the Guaranteed Parties provided by law, upon the occurrence and during the continuance of any Event of Default, each Guaranteed Party (after obtaining the written consent of Administrative Agent) is authorized at any time and from time to time, without prior notice to Guarantors, any such notice being waived by each Guarantor to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 6



owing by, such Guaranteed Party to or for the credit or the account of any one or more Guarantors against any and all Guaranteed Obligations owing to such Guaranteed Party hereunder or under any other Loan Document, now or hereafter existing, irrespective of whether or not Administrative Agent or such other Guaranteed Party shall have made demand under this Guaranty or any other Loan Document and although such Guaranteed Obligations may be contingent or unamused or denominated in a currency different from that of the applicable deposit or Guaranteed Obligations. Each Guaranteed Party agrees promptly to notify the affected Guarantor and Administrative Agent after any such set-off and application made by such Guaranteed Party; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application.

12. Costs and Expenses. Guarantors jointly and severally agree to pay to Administrative Agent and each other Guaranteed Party, upon demand, all losses and reasonable costs and expenses, including attorneys' fees, that may be incurred by Administrative Agent and/or such other Guaranteed Party in attempting to cause the Guaranteed Obligations to be satisfied or in attempting to cause satisfaction of Guarantors' liability under this Guaranty.

13. Exercising Rights. Efc. No notice to or demand upon any Guarantor in any case shall, of itself, entitle such Guarantor or any other Guarantor to any other or further notice or demand in similar or other circumstances. No delay or omission by Administrative Agent in exercising any power or right hereunder shall impair such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such power preclude other or further exercise thereof, or the exercise of any other right or power hereunder.

14. Incorporation of Certain Provisions by Reference. The provisions of Section 12.09 of the Credit Agreement captioned “Governing Law; Jurisdiction; Consent to Service of Process” are incorporated herein by reference for all purposes. If the Credit Agreement shall cease to remain in effect for any reason whatsoever during any period and any part of the Guaranteed Obligations remain unpaid, then the terms, covenants, and agreements set forth therein applicable to the Guarantors shall nevertheless continue in full force and effect as obligations of each Guarantor under this Guaranty.

15. Notices. Any notice required or permitted by this Guaranty shall be in writing and shall be delivered in accordance with Section 12.01 of the Credit Agreement, addressed to Guarantors at their respective addresses set forth on the signature pages hereof and to Administrative Agent at its address set forth in the Credit Agreement.

16. Benefit: Binding Effect. This Guaranty shall (a) inure to the benefit of Administrative Agent, each other Guaranteed Party, and their respective successors and assigns, and to any transferee of any interest in any of the Guaranteed Obligations and (b) be binding on each Guarantor and such Guarantor's successors and assigns; provided, however, no Guarantor may assign or delegate any of its rights, powers, duties or obligations hereunder, except in accordance with the Credit Agreement.

17. Entity and Amendments. This Guaranty embodies the entire agreement between the parties and supersedes all prior agreements, conditions, and understandings, if any, relating to the subject matter hereof and thereof, and this Guaranty may be amended only by an instrument in writing executed by Guarantors and Administrative Agent (with the requisite consent, if any, of all Lenders or the Majority Lenders in accordance with the Credit Agreement).

18. Additional Guarantors. From time to time subsequent to the date hereof, additional Persons may become parties hereto as additional Guarantors (each, an “Additional Guarantor”), by executing a Joinder Agreement in the form of Exhibit A hereto. Upon delivery to Administrative Agent of any such Joinder Agreement, notice of which is hereby waived by the other Guarantors, each

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 7



Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if such Additional Guarantor were an original signatory hereto. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Borrower to become an Additional Guarantor hereunder. This Guaranty shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder.

19. Limitation on Liability. The liability of each Guarantor with respect to the Guaranteed Obligations shall not exceed the Maximum Amount (as defined below) for such Guarantor. "Maximum Amount" means the greater of (a) the amount of the economic benefit received by such Guarantor from the Guaranteed Obligations whether by loan proceeds to purchase assets or perform contracts for such Guarantor or by loan proceeds being otherwise available to such Guarantor through intercompany loans, advances, capital contributions or otherwise, or (b) the largest amount that would not render such Guarantor's obligations hereunder subject to avoidance under Section 548 of the Bankruptcy Code (Title 11, United States Code) or any comparable provisions of any applicable state law.

20. Amendment and Restatement. This Guaranty is an amendment, restatement and consolidation of, but not a release, novation, extinguishment, discharge or satisfaction of any indebtedness, liabilities, obligations, waivers or agreements of each of the Guarantors under, the Existing Guaranties. Each of the Guarantors affirms and ratifies its waivers and agreements in each Existing Guaranty to which it is a party and agrees that the waivers and agreements made by such Guarantor in each Existing Guaranty to which it is a party shall remain valid, binding, and enforceable waivers and agreements in favor of the Guaranteed Parties, but shall hereafter be governed by this Guaranty that amends and restates the Existing Guaranties in their entirety. This Guaranty is not intended as, and shall not be construed as, a release, novation, extinguishment, discharge or satisfaction of any indebtedness, liabilities, obligations, waivers or agreements of any of the Guarantors pursuant to any Existing Guaranty.

[The rest of this page is intentionally left blank. The signature pages follow.]

AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Page 8



IN WITNESS WHEREOF, Guarantors, intending to be jointly and severally legally bound hereby, have duly executed and delivered this Guaranty as of the date and year first above written.

## GUARANTORS:

## PRIMEENERGY MANAGEMENT CORPORATION

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## PRIME OPERATING COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## EASTERN OIL WELL SERVICE COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## SOUTHWEST OILFIELD CONSTRUCTION COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## EOWS MIDLAND COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer



AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Signature Page

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer



AMENDED, RESTATED AND CONSOLIDATED GUARANTY – Signature Page

COMPASS BANK,
as Administrative Agent

By: /s/ Kathleen J. Bowen

Name: Kathleen J. Bowen

Title: Managing Director



## EXHIBIT A
[FORM OF] JOINDER AGREEMENT

THIS JOINDER AGREEMENT (this “Joinder Agreement”) is entered into as of ___, 201_, by the undersigned (“Additional Guarantor”), in favor of COMPASS BANK, as Administrative Agent for the Guaranteed Parties as defined in the Guaranty referred to below (in such capacity, “Administrative Agent”).

WHEREAS, PrimeEnergy Corporation, a Delaware corporation (the "Borrower"), the Lenders from time to time party thereto, and Administrative Agent have entered into that certain Third Amended and Restated Credit Agreement, dated as of February 15, 2017 (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"); and

WHEREAS, pursuant to the Credit Agreement, certain Subsidiaries of Borrower executed and delivered to Administrative Agent, for the benefit of the Guaranteed Parties, that certain Amended, Restated and Consolidated Guaranty, dated as of February 15, 2017 (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the "Guaranty"), in order to, among other things, induce the Guaranteed Parties to make the extensions of credit and other financial accommodations provided for in the Credit Agreement, the Secured Swap Agreements and agreements related to Cash Management Services; and

WHEREAS, Additional Guarantor (i) is a Subsidiary of Borrower, (ii) desires that the Guaranteed Parties continue to make the extensions of credit and other financial accommodations provided for in the Credit Agreement, the Secured Swap Agreements, and the agreements related to Cash Management Services, and (iii) will directly or indirectly benefit from the extensions of credit and other financial accommodations provided for in the Credit Agreement, the Secured Swap Agreements, and the agreements related to Cash Management Services; and

WHEREAS, Additional Guarantor, by and through the action of its governing body, has determined that it may reasonably be expected to benefit, directly or indirectly, from guarantying the Guaranteed Obligations, all as provided herein and in the Guaranty;

ACORDINGLY, Additional Guarantor hereby agrees with Administrative Agent, for the benefit of the Guaranteed Parties, as follows:

1. Definitions. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Guaranty.

2. Party to Guaranty. Additional Guarantor hereby acknowledges, agrees and confirms that, by its execution of this Joinder Agreement, Additional Guarantor will be deemed to be a party to the Guaranty and a "Guarantor" for all purposes of the Guaranty, and shall have all of the obligations of a Guarantor thereunder as if it had been an original party thereto. Additional Guarantor hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to Guarantors contained in the Guaranty or the Credit Agreement. Without limiting the generality of the foregoing terms of this Section 2, Additional Guarantor hereby, jointly and severally with the other Guarantors, unconditionally, absolutely and irrevocably guarantees to the Guaranteed Parties, as provided in the Guaranty, the full and prompt payment when due, whether at stated maturity, by acceleration or otherwise, of, and the performance of, the Guaranteed Obligations. Additional Guarantor is jointly and severally liable for the full payment and performance of the Guaranteed Obligations as a primary obligor.

## EXHIBIT A – Page 1



3. Address for Notice Purposes. The address of Additional Guarantor for purposes of all notices and other communications is set forth on its signature page hereto.

4. Waiver of Acceptance. Additional Guarantor hereby waives acceptance by Administrative Agent and the other Guaranteed Parties of the guarantee by Additional Guarantor under the Guaranty upon Additional Guarantor's execution of this Joinder Agreement.

5. Representations and Warranties. Additional Guarantor hereby makes each representation and warranty set forth in the Guaranty with respect to itself.

6. Counterparts. This Joinder Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract.

7. Governing Law. The provisions of Section 12.09 of the Credit Agreement captioned “Governing Law; Jurisdiction; Consent to Service of Process; Waiver of Jury Trial” are incorporated herein by reference for all purposes.

8. Loan Document. This Joinder Agreement is a Loan Document for all purposes, and each reference in any Loan Document to the Guaranty shall mean the Guaranty as supplemented by this Joinder Agreement.

[The remainder of this page is left intentionally blank. Signature pages follows.]

## EXHIBIT A – Page 2



IN WITNESS WHEREOF, the undersigned Additional Guarantor and Administrative Agent have executed this Joinder Agreement as of the date first above written.

## ADDITIONAL GUARANTOR:

By:

Name:

Title:

Address for Notices:

EXHIBIT A – Page 3



EXHIBIT A – Page 4

COMPASS BANK

as Administrative Agent

By:

Name:

Title:



## AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT

THIS AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, this “Agreement”), dated as of February 15, 2017, is among PRIMEENERGY CORPORATION, a Delaware corporation (“Borrower”), each of its undersigned Subsidiaries and Affiliates, whether as an original signatory hereto or as an Additional Debtor (together with Borrower and each of their respective successors and assigns, collectively, “Debtors” and, each, individually, a “Debtor”), and COMPASS BANK, as Administrative Agent for the Secured Parties (in such capacity, “Administrative Agent”).

WHEREAS, at the time of the execution hereof, Borrower, the Lenders, and Administrative Agent have entered into that certain Third Amended and Restated Credit Agreement dated as of February 15, 2017 (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), which amends and restates the Existing Credit Agreement.

WHEREAS, in connection with the Existing Credit Agreement, certain Debtors have previously entered into (i) that certain Security Agreement, dated as of December 19, 2002, (ii) that certain Security Agreement, dated as of February 5, 2003, (iii) each of those certain Security Agreements, dated as of June 6, 2006, and (iv) that certain Security Agreement (Membership Pledge), dated as of June 6, 2006, each in favor of the Administrative Agent (such agreements, together with all amendments and restatements from time to time prior to the date hereof, collectively, the “Existing Security Agreements”).

WHEREAS, Borrower and each other Debtor are members of the same affiliated group of companies and are engaged in operations which require financing on a basis in which credit can be made available from time to time to the Borrower and the other Debtors, and each of the Debtors will derive direct and indirect economic benefit from the Loans and other financial accommodations under the Credit Agreement and other Loan Documents and financial accommodations under Secured Swap Agreements and agreements with respect to Cash Management Services.

WHEREAS, it is the intention of the parties hereto that this Agreement continue and/or create a first priority security interest in property of the Debtors in favor of the Administrative Agent for the benefit of the Secured Parties securing the payment and performance of the Secured Obligations.

WHEREAS, each Debtor desires to amend the Existing Security Agreements to reflect the foregoing, to grant or confirm the grant of a security interest in the Collateral (as hereinafter defined) of such Debtor, and, for purposes of clarity and ease of administration, to do so by means of this Agreement.

NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Secured Parties to (a) make and/or continue to make Loans and other extensions of credit under the Credit Agreement and to extend and/or continue to extend credit and other financial accommodations under the Loan Documents, and (b) make and/or continue to make financial accommodations under Secured Swap Agreements and agreements with respect to Cash Management

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 1



Services, each Debtor hereby agrees with the Administrative Agent, for the benefit of the Secured Parties, as follows, and agrees that the Existing Security Agreements shall be amended, restated and consolidated in their entirety to read as follows:

## ARTICLE I DEFINITIONS

1.1 Terms Defined in Credit Agreement. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement.

1.2 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings:

“Account” means any “account” (as such term is defined in Section 9.102(a)(2) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, any right of a Debtor to payment of a monetary obligation, whether or not earned by performance, for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, and for services rendered or to be rendered, and all right, title, and interest in any returned property, together with all rights, titles, securities, and guarantees with respect thereto, including any rights to stoppage in transit, replenishment, reclamation, and resales, and all related Liens whether voluntary or involuntary.

“Account Debtor” means an “account debtor” (as such term is defined in Section 9.102(a)(3) of the UCC) and, in any event, shall include, without limitation, any Person who is or who may become obligated to a Debtor under, with respect to, or on account of an Account.

“Acquisition Rights” means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to each warrant, option, instrument, subscription right, redemption right and other right (including any instrument or right convertible into an Equity Interest) to acquire or sell any Equity Interest in any Person.

“Chattel Paper” means “chattel paper” (as such term is defined in Section 9.102(a)(1) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods. “Chattel Paper” includes Electronic Chattel Paper and Tangible Chattel Paper, whether now owned or hereafter acquired by such Debtor.

“Collateral” means, collectively, all right, title and interest of each Debtor in and to all personal property of such Debtor, whether now owned or hereafter acquired, including all right, title and interest of each Debtor in and to the following property, whether now owned or hereafter acquired: Accounts, Chattel Paper, Commercial Tort Claims, including but not limited to the specific Commercial Tort Claims listed on Schedule 8, Commodity Accounts, Commodity Contracts, Deposit Accounts, Documents, Equipment, Financial Assets, Fixtures, General Intangibles, Goods, Instruments, Intellectual Property, Inventory, Investment Property, Letter-of-Credit Rights, Money, Payment Intangibles, Pledged Equity Interests, Securities, Securities Accounts, Security Entitlements, Software, Supporting Obligations, Collateral Records and all Proceeds of the foregoing, in each case, wherever located and whether presently existing or hereafter created or acquired, and any accessories thereto, substitutions therefor or replacements thereof; provided, however, notwithstanding anything to the contrary herein, the Collateral shall not include any Excluded Property. With respect to Intellectual Property, the Collateral further includes all applications and registrations related thereto and any reissues, renewals, continuations, continuations-in-part, divisions, substitutions or extensions thereof, all goodwill associated with and symbolized by any of the foregoing, all income, royalties, profits, damages, awards, and payments relating to or payable under any of the foregoing, the right to sue for past, present, and future infringements, dilution or breach of any of the foregoing, and all other rights and benefits relating to any of the foregoing throughout the world, in each case, whether now owned or hereafter acquired or whether now known or subsequently developed by or for a Debtor.

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 2



“Collateral Records” means books, records, ledger cards, files, correspondence, customer lists, blueprints, technical specifications, manuals, computer software, computer printouts, tapes, disks and related data processing software and similar items that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon.

“Commercial Tort Claims” means any “commercial tort claim” (as such term is defined in Section 9.102(a)(13) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, any claim now owned or hereafter acquired by a Debtor, arising in tort with respect to which: (a) the claimant is an organization; or (b) the claimant is an individual and the claim(i) arose in the course of the claimant’s business or profession and (ii) does not include damages arising out of personal injury to or the death of an individual.

“Commodity Account” means any “commodity account” (as such term is defined in Section 9.102(a)(14) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include an account maintained by a Commodity Intermediary in which a Commodity Contract is carried for such Debtor.

“Commodity Contract” means any “commodity contract” (as such term is defined in Section 9.102(a)(15) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include a commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is: (a) traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to federal commodities laws; or (b) traded on a foreign commodity board of trade, exchange, or market and is carried on the books of a Commodity Intermediary for a Debtor.

“Commodity Intermediary” means (a) a Person that is registered as a futures commission merchant under the federal commodities laws or (b) a Person that in the ordinary course of its business provides clearance or settlement services for a board of trade that has been designated as a contract market pursuant to federal commodities laws.

“Deposit Account” means any “deposit account” (as such term is defined in Section 9.102(a)(29) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a demand, time, savings, passbook, or similar account maintained at a bank (as defined in the UCC).

“Document” means any “document” (as such term is defined in Section 9.102(a)(30) of the UCC), whether now owned or hereafter acquired by a Debtor, including, without limitation, a document of title, bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of Goods.

“Electronic Chatted Paper” means any “electronic chatted paper” (as such term is defined in Section 9.102(a)(31) of the UCC), whether now owned or hereafter acquired by a Debtor.

“Entitlement Holder” means a Person identified in the records of a Securities Intermediary as the Person having a Security Entitlement against the Securities Intermediary. If a Person acquires a Security Entitlement by virtue of Section 8.501(b)(2) or (3) of the UCC, such Person is the Entitlement Holder.

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 3



“Equipment” means any “equipment” (as such term is defined in Section 9.102(a)(33) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, all Goods other than Inventory or consumer goods, and all improvements, accessions or appurtenances thereto.

“Excluded Equity Interests” means that portion of Equity Interests of any First Tier Foreign Subsidiary in excess of 65% of the total outstanding voting Equity Interests of such First Tier Foreign Subsidiary or any of the outstanding Equity Interests of any Subsidiary of such First Tier Foreign Subsidiary solely to the extent hypothecating more than 65% of the total outstanding Equity Interests of such First Tier Foreign Subsidiary would result in material adverse tax consequences.

“Excluded Property” means, collectively, each Debtor’s rights or interests in:

(a) Excluded Equity Interests; and

(b) any rights or interest in any contract, lease, permit, license, charter or license agreement covering any property of any Debtor if under the terms of such contract, lease, permit, license, charter or license agreement, or applicable law with respect thereto, the grant of a security interest or Lien therein (i) is prohibited as a matter of law or under the terms of such contract, lease, permit, license, charter or license agreement, (ii) shall give any other party to such contract, lease, permit, license, charter or license agreement (other than a Loan Party) the right to terminate such contract, lease, permit, license, charter or license agreement, or (iii) would constitute or result in a breach or termination pursuant to the terms of, a default, a right of recompount, or other remedy under any such contract, lease, permit, license, charter or license agreement, and, in the case of any of clauses (i) through (iii) above, such prohibition or restriction has not been waived or the consent of the applicable Governmental Authority or the other party to such contract, lease, permit, license, charter or license agreement has not been obtained; provided, that, the foregoing exclusions in this clause (b) shall in no way be construed (x) to apply to the extent that any described prohibition or restriction is unenforceable under Section 9.406, 9.407, 9.408, or 9.409 of the UCC or other applicable law, (y) to apply to the extent that any consent or waiver has been obtained that would permit the security interest or Lien notwithstanding the prohibition or restriction or (z) to limit, impair or otherwise affect the Administrative Agent's and the other Secured Parties' continuing security interests in and Liens upon any rights or interests of any Debtor to monies due or to become due any such contract, lease, permit, license, charter or license agreement;

provided, however, the exclusions in the foregoing clauses (a) and (b) shall in no way be construed to limit, impair, or otherwise affect the Secured Parties' continuing security interests in and Liens upon any Proceeds of Excluded Property, unless such Proceeds would constitute Excluded Property.

“Financial Asset” means any “financial asset” (as such term is defined in Section 8.102(a)(9) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, (a) a Security, (b) an obligation of a Person or a share, participation or other interest in a Person or in property or an enterprise of a Person, that is, or is of a type, dealt in or traded on financial markets or that is recognized in any area in which it is issued or dealt in as a medium for investment, or (c) any property that is held by a Securities Intermediary for another Person in a Securities Account if the Securities Intermediary has expressly agreed with the other Person that the property is to be treated as a financial asset under Chapter 8 of the UCC. As the context requires, “Financial Asset” means either the interest itself or the means by which a Person’s claim to it is evidenced, including a certificated or uncertificated Security, a certificate representing a Security, or a Security Entitlement.

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 4



“First Tier Foreign Subsidary” means any Foreign Subsidary that is a “controlled foreign corporation” within the meaning of Section 957 of the Code and the Equity Interests of which are owned directly by any Loan Party.

“Fixtures” means any “fixture” (as such term is defined in Section 9.102(a)(41) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, goods that have become so related to particular real property that an interest in them arises under the real property law of the state in which the real property is situated.

“General Intangibles” means any “general intangible” (as such term is defined in Section 9.102(a)(42) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, all personal property, including things in action, other than Accounts, Chattel Paper, Commercial Tort Claims, Deposit Accounts, Documents, Goods, Instruments, Investment Property, Letter-Of-Credit Rights, Letters of Credit (as defined in the UCC), Money, and oil, gas, or other minerals before extraction.

“Goods” means any “goods” (as such term is defined in Section 9.102(a)(44) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, all things that are movable when a security interest attaches.

“Instrument” means any “instrument” (as such term is defined in Section 9.102(a)(47) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment, in each case, whether now owned or hereafter acquired.

“Intellectual Property” means all domestic and foreign (a) internet domains and URLs; (b) trademarks, trademark registrations, trademark applications, service marks, service mark registrations, service mark applications, business marks, brand names, trade names, trade dress, names, logos and slogans; (c) patents, patent rights, provisional patent applications, patent applications, designs, registered designs, registered design applications, industrial designs, industrial design applications, industrial design registrations and inventors' certificates, including any and all divisions, continuations, continuations-in-part, extensions, substitutions, renewals, registrations, revalidations, re-examinations, reissues or additions, including supplementary certificates of protection, of or to any of the foregoing items; (d) copyrights (whether or not registered and including all derivative works, moral rights, renewals, extensions, reversions and restorations associated with such copyrights, now or hereafter provided by applicable law), copyright registrations, copyright applications, copyright renewals, original works of authorship fixed in any tangible medium of expression or fixation, including literary works (including all forms and types of computer software, including all source code, object code, firmware, development tools, files, records and data, and all documentation related to any of the foregoing), musical, dramatic, pictorial, graphic and sculptured works; (e) trade secrets, technology, discoveries and improvements, know-how, proprietary rights, formulae, confidential and proprietary information, research and development information, technical or other data or information, techniques, customer and vendor lists, unpatented inventions, designs, drawings, procedures, processes, models, materials, methods, developments, formulations, manuals and systems, whether or not patentable or copyrightable and whether or not such has actual or potential commercial value and are not available in the public domain; and (f) all other intellectual property or proprietary rights, in each case whether or not subject to statutory registration or protection.

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“Inventory” means any “inventory” (as such term is defined in Section 9.102(a)(48) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, Goods that (a) are leased by a Person as lessor, (b) are held by a Person for sale or lease or to be furnished under a contract of service, (c) are furnished by a Person under a contract of service, or (d) consist of raw materials, work in process, or materials used or consumed in a business, including packaging materials, scrap material, manufacturing supplies and spare parts, and all such Goods that have been returned to or repossessed by or on behalf of such Person, in each case, whether now owned or hereafter acquired by a Debtor.

“Investment Property” means any “investment property” (as such term is defined in Section 9.102(a)(49) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a Security, whether certificated or uncertificated, Security Entitlement, Securities Account, Commodity Contract, or Commodity Account, in each case, whether now owned or hereafter acquired by any Debtor.

“Letter-of-Credit Right” means any “letter-of-credit right” (as such term is defined in Section 9.102(a)(51) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, (a) a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance, and (b) the right of a beneficiary to demand payment or performance under a letter of credit, in each case, whether now owned or hereafter acquired by such Debtor.

“Marks” means all registered and unregistered trademarks, service marks, domain names and trade names now or hereafter used by a Debtor.

“Money” means “money”, as defined in the UCC.

“Payment Intangible” means any “payment intangible” (as such term is defined in Section 9.102(a)(62) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a General Intangible under which the Account Debtor’s principal obligation is a monetary obligation.

“Permitted Liens” means Liens permitted by Section 9.03 of the Credit Agreement.

“Pledged Equity Interests” means all Acquisition Rights, Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests; provided, however, notwithstanding anything herein to the contrary, the term “Pledged Equity Interests” shall not include the Excluded Equity Interests.

“Pledged LLC Interests” means, with respect to each Debtor, all interests of such Debtor in any limited liability company and the certificates, if any, representing such limited liability company interests and any interest of such Debtor on the books and records of such limited liability company or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such limited liability company interests; provided, however, notwithstanding anything herein to the contrary, the term “Pledged LLC Interests” shall not include the Excluded Equity Interests.

“Pledged Partnership Interests” means, with respect to each Debtor, all interests of such Debtor in any general partnership, limited partnership, limited liability partnership or other partnership and the certificates, if any, representing such partnership interests and any interest of such Debtor on the books and records of such partnership or on the books and records of any securities intermediary pertaining to

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such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such partnership interests; provided, however, notwithstanding anything herein to the contrary, the term “Pledged Partnership Interests” shall not include the Excluded Equity Interests.

“Pledged Stock” means, with respect to each Debtor, all shares of capital stock owned by such Debtor and the certificates, if any, representing such shares and any interest of such Debtor on the books of the issuer of such shares or on the books of any securities intermediary pertaining to such shares, and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; provided, however, notwithstanding anything herein to the contrary, the term “Pledged Stock” shall not include the Excluded Equity Interests.

“Pledged Trust Interests” means, with respect to each Debtor, all interests of such Debtor in a business trust or other trust and the certificates, if any, representing such trust interests and any interest of such Debtor on the books and records of such trust or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such trust interests.

“Proceeds” means any “proceeds” (as such term is defined in Section 9.102(a)(65) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, (a) whatever is acquired upon the sale, lease, license, exchange, collection, or other disposition of the Collateral (including any and all Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, General Intangibles, Instruments, Inventory, Investment Property, Letters of Credit (as defined in the UCC), Letter-of-Credit Rights, Money, Collateral Records, Supporting Obligations, and other tangible or intangible property resulting therefrom), (b) whatever is collected on, or distributed on account of, the Collateral, (c) rights arising out of the Collateral, (d) claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to the Collateral, (e) proceeds of insurance, including insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to the Collateral, (f) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral, and (g) all proceeds of any such proceeds.

“Receivables” means the Accounts, Chattel Paper, Documents, Investment Property, Instruments, or Commercial Tort Claims, and any other rights or claims to receive money which are General Intangibles or which are otherwise included as Collateral.

“Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form

“Release Date” means the last to occur of the dates upon which Liens securing the Secured Obligations may be released pursuant to Section 12.18(a) of the Credit Agreement.

“Securities Account” means all right, title, and interest of each Debtor (in each case whether now or hereafter existing, owned, arising, or acquired) in and to an account to which a Financial Asset is or may be credited in accordance with an agreement under which the Person maintaining the account undertakes to treat the Person for whom the account is maintained as entitled to exercise rights that comprise the Financial Asset.

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“Securities Intermediary” means (a) a clearing corporation, or (b) a Person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity.

“Security” means any “security” (as such term is defined in Section 8.102(a)(15) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, any obligations of an issuer or any shares, participations or other interests in an issuer or in property or an enterprise of an issuer which (a) are represented by a certificate representing a security in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer, (b) are one of a class or series or by its terms is divisible into a class or series of shares, participations, interests or obligations, and (c)(i) are, or are of a type, dealt with or traded on securities exchanges or securities markets or (ii) are a medium for investment and by their terms expressly provide that they are a security governed by Chapter 8 of the UCC.

“Security Entitlement” means a “security entitlement” (as such term is defined in Section 8.102(a)(17)), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, the rights and property interests as and of an Entitlement Holder with respect to a Financial Asset.

“Software” means “software” (as such term is defined in Section 9.102(a)(76) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a computer program and any supporting information provided in connection with a transaction relating to the program.

“Supporting Obligation” means a “supporting obligation” (as such term is defined in Section 9.102(a)(78) of the UCC), whether now owned or hereafter acquired by a Debtor, and, in any event, shall include, without limitation, a Letter-of-Credit Right or secondary obligation that supports the payment or performance of an Account, Chatlet Paper, a Document, a General Intangible, an Instrument, or Investment Property.

“Tangible Chatlet Paper” means any “tangible chatlet paper” (as such term is defined in Section 9.102(a)(79) of the UCC), whether now owned or hereafter acquired by a Debtor.

“UCC” means the Uniform Commercial Code as in effect in the State of Texas, as the same has been or may be amended or revised from time to time, or, if so required with respect to any particular Collateral by mandatory provisions of applicable law, as in effect in the jurisdiction in which such Collateral is located.

1.3 Terms Generally: Rules of Construction. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, and the word “or” is not exclusive. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument, certificate, Organizational Document or other document as from time to time amended, supplemented, restated or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth in the Loan Documents), (b) any reference herein to any law shall be construed as referring to such law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, (c) any reference herein to any Person shall be construed to include such Person’s successors and assigns (subject to the restrictions contained in the Loan Documents), (d) the

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words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (e) with respect to the determination of any time period, the word “from” means “from and including” and the word “to” and “until” means “to but excluding” and the word “through” means “to and including” and (f) any reference herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any Person solely because such Person or its legal representative drafted such provision.

## ARTICLE II
GRANT OF SECURITY INTEREST

2.1 Security Interest. As security for the payment and performance of the Secured Obligations, each Debtor hereby pledges, assigns and grants to Administrative Agent, for the benefit of the Secured Parties, a continuing security interest in the entire right, title and interest of such Debtor in and to all Collateral of such Debtor, whether now or hereafter existing, owned arising or acquired; provided, the foregoing shall not include the Excluded Property.

2.2 Debtors Remain Liable. Notwithstanding anything to the contrary contained herein, (a) each Debtor shall remain liable with respect to all Collateral, (b) the exercise by Administrative Agent or any other Secured Party of any of such Person’s rights hereunder shall not release any Debtor from any of its duties or obligations with respect to or under any Collateral or under this Agreement, and (c) neither Administrative Agent nor any other Secured Party shall have any obligation or liability with respect to or under any Collateral by reason of this Agreement, nor shall any Secured Party be obligated to perform any of the obligations or duties of a Debtor thereunder or to take any action to collect or enforce any claim for payment assigned or in which a security interest is granted hereunder.

2.3 Authorization to File Financing Statements. Each Debtor hereby irrevocably authorizes Administrative Agent at any time and from time to time to file in any UCC jurisdiction any initial financing statements and amendments thereto that indicate the Collateral as all assets of such Debtor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article or Chapter 9 of the UCC. Each Debtor hereby irrevocably authorizes Administrative Agent at any time and from time to time to file this Agreement, any other document of similar import signed by such Debtor (including without limitation a short form of security agreement satisfactory to Administrative Agent and such Debtor), or a true and correct copy thereof in the United States Patent and Trademark Office, the United States Copyright Office or any other office of a Governmental Authority. Each Debtor agrees to furnish any such information to Administrative Agent promptly upon request.

2.4 Limitation on Liability. Notwithstanding any provision to the contrary contained herein or in any other of the Loan Documents, Secured Swap Agreements or agreements with respect to Cash Management Services, the obligations of each Debtor under this Agreement and the other Loan Documents shall be limited to an aggregate amount equal to the largest amount that would not render such obligations subject to avoidance under the Debtor Relief Laws or any comparable provisions of any applicable state law.

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## ARTICLE III

3.1 Representations and Warranties – All Debtors. Each Debtor represents and warrants to Administrative Agent and each other Secured Party with respect to itself and the Collateral owned by it that:

(a) This Agreement and the grant of the security interest in the Collateral pursuant to this Agreement create a valid first priority security interest in the Collateral in favor of Administrative Agent for the benefit of Secured Parties, securing the payment and performance of the Secured Obligations. Upon (i) the filing of UCC-1 financing statements for such Debtor in the appropriate filing offices listed on Schedule 4, (ii) the granting of control (as defined in the UCC) to Administrative Agent, (iii) the delivery to and continuing possession by Administrative Agent of all certificates evidencing the Pleaded Equity Interests, and (iv) the filing of an appropriate notice with the United States Patent and Trademark Office or the United States Copyright Office, as appropriate for the item and type of Collateral in question, the security interest in the Collateral granted pursuant to this Agreement shall constitute a valid, first priority, perfected security interest in such Collateral (subject (A) in the case of Collateral other than Pleaded Equity Interests, to Permitted Liens, and (B) in the case of Pleaded Equity Interests, to Liens arising under the Loan Documents and Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of such Debtor in accordance with GAAP) to the extent such security interests can be perfected by taking the actions described in the foregoing clauses (i) through (iv), and all filings and other actions necessary to perfect and protect such security interest and such priority have been duly taken (or will be taken upon such Debtor obtaining rights in Collateral after the date hereof).

(b) The execution, delivery and performance by such Debtor of this Agreement and each other Loan Document to which it is a party are within such Debtor's organizational powers and have been duly authorized by all necessary organizational action and, if required, action by equity holders. Each Loan Document to which such Debtor is a party has been duly executed and delivered by such Debtor and constitutes a legal, valid and binding obligation of such Debtor, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

(c) The execution, delivery and performance by such Debtor of this Agreement and each other Loan Document to which it is a party (i) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority or any other third Person, nor is any such consent, approval, registration, filing or other action necessary for the validity or enforceability of this Agreement or any other Loan Document or the consummation of the transactions contemplated hereby or thereby, except such as have been obtained or made and are in full force and effect and except for filings necessary to perfect Liens created pursuant to the Loan Documents, (ii) will not violate (A) any Governmental Requirement applicable to such Debtor or (B) the Organizational Documents of such Debtor or any Subsidiary of such Debtor, (iii) will not violate or result in a default under any indenture, note, credit agreement or other similar instrument binding upon such Debtor or the assets of such Debtor, or give rise to a right thereunder to require any payment to be made by such Debtor, and (iv) will not result in the creation or imposition of any Lien on any property of such Debtor or any Subsidiary of such Debtor (other than the Liens created by the Loan Documents).

(d) Such Debtor has good record and marketable title to the Collateral free and clear of all Liens, except for Permitted Liens. Such Debtor has not granted a security interest in or Lien on or made an assignment of any of the Collateral (except for the security interest and Lien granted by this Agreement and Permitted Liens). Such Debtor has neither entered into nor is it or any of its property subject to any agreement limiting the ability of such Debtor to grant a Lien in any of the Collateral, or the ability of such Debtor to agree to grant or not grant a Lien in any of the Collateral. None of the Collateral is consigned goods, subject to any agreement of

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repurchase, or subject to any dispute, defense, or counterclaim. No effective financing statement or other similar effective document used to perfect and preserve a security interest or other Lien under the laws of any jurisdiction covering all or any part of the Collateral is on file in any recording office, except such as may have been filed (i) pursuant to this Agreement or another Loan Document, or (ii) relating to Permitted Liens. Such Debtor has not sold any interest in any of its Accounts, Chatlet Paper, promissory notes, Payment Intangibles, or consigned any of its Goods or been a party to any securitization of any of its property. No control agreement in favor of anyone other than Administrative Agent exists with respect to any Collateral

(e) Schedule 1 is a complete and correct list of each Deposit Account, Securities Account or Commodity Account maintained by or in which such Debtor has any interest, including: (i) for each Deposit Account, the bank in which such account is maintained and ABA number of such bank, the account number, and account type; (ii) for each Securities Account, the complete name and identification number of the account, the jurisdiction the law of which governs such account, and the name and street address of the Securities Intermediary maintaining such account; and (iii) for each Commodity Account, the complete name and identification number of the account, the jurisdiction the law of which governs such account, and the name and street address of the Commodity Intermediary maintaining such account.

(f) Schedule 2 sets forth a complete and accurate list of the Intellectual Property owned by such Debtor that is registered with, or subject to an application for registration with, the United States Patent and Trademark Office, the United States Copyright Office, or any state trademark offices or other foreign offices or agencies, as applicable.

(g) Schedule 3 sets forth a complete and accurate list of all Instruments, Securities and other Investment Property owned by such Debtor. Such Debtor is the direct and beneficial owner of each Instrument, Security and other type of Investment Property listed on Schedule 3 as being owned by it, free and clear of any Liens, except for Permitted Liens. All Pledged Equity Interests have been duly and validly issued and are fully paid and non-assessable. All Pledged Equity Interests that are certificated have been delivered and pledged to Administrative Agent duly endorsed and accompanied by such duly executed instruments of transfer or assignment as are necessary for such pledge to be held as pledged collateral. Except with respect to partnership or limited liability company interests of issuers the Organizational Documents of which do not provide that any interest in such issuer is a security governed by Chapter 8 of the UCC, there is no Pledged Equity Interest other than Pledged Equity Interests represented by certificated securities in the possession of Administrative Agent. Except as set forth on Schedule 3, the Organizational Documents of each issuer which is a partnership or limited liability company do not provide that any interest in such issuer is a security governed by Chapter 8 of the UCC, and no Equity Interest of such issuer is evidenced by a certificate or other instrument.

(h) Schedule 5 sets forth such Debtor's mailing address, the location of its chief executive office, and each location where such Debtor maintains any Collateral or any books and records relating to any Collateral, including, for each such location, whether such location is owned or leased by such Debtor. Such Debtor does not conduct business at any location other than those set forth in Schedule 5.

(i) Except as listed on Schedule 6, such Debtor has not changed its identity or type of entity in any way within the past five years.

(j) Such Debtor's Federal employer identification number and state organizational identification number are listed on Schedule 7.

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3.2 Representations and Warranties – Subsidiaries. Each Debtor (other than Borrower) represents and warrants to Administrative Agent and each other Secured Party with respect to itself and its Collateral that this Agreement may reasonably be expected to benefit, directly or indirectly, such Debtor, and the board of directors of such Debtor, the requisite number of its partners, the requisite number of its members or the requisite number of the appropriate governance body or equity holders, as appropriate, have determined that this Agreement may reasonably be expected to benefit, directly or indirectly, such Debtor. Such Debtor is familiar with, and has independently reviewed the books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be security for the payment of all or any part of the Secured Obligations; provided, however, such Debtor is not relying on such financial condition or collateral as an inducement to enter into this Agreement.

3.3 Survival. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by Administrative Agent and each other Secured Party, regardless of any investigation made by Administrative Agent or any other Secured Party or on their behalf and notwithstanding that Administrative Agent or any other Secured Party may have had notice or knowledge of any Default at the time of any credit extension, and shall continue in full force and survive the Release Date.

## ARTICLE IV
COVENANTS

Until the Release Date, each Debtor covenants and agrees with Administrative Agent, for the benefit of the Secured Parties, as follows:

4.1 Further Assurances. At any time and from time to time, upon the request of Administrative Agent, and at the sole expense of such Debtor, such Debtor shall promptly execute and deliver all such further instruments and documents and take such further actions as Administrative Agent may deem necessary or desirable to preserve and perfect its security interest in the Collateral and carry out the provisions and purposes of this Security Agreement, including, without limitation, (a) the execution and filing of such financing statements as Administrative Agent may require and (b) the deposit of all certificates of title issuable with respect to any of the Collateral and noting thereon the security interest hereunder. A carbon, photographic, or other reproduction of this Security Agreement or of any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement and may be filed as a financing statement. Such Debtor shall promptly endorse and deliver to Administrative Agent all documents, instruments, and chattel paper that it now owns or may hereafter acquire.

4.2 Financing Statements and Other Actions: Defense of Title. Such Debtor will execute and deliver to Administrative Agent all financing statements, continuations, recordings, statements, amendments and other documents and take such other actions as may from time to time be requested by Administrative Agent in order to maintain a first perfected security interest in and, in the case of Investment Property, Deposit Accounts, Letter-of-Credit Rights, and Electronic Chattel Paper, control (within the meaning of the UCC) of, the Collateral. Such Debtor will take any and all actions necessary to defend title to the Collateral against all Persons and to defend the security interest of Administrative Agent in the Collateral and the priority thereof against any Lien not expressly permitted hereunder.

4.3 Disposition of Collateral. Such Debtor will not sell, lease, license or otherwise dispose of the Collateral, except as specifically permitted by Section 9.08 of the Credit Agreement.

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4.4 Liens. Such Debtor will not create, incur, or suffer to exist any Lien on the Collateral except Permitted Liens.

4.5 Change in Location, Jurisdiction of Organization or Name. Such Debtor will not (i) keep any Inventory, Equipment or Fixtures or proceeds or products thereof (other than Inventory sold in the ordinary course of business or Equipment used in the ordinary course of business) at a location other than a location specified in Schedule 5, (ii) maintain records relating to the Receivables at a location other than at the location specified on Schedule 5, (iii) maintain a place of business at a location other than a location specified on Schedule 5, (iv) change its name or taxpayer identification number, (v) change its mailing address, or (vi) change its jurisdiction of organization, in each case, unless such Debtor shall have given Administrative Agent not less than 30 days' prior written notice thereof and taken such actions as Administrative Agent may reasonably require with respect to such change.

## 4.6 Accounts and other Receivables.

(a) Such Debtor will hold and preserve its Records concerning its Accounts and the originals of all Chattel Paper and Instruments in a commercially reasonable manner and will permit representatives of Administrative Agent or any Lender to visit and inspect its properties and make abstracts from and copies of such Records and Chattel Paper and Instruments in accordance with Section 8.08 of the Credit Agreement.

(b) Except as otherwise provided in this Section 4.6, such Debtor shall continue to collect, in accordance with commercially reasonable procedures and at its own expense, all amounts due or to become due to such Debtor under its Accounts, Chattel Paper, and Instruments. In connection with such collections, such Debtor may take (and, at Administrative Agent's direction, shall take) such action as such Debtor or Administrative Agent may deem reasonably necessary or advisable to enforce collection of such Debtor's Accounts, Chattel Paper, and Instruments; provided, however, that Administrative Agent shall have the right, if an Event of Default exists, without notice to any Debtor, to notify the Account Debtors or obligors under any Accounts, Chattel Paper, and Instruments of the assignment to Administrative Agent of such Accounts, Chattel Paper, and Instruments, to direct such Account Debtors or obligors to make payment of all amounts due or to become due to such Debtor thereunder directly to Administrative Agent and, at the expense of such Debtor, to enforce collection of any such Accounts, Chattel Paper, and Instruments, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Debtor might have done or as Administrative Agent reasonably deems appropriate.

(c) If any Event of Default exists, all amounts and proceeds (including Instruments) received by such Debtor in respect of any Receivable shall be received in trust for the benefit of Administrative Agent hereunder, shall be segregated from other funds and property of such Debtor and shall be forthwith paid or delivered over to Administrative Agent in the same form as so received (with any necessary endorsement) to be held as cash collateral, thereafter to be applied as provided in the Credit Agreement and the other Loan Documents.

(d) Such Debtor will not adjust, settle, or compromise the amount or payment of any Receivable, release wholly or partly any Account Debtor or obligor thereof, or allow any credit or discount thereon, except in the ordinary course of business.

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4.7 Inventory and Equipment. Such Debtor will do all things necessary to maintain, preserve, protect and keep its Inventory and Equipment in good repair and working and saleable condition.

4.8 Insurance. Such Debtor will maintain insurance on the Collateral for the benefit of Administrative Agent in accordance with the Credit Agreement.

TEXAS FINANCE CODESECTION 307.052 COLLATERAL PROTECTION INSURANCE NOTICE (IF ANY DEBTOR IS A "DEBTOR" AS DEFINED IN SUCH SECTION): (A) SUCH DEBTOR IS REQUIRED TO: (i) KEEP THE COLLATERAL INSURED AGAINST DAMAGE IN THE AMOUNT ADMINISTRATIVE AGENT AND THE LOAN DOCUMENTS SPECIFY; (ii) PURCHASE THE INSURANCE FROM AN INSURER THAT IS AUTHORIZED TO DO BUSINESS IN THE STATE OF TEXAS OR AN ELIGIBLE SURPLUS LINES INSURER; AND (iii) NAME ADMINISTRATIVE AGENT AS THE PERSON TO BE PAID UNDER THE POLICY OR POLICIES IN THE EVENT OF A LOSS; (B) SUCH DEBTOR MUST, IF REQUIRED BY ADMINISTRATIVE AGENT OR THE LOAN DOCUMENTS, DELIVER TO ADMINISTRATIVE AGENT A COPY OF EACH POLICY AND PROOF OF THE PAYMENT OF PREMIUMS; AND (C) IF SUCH DEBTOR FAILS TO MEET ANY REQUIREMENT LISTED IS CLAUSES (A) OR (B), ADMINISTRATIVE AGENT MAY OBTAIN COLLATERAL PROTECTION INSURANCE ON BEHALF OF SUCH DEBTOR AT SUCH DEBTOR'S EXPENSE.

## 4.9 Instruments. Chattel Paper, and Documents.

(a) Such Debtor will (i) deliver to Administrative Agent all Tangible Chattel Paper and all Collateral evidenced by a promissory note or other Instrument duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance reasonably satisfactory to Administrative Agent, and (ii) upon Administrative Agent's request, deliver to Administrative Agent (and thereafter hold in trust for Administrative Agent upon receipt and immediately deliver to Administrative Agent) any Document evidencing or constituting Collateral.

(b) Such Debtor shall take all actions reasonably necessary to establish in Administrative Agent control (as that term is defined in the UCC) of all Electronic Chattel Paper.

4.10 Delivery of Security and Instrument Collateral. All certificates, if any, constituting or evidencing the Collateral shall be delivered to and held by or on behalf of Administrative Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by undated and duly executed stock powers or instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Administrative Agent. If an Event of Default exists, Administrative Agent has the right without notice to any Debtor to transfer to or to register in the name of Administrative Agent or any of its nominees any or all of such Collateral. In addition, Administrative Agent has the right, if Administrative Agent reasonably determines that the exercise of such right is necessary to protect its rights, at any time to exchange certificates representing or evidencing Collateral for certificates of smaller or larger denominations.

4.11 Equity Interests: Dilution of Ownership. Such Debtor will not, and will not permit any Person to, revise, modify, amend or restate the Organizational Documents of any issuer of Pledged Equity Interests in a manner that adversely affects the security interest of Administrative Agent therein (except as permitted by the Loan Documents), or terminate, cancel, or dissolve any such Person (except as permitted by the Loan Documents). As to any Pledged Equity Interests, such Debtor will not consent to or approve

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of the issuance of (a) any additional shares or units of any class of Equity Interests of such issuer (unless, promptly upon issuance, additional Equity Interests are pledged and delivered to Administrative Agent pursuant to the terms hereof to the extent necessary to give Administrative Agent a security interest after such issuance in at least the same percentage of such issuer's outstanding Equity Interests as Administrative Agent had before such issuance), (b) any instrument convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any Equity Interests, or (c) any warrants, options, contracts or other commitments entitling any third party to purchase or otherwise acquire any Equity Interests.

4.12 Waiver. To the extent not prohibited by applicable laws, such Debtor agrees that any provision of any Organizational Document of any issuer of Collateral, any applicable law, any certificate or instrument evidencing Collateral, or any other governance document that in any manner restricts, prohibits or provides conditions to (a) the grant of a Lien on any Equity Interest of such issuer or any other Collateral, (b) any transfer of any Equity Interest of such issuer or any other Collateral, (c) any change in management or control of such issuer or any other Collateral, (d) the admission of any transferee of any Collateral as a shareholder, member, partner or other equity holder of the issuer of such Collateral, or (e) any other exercise by Administrative Agent or any other Secured Party of any rights pursuant to this Agreement, any other Loan Document or law, in each case shall not apply to (i) the grant of any Lien hereunder, (ii) the execution, delivery and performance of this Agreement by such Debtor, (iii) the foreclosure or other realization upon any interest in any Collateral, or (iv) the exercise of rights with respect to such Collateral, including the right to participate in the management of such issuer. Furthermore, to the extent not prohibited by applicable laws, such Debtor will not permit any amendment to or restatement of any Organizational Document or any other governance document or enter into or permit to exist any agreement that in any manner adversely affects Administrative Agent's ability to foreclose on any Collateral or which conflicts with the provisions of this Section 4.12.

4.13 Restrictions on Securities. No issuer of any Pledged Equity Interests which is either a partnership or limited liability company shall amend or restate its Organizational Documents (if its Organizational Documents do not provide that any Equity Interest in such issuer is a security governed by Chapter 8 of the UCC or that any Equity Interest in such issuer is evidenced by a certificate or other instrument) to provide that any Equity Interest in such issuer is a security governed by Chapter 8 of the UCC or permit any Equity Interest in such issuer to be evidenced by a certificate or other instrument. No certificate or other instrument evidencing or constituting any Pledged Equity Interest shall contain any restriction on transfer or other legend not reasonably acceptable to Administrative Agent. With respect to each certificate that contains any such legend that is not reasonably acceptable to Administrative Agent, such Debtor shall cause the issuer of each such certificate to issue one or more certificates in a form reasonably acceptable to Administrative Agent.

4.14 Rights to Dividends and Distributions. With respect to any certificates, bonds, or other Instruments or Securities constituting a part of the Collateral, Administrative Agent shall have authority, if an Event of Default exists, without notice to such Debtor, either to have the same registered in Administrative Agent's name or in the name of a nominee, and, with or without such registration, to demand of the issuer thereof, and to receive and receipt for, any and all dividends and distributions (including any stock or similar dividend or distribution) payable in respect thereof, whether they be ordinary or extraordinary. If such Debtor shall become entitled to receive or shall receive any interest in or certificate (including, without limitation, any interest in or certificate representing a dividend or a distribution in connection with any reclassification, increase, or reduction of capital, or issued in connection with any reorganization), or any option or rights arising from or relating to any of the Collateral, whether as an addition to, in substitution of, as a conversion of, or in exchange for any of the Collateral, or otherwise, such Debtor agrees to accept the same as Administrative Agent's agent and to hold the same in trust on behalf of and for the benefit of Administrative Agent, and to deliver the same

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immediately to Administrative Agent in the exact form received, with appropriate undated stock or similar powers, duly executed in blank, to be held by Administrative Agent, subject to the terms hereof, as Collateral. Unless an Event of Default exists or will result therefrom and subject to the other Loan Documents, such Debtor shall be entitled to receive all cash dividends and distributions not representing a return of capital or liquidating dividend paid or distributed with respect to the Securities, other than dividends or distributions or interests payable in Securities of the issuer of such Securities (which, if evidenced by certified securities, shall be delivered to Administrative Agent as set forth in the immediately preceding sentence, whether or not an Event of Default exists). Administrative Agent shall be entitled to all dividends and distributions, and to any sums paid upon or in respect of any Collateral, upon the liquidation, dissolution, or reorganization of the issuer thereof, which shall be paid to Administrative Agent to be held by it as additional collateral security for and application to the Secured Obligations as provided in the Loan Documents. All dividends, distributions and Proceeds paid or distributed in respect of the Collateral which are received by such Debtor in violation of this Agreement shall, until paid or delivered to Administrative Agent, be held by such Debtor in trust as additional Collateral for the Secured Obligations.

4.15 Right of Administrative Agent to Notify Issuers. If an Event of Default exists and at such other times as Administrative Agent is entitled to receive dividends, distributions and other property in respect of or consisting of any Collateral which is or represents a Security or an Equity Interest, Administrative Agent may notify issuers of such Security or Equity Interest to make payments of all dividends and distributions directly to Administrative Agent and Administrative Agent may take control of all Proceeds of any Securities and Equity Interests. Until Administrative Agent elects to exercise such rights, such Debtor, as agent of Administrative Agent, shall collect, segregate and hold in trust all dividends and other amounts paid or distributed with respect to Securities and Equity Interests.

4.16 Deposit Accounts, Securities Accounts and Commodity Accounts. Such Debtor shall not establish or maintain any Deposit Account, Securities Account or Commodity Account not listed on Schedule 1 unless prior to the establishment of such new Deposit Account, Securities Account, or Commodity Account, as applicable, such Debtor (i) delivers to Administrative Agent notice thereof and executes and delivers to Administrative Agent assignments of, and control agreements with respect to, such new Deposit Account, Securities Account, or Commodity Account, as applicable, in such form as Administrative Agent may reasonably request, (ii) causes the bank, Securities Intermediary or Commodity Intermediary, as appropriate, in which such account is or will be maintained, to deliver to Administrative Agent acknowledgments of the assignment of, and control agreements with respect to, such account, in form and substance reasonably satisfactory to Administrative Agent, and (iii) takes all actions necessary to establish in Administrative Agent control (as that term is defined in the UCC) with respect to such Deposit Account, Securities Account, or Commodity Account. No Debtor shall obtain or maintain any interest in any Security Entitlement other than Security Entitlements held in and subject to a Securities Account described in Schedule 1 or with respect to which such Debtor has complied with this Section 4.16. No Debtor shall obtain or maintain any interest in any Commodity Contract other than Commodity Contracts held in and subject to a Commodity Account described in Schedule 1 or with respect to which such Debtor has complied with this Section 4.16.

4.17 Mortgagee’s and Landlord Waivers. Upon the request of Administrative Agent, such Debtor shall use its best efforts to cause each mortgagee of real property owned by such Debtor and each landlord of real property leased by such Debtor to execute and deliver instruments satisfactory in form and substance to Administrative Agent by which such mortgagee or landlord waives their rights, if any, in the Collateral.

4.18 Commercial Tort Claim. If such Debtor at any time holds or acquires a Commercial Tort Claim such Debtor shall immediately notify Administrative Agent in writing of the details thereof and grant to Administrative Agent in writing a security interest therein or Lien thereon and in the Proceeds thereof, in form and substance satisfactory to Administrative Agent.

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4.19 Letters-of-Credit Rights. If such Debtor is at any time a beneficiary under a letter of credit now or hereafter issued in favor of such Debtor, such Debtor shall promptly notify Administrative Agent thereof in writing and, at Administrative Agent's request, such Debtor shall, pursuant to an agreement in form and substance satisfactory to Administrative Agent, either (a) arrange for the issuer or any confirmer of such letter of credit to consent to an assignment to Administrative Agent of the proceeds of any drawing under the letter of credit or (b) arrange for Administrative Agent to become the transferee beneficiary of the letter of credit, with Administrative Agent agreeing, in each case, that the proceeds of any drawing under the letter of credit are to be applied as provided in the Credit Agreement.

## 4.20 Intellectual Property.

(a) Such Debtor shall ensure that an acknowledgment (approved in form and substance by Administrative Agent) containing a description of all Collateral consisting of Intellectual Property has been received by and recorded with the United States Patent and Trademark Office and/or the United States Copyright Office, as applicable, shall take such other actions as may be required pursuant to the laws of any other applicable jurisdiction to protect the validity of and to establish a legal, valid, and perfected security interest in favor of Administrative Agent in respect of all Collateral consisting of Intellectual Property in which a security interest may be perfected by filing, recording, or registration in the United States and its territories and possessions, or in such other jurisdictions as may be required by Administrative Agent, such that no further or subsequent filing, refiling, recording, rerecording, registration, or reregistration is necessary (other than such actions as are necessary to perfect the security interest with respect to any Collateral consisting of Intellectual Property (or registration or application for registration thereof) acquired or developed after the date hereof).

(b) Such Debtor will promptly notify Administrative Agent in writing of the occurrence of any development, financial or otherwise, which might materially and adversely affect the Intellectual Property included in the Collateral.

(c) Such Debtor shall: (i) diligently prosecute any patent, copyright or trademark application at any time pending, which is necessary for the conduct of its business; (ii) make application on all new patents, copyrights and trademarks as it may reasonably deem appropriate; (iii) preserve and maintain all rights in all Intellectual Property and that are necessary for the conduct of such Debtor's businesses; and (iv) use its best efforts to obtain any consents, waivers, or agreements necessary to enable Administrative Agent to exercise its remedies with respect to Intellectual Property that constitutes Collateral.

(d) Such Debtor shall not abandon any pending patent, copyright or trademark application, or patent, copyright or trademark, or any other Intellectual Property that is necessary for the conduct of its business without the prior written consent of Administrative Agent. Such Debtor shall not, without the prior consent of Administrative Agent, amend or otherwise modify any pending application or registration contained in or covering the Collateral, to the extent such amendment or modification would impair the Liens of Administrative Agent in the Collateral.

4.21 Administrative Agent Appointed Attorney-in-Fact. Such Debtor hereby irrevocably appoints Administrative Agent such Debtor's attorney-in-fact (exercisable if an Event of Default exists), with full authority in the place and stead of such Debtor and in the name of such Debtor or otherwise, to take any action and to execute any instrument which Administrative Agent may deem necessary or

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advisable to accomplish the purposes of this Agreement, including, without limitation (provided, Administrative Agent shall not have any duty to take any such action or execute any instrument):

(a) to obtain and adjust insurance required to be paid to Administrative Agent pursuant to Section 4.8:

(b) to ask, demand, collect, sue for, recover, compromise, receive, and give acquittance and receipts for moneys due and to become due under or in connection with the Collateral;

(c) to receive, indorse, and collect any drafts or other Instruments, Documents, and Chattel Paper in connection therewith; and

(d) to file any claims or take any action or institute any proceedings which Administrative Agent may deem reasonably necessary or desirable for the collection of any of the Collateral or otherwise to enforce compliance with the terms and conditions of any Collateral or the rights of Administrative Agent with respect to any of the Collateral.

SUCH DEBTOR HEREBY IRREVOCABLY GRANTS TO ADMINISTRATIVE AGENT SUCH DEBTOR'S PROXY (EXERCISABLE IF AN EVENT OF DEFAULT EXISTS) TO VOTE ANY SECURITIES INCLUDED IN COLLATERAL AND APPOINTS ADMINISTRATIVE AGENT SUCH DEBTOR'S ATTORNEY-IN-FACT (EXERCISABLE IF AN EVENT OF DEFAULT EXISTS) TO PERFORM ALL OBLIGATIONS OF SUCH DEBTOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF ADMINISTRATIVE AGENT'S AND EACH OTHER SECURED PARTY'S RIGHTS HEREUNDER. THE PROXY AND EACH POWER OF ATTORNEY HEREIN GRANTED, AND EACH STOCK POWER AND SIMILAR POWER NOW OR HEREAFTER GRANTED (INCLUDING ANY EVIDENCED BY A SEPARATE WRITING), ARE COUPLED WITH AN INTEREST AND ARE IRREVOCABLE BEFORE THE RELEASE DATE.

## ARTICLE V

## RIGHTS AND POWERS OF ADMINISTRATIVE AGENT

## 5.1 Remedies. If an Event of Default exists:

(a) Administrative Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it or any other Secured Party pursuant to any applicable laws, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may require each Debtor to, and each Debtor will at its expense and upon request of Administrative Agent forthwith, assemble all or part of the Collateral as directed by Administrative Agent and make it available to Administrative Agent at a place to be designated by Administrative Agent which is reasonably convenient to both parties for public or private sale, at any of Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery and upon such other terms as Administrative Agent may deem commercially reasonable. Each Debtor agrees that, to the extent notice of sale shall be required by law, 10 days' notice to such Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

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(b) All cash proceeds received by Administrative Agent upon any sale of, collection of, or other realization upon, all or any part of the Collateral shall be applied as set forth in the Credit Agreement.

(c) All payments received by each Debtor under or in connection with any Collateral shall be received in trust for the benefit of Administrative Agent, shall be segregated from other funds of such Debtor, and shall be forthwith paid or delivered over to Administrative Agent in the same form as so received (with any necessary endorsement).

(d) Because of the Securities Act of 1933, as amended (the “Securities Act”), and other laws, including without limitation state “blue sky” laws, or contractual restrictions or agreements, there may be legal restrictions or limitations affecting Administrative Agent in any attempts to dispose of the Collateral and Administrative Agent’s enforcement of its rights under this Agreement. For these reasons, Administrative Agent is authorized by each Debtor, but not obligated, if any Event of Default exists, to sell or otherwise dispose of any of the Collateral at private sale, subject to an investment letter, or in any other manner which will not require the Collateral, or any part thereof, to be registered in accordance with the Securities Act or any other applicable law. Administrative Agent is also hereby authorized by each Debtor, but not obligated, to take such actions, give such notices, obtain such consents, and do such other things as Administrative Agent may deem required or appropriate under the Securities Act or other securities laws or other laws or contractual restrictions or agreements in the event of a sale or disposition of any Collateral. Each Debtor understands that Administrative Agent may in its discretion approach a restricted number of potential purchasers and that a sale under such circumstances may yield a lower price for the Collateral than would otherwise be obtainable if the same were registered and/or sold in the open market. No sale so made in good faith by Administrative Agent shall be deemed to be not “commercially reasonable” because so made. Each Debtor agrees that if an Event of Default exists and Administrative Agent sells the Collateral or any portion thereof at any private sale or sales, Administrative Agent shall have the right to rely upon the advice and opinion of appraisers and other Persons duly qualified to render such advice and opinion, which appraisers and other Persons are acceptable to Administrative Agent, as to the best price reasonably obtainable upon such a private sale thereof. In the absence of fraud or gross negligence, such reliance shall be conclusive evidence that Administrative Agent and the other Secured Parties handled such matter in a commercially reasonable manner under applicable law.

(e) After notice to any Debtor, Administrative Agent and such Persons as Administrative Agent may designate shall have the right, at Debtors' own cost and expense, to verify under reasonable procedures the validity, amount, quality, quantity, value, condition, and status of, or any other matter relating to, the Collateral, including, in the case of Accounts or Collateral in the possession of any third Person, by contacting Account Debtors or the third Person possessing such Collateral for the purpose of making such a verification. Administrative Agent shall have the absolute right to share any information it gains from such inspection or verification with any Secured Party.

(f) For purposes of enabling Administrative Agent to exercise rights and remedies under this Agreement, each Debtor grants to Administrative Agent an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to any Debtor or any other Person; provided, that if the license granted to Administrative Agent is a sublicense, each Debtor shall be solely responsible for, and indemnify Administrative Agent and each other Secured Party against, any royalty or other compensation payable to such Debtor's licensor or other Person) to use all of such Debtor's Software, and including in such license reasonable access to all media in



which any of the licensed items may be recorded and all related manuals. The use of such license by Administrative Agent shall be exercised, at the option of Administrative Agent, if an Event of Default exists; provided, that any license, sub-license, or other transaction entered into by Administrative Agent in accordance herewith shall be binding upon such Debtor notwithstanding any subsequent cure or waiver of an Event of Default.

(g) For the purpose of enabling Administrative Agent to exercise rights and remedies under this Agreement, each Debtor grants (to the extent not otherwise prohibited by a license with respect thereto) to Administrative Agent an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to any Debtor or any other Person; provided, that if the license granted to Administrative Agent is a sublicense, such Debtor shall be solely responsible for, and indemnify Administrative Agent and the other Secured Parties against, any royalty or other compensation payable to such Debtor's licensor or other Person) to use, license, or sub-license any of the Collateral consisting of Intellectual Property wherever the same may be located, and including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all Software used for the use, compilation, or printout thereof. In connection therewith, each Debtor shall execute and deliver a license agreement to Administrative Agent to evidence the grant of such license. The use of such license by Administrative Agent shall be exercised, at the option of Administrative Agent, if an Event of Default exists; provided, that any license, sub-license, or other transaction entered into by Administrative Agent in accordance herewith shall be binding upon each Debtor notwithstanding any subsequent cure or waiver of an Event of Default

5.2 Appointment of Receiver or Trustee. In connection with the exercise of Administrative Agent’s rights under this Agreement or any other Loan Document, Administrative Agent may, if an Event of Default exists, obtain the appointment of a receiver or trustee to assume, upon receipt of any necessary judicial or other Governmental Authority consents or approvals, control or ownership of any Collateral. Such receiver or trustee shall have all rights and powers provided to it by law or by court order or provided to Administrative Agent under this Agreement or any other Loan Document. Upon the appointment of such trustee or receiver, each Debtor shall cooperate, to the extent necessary or appropriate, in the expeditious preparation, execution, and filing of an application to any Governmental Authority or for consent to the transfer, control or assignment of such Collateral to the receiver or trustee. To the extent required by applicable law, Administrative Agent shall provide to each Debtor notice of the request for or appointment of such receiver or trustee.

## 5.3 Further Approvals Required.

(a) In connection with the exercise by Administrative Agent of rights under this Agreement that affects the disposition of or use of any Collateral, it may be necessary to obtain the prior consent or approval of Governmental Authorities and other Persons to a transfer or assignment of Collateral. Each Debtor shall execute, deliver, and file, and hereby appoints (to the extent not prohibited by applicable law) Administrative Agent as its attorney-in-fact (exercisable if an Event of Default exists), to execute, deliver, and file on such Debtor's behalf and in such Debtor's name all applications, certificates, filings, instruments, and other documents (including without limitation any application for an assignment or transfer of control or ownership) that may be necessary or appropriate, in Administrative Agent's reasonable opinion, to obtain such consents or approvals. Each Debtor shall use commercially reasonable efforts to obtain the foregoing consents, waivers, and approvals, including receipt of consents, waivers, and approvals under applicable agreements regardless of whether a Default or Event of Default exists.

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(b) Each Debtor acknowledges that there is no adequate remedy at Law for failure by it to comply with the provisions of this Section 5.3 and that such failure would not be adequately compensable in damages, and therefore agrees that this Section 5.3 may be specifically enforced.

5.4 Deficiency. In the event that the proceeds of any sale, collection or realization of or upon Collateral by Administrative Agent are insufficient to pay all Secured Obligations and any other amounts to which Administrative Agent and the other Secured Parties are legally entitled, Debtors shall be jointly and severally liable for the deficiency, together with interest thereon as provided in the Credit Agreement or (if no interest is so provided) at such other rate as shall be fixed by applicable law, together with the costs of collection and the reasonable fees of any attorneys employed by Administrative Agent to collect such deficiency.

5.5 Cumulative Rights. All rights of Administrative Agent and each other Secured Party under the Loan Documents, the Secured Swap Agreements and the agreements related to Cash Management Services are cumulative of each other and of every other right which Administrative Agent and each other Secured Party may otherwise have at law or in equity or under any other agreement. The exercise of one or more rights shall not prejudice or impair the concurrent or subsequent exercise of other rights.

5.6 Obligations Not Affected. To the fullest extent not prohibited by applicable law, the obligations of each Debtor under this Agreement shall remain in full force and effect without regard to, and shall not be impaired or affected by:

(a) any amendment, addition, or supplement to, or restatement of any Loan Document, Secured Swap Agreement, agreement related to Cash Management Services or any instrument delivered in connection therewith or any assignment or transfer thereof;

(b) any exercise, non-exercise, or waiver by Administrative Agent or any other Secured Party of any right, remedy, power, or privilege under or in respect of, or any release of any guaranty, any collateral, or the Collateral or any part thereof provided pursuant to, this Agreement, any other Loan Document, any Secured Swap Agreement or any agreement related to Cash Management Services;

(c) any waiver, consent, extension, indulgence, or other action or inaction in respect of this Agreement, any other Loan Document, any Secured Swap Agreement or any agreement related to Cash Management Services or any assignment or transfer of any thereof;

(d) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation, or the like of any Loan Party or any other Person, whether or not any Debtor shall have notice or knowledge of any of the foregoing; or

(e) any other event which may give any Debtor or any other Loan Party a defense to, or a discharge of, any of its obligations under any Loan Document, any Secured Swap Agreement or any agreement related to Cash Management Services.

5.7 Administrative Agent’s Duties. The powers conferred on Administrative Agent hereunder are solely to protect Administrative Agent’s and the other Secured Parties’ interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by Administrative Agent and the other Secured Parties hereunder, neither Administrative Agent nor any other Secured Party shall have any duty as to any Collateral, as to ascertaining or taking action with respect to calls,

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conversions, exchanges, maturities, tenders, or other matters relative to any Collateral, whether or not Administrative Agent or any other Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Administrative Agent accords its own property. Except as provided in this Section 5.7, neither Administrative Agent nor any other Secured Party shall have any duty or liability to protect or preserve any Collateral or to preserve rights pertaining thereto. Nothing contained in this Agreement shall be construed as requiring or obligating Administrative Agent or any other Secured Party, and neither Administrative Agent nor any other Secured Party shall be required or obligated, to (a) present or file any claim or notice or take any action with respect to any Collateral or in connection therewith or (b) notify any Debtor of any decline in the value of any Collateral. This Section 5.7 shall survive the termination of this Agreement, and any satisfaction and discharge of each Debtor by virtue of any payment, court order, or Law.

## ARTICLE VI
PROCEEDS; COLLECTION OF RECEIVABLES

6.1 Lockboxes. Upon request of Administrative Agent, each Debtor shall execute and deliver to Administrative Agent irrevocable lockbox agreements in the form provided by or otherwise acceptable to Administrative Agent, which agreements shall be accompanied by an acknowledgment by the bank where the lockbox is located of the Lien of Administrative Agent granted hereunder and of irrevocable instructions to wire all amounts collected therein to a special collateral account at Administrative Agent.

6.2 Collection of Receivables. Upon the occurrence and during the continuation of a an Event of Default, Administrative Agent may at any time in its sole discretion, by giving any Debtor written notice, elect to require that the Receivables be paid directly to Administrative Agent. In such event, such Debtor shall, and shall permit Administrative Agent to, promptly notify the Account Debtors or obligors under the Receivables of Administrative Agent's interest therein and direct such Account Debtors or obligors to make payment of all amounts then or thereafter due under the Receivables directly to Administrative Agent. Upon receipt of any such notice from Administrative Agent, such Debtor shall thereafter hold in trust for Administrative Agent, all amounts and proceeds received by it with respect to the Receivables and Other Collateral and immediately and at all times thereafter deliver to Administrative Agent all such amounts and proceeds in the same form as so received, whether by cash, check, draft or otherwise, with any necessary endorsements. Administrative Agent shall hold and apply funds so received as provided by the terms of Sections 6.3 and 6.4.

6.3 Special Collateral Account. Administrative Agent may require all cash proceeds of the Collateral to be deposited in a special non-interest bearing cash collateral account with Administrative Agent and held there as security for the Secured Obligations, and no Debtor shall have control whatsoever over said cash collateral account. If no Event of Default has occurred or is continuing, Administrative Agent shall from time to time deposit the collected balances in such cash collateral account into the applicable Debtor's general operating account maintained with Administrative Agent or otherwise subject to Administrative Agent's control (within the meaning of the UCC). If any Event of Default has occurred and is continuing, Administrative Agent may, from time to time, apply the collected balances in such cash collateral account to the payment of the Secured Obligations whether or not the Secured Obligations shall then be due.

6.4 Application of Proceeds. After the occurrence and during the continuation of an Event of Default, the proceeds of the Collateral shall be applied by Administrative Agent to payment of the Secured Obligations as provided in the Credit Agreement.

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## ARTICLE VII
MISCELLANEOUS

7.1 Additional Debtors. From time to time subsequent to the date hereof, additional Persons may become parties hereto as additional Debtors (each, an “Additional Debtor”), by executing a Joinder Agreement in the form of Exhibit A hereto. Upon delivery of any such Joinder Agreement to Administrative Agent, notice of which is hereby waived by Debtors, each Additional Debtor shall be a Debtor and shall be as fully a party hereto as if such Additional Debtor were an original signatory hereto. Each Debtor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Debtor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary or Affiliate of Borrower to become an Additional Debtor hereunder. This Agreement shall be fully effective as to any Debtor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Debtor hereunder.

7.2 Preservation of Rights. No delay or omission of Administrative Agent to exercise any right or remedy granted under this Agreement shall impair such right or remedy or be construed to be a waiver of any Event of Default, or an acquiescence therein, and any single or partial exercise of any such right or remedy shall not preclude any other or further exercise thereof or the exercise of any other right or remedy. All rights and remedies contained in this Agreement or by law afforded shall be cumulative and all shall be available to Administrative Agent until the Secured Obligations have been paid in full.

7.3 Waiver; Amendment. No waiver, amendment or other variation of the terms, conditions or provisions of this Agreement whatsoever shall be valid unless in writing signed by Administrative Agent (with the requisite consent, if any, of all Lenders or the Majority Lenders in accordance with the Credit Agreement) and then only to the extent in such writing specifically set forth.

7.4 Compromises and Collection of Collateral. Each Debtor and Administrative Agent recognize that setoffs, counterclaims, defenses and other claims may be asserted by obligors with respect to certain of the Receivables, that certain of the Receivables may be or become uncollectible in whole or in part and that the expense and probability of success in litigating a disputed Receivable may exceed the amount that reasonably may be expected to be recovered with respect to such Receivable. In view of the foregoing, each Debtor agrees that Administrative Agent may at any time and from time to time, if an Event of Default has occurred and is continuing, compromise with the obligor on any Receivable, accept in full payment of any Receivable such amount as Administrative Agent in its sole discretion shall determine or abandon any Receivable, and any such action by Administrative Agent shall be commercially reasonable so long as Administrative Agent acts in good faith based on information known to it at the time it takes any such action.

7.5 Administrative Agent Performance of Debtors’ Obligations. Without having any obligation to do so, Administrative Agent may perform or pay any obligation which any Debtor has agreed to perform or pay in this Agreement and such Debtor shall, reimburse Administrative Agent for any amounts paid by Administrative Agent pursuant to this Section 7.5. Each Debtor’s obligation to reimburse Administrative Agent pursuant to the preceding sentence shall be a Secured Obligation payable on demand.

7.6 Authorization for Administrative Agent to Take Certain Action. Each Debtor irrevocably authorizes Administrative Agent at any time and from time to time in the sole discretion of Administrative Agent and appoints Administrative Agent as its attorney in fact (a) to execute on behalf of such Debtor as debtor and to file financing statements necessary or desirable in Administrative Agent’s sole discretion to perfect and to maintain the perfection and priority of Administrative Agent’s security interest in the Collateral, (b) to endorse and collect any cash proceeds of the Collateral, (c) to file a

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 23



carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as Administrative Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of Administrative Agent's security interest in the Collateral, (d) to contact and enter into one or more agreements with the issuers of uncertificated securities which are Collateral and which are Securities or with financial intermediaries holding other Investment Property as may be necessary or advisable to give Administrative Agent control (within the meaning of the UCC) over such Securities or other Investment Property, (e) subject to the terms of Section 6.2, to enforce payment of the Receivables in the name of Administrative Agent or such Debtor, (f) to apply the proceeds of any Collateral received by Administrative Agent to the Secured Obligations as provided in this Agreement and (g) to discharge past due taxes, assessments, charges, fees or Liens on the Collateral (except for such Liens as are specifically permitted hereunder), and such Debtor agrees to reimburse Administrative Agent on demand for any payment made or any expense incurred by Administrative Agent in connection therewith, provided that this authorization shall not relieve such Debtor of any of its obligations under this Agreement or under the Credit Agreement.

7.7 Specific Performance of Certain Covenants. Each Debtor acknowledges and agrees that (a) a breach of any of the covenants contained in Article IV, Article V or in Article VI will cause irreparable injury to Administrative Agent, and (b) Administrative Agent has no adequate remedy at law in respect of such breaches. Each Debtor therefore agrees, without limiting the right of Administrative Agent to seek and obtain specific performance of other obligations of such Debtor contained in this Agreement, that the covenants of such Debtor referred to in the immediately preceding sentence of this Section 7.7 shall be specifically enforceable against such Debtor.

7.8 Dispositions Not Authorized. No Debtor is authorized to sell or otherwise dispose of the Collateral except as set forth in Section 4.3 or as otherwise permitted by the Credit Agreement, and notwithstanding any course of dealing between any Debtor and Administrative Agent or other conduct of Administrative Agent, no authorization to sell or otherwise dispose of the Collateral (except as set forth in Section 4.3 or as otherwise permitted by the Credit Agreement) shall be binding upon Administrative Agent unless such authorization is in writing signed by Administrative Agent.

7.9 Benefit of Agreement. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of each Debtor, Administrative Agent and their respective successors and assigns, except that no Debtor shall have the right to assign its rights or delegate its obligations under this Agreement or any interest herein, without the prior written consent of Administrative Agent.

7.10 Expenses. To the extent permitted by applicable law, each Debtor promptly will pay, upon demand, any out-of-pocket expenses incurred by Administrative Agent in connection herewith, including all costs, expenses, taxes, assessments, insurance premiums, repairs (including repairs to realty or other property to which any Collateral may have been attached), court costs, reasonable attorneys' fees, rent, storage costs and expenses of sales incurred in connection with the administration of this Agreement, the enforcement of the rights of Administrative Agent hereunder, whether incurred before or after the occurrence of an Event of Default or incurred in connection with the perfection, preservation, or defense of the security interest created hereunder, or the custody, protection, collection, repossession, enforcement or sale of the Collateral. All such expenses shall become part of the Secured Obligations and shall bear interest at the post-default rate provided in the Credit Agreement from the date paid or incurred by Administrative Agent until paid by such Debtor.

7.11 Headings. The title of and section headings in this Agreement are for convenience of reference only, and shall not govern the interpretation of any of the terms and provisions of this Agreement.

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 24



7.12 Termination. This Agreement shall continue in effect (notwithstanding the fact that from time to time there may be no Secured Obligations outstanding) until the Release Date.

7.13 Governing Law; Jurisdiction; Consent to Service of Process; Waiver of Jury Trial. The provisions of Section 12.09 of the Credit Agreement captioned “Governing Law; Jurisdiction; Consent to Service of Process” are incorporated herein by reference for all purposes.

7.14 Notices. Any notice required or permitted to be given under this Agreement shall be sent (and deemed received) in the manner and to the addresses set forth in the Credit Agreement. Each Debtor (other than Borrower) appoints Borrower as such Debtor's agent, and Borrower shall act as agent for each other Debtor, for receipt of notices and other communications pursuant to the Loan Documents.

7.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective when it shall have been executed by Administrative Agent and when Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic imaging means (e.g. "pdf" or "tif") shall be effective as delivery of a manually executed counterpart of this Agreement.

7.16 INDEMNITY. EACH DEBTOR HEREBY AGREES TO INDEMNIFY ADMINISTRATIVE AGENT, EACH OTHER SECURED PARTY AND THEIR RESPECTIVE SUCCESSORS, ASSIGNS, AGENTS, ATTORNEYS, AND EMPLOYEES (EACH OF THE FOREGOING PERSONS, AN "INDEMNITE"), FROM AND AGAINST ANY AND ALL LIABILITIES, DAMAGES, PENALTIES, SUITS, COSTS, AND EXPENSES OF ANY KIND AND NATURE (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE EXPENSES OF LITIGATION OR PREPARATION THEREFOR WHETHER OR NOT ANY INDEMNITE IS A PARTY THERETO) IMPOSED ON, INcurred BY OR ASSERTED AGAINST ANY INDEMNITE, IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT, OR THE MANUFACTURE, PURCHASE, ACCEPTANCE, REJECTION, OWNERSHIP, DELIVERY, LEASE, POSSESSION, USE, OPERATION, CONDITION, SALE, RETURN OR OTHER DISPOSITION OF ANY COLLATERAL (INCLUDING, WITHOUT LIMITATION, LATENT AND OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE BY ADMINISTRATIVE AGENT OR SUCH DEBTOR, AND ANY CLAIM FOR INTELLECTUAL PROPERTY INFRINGEMENT).

7.17 Amendment and Restatement. This Agreement is a consolidated amendment and restatement of each of the Existing Security Agreements and supersedes each of the Existing Security Agreements in its entirety; provided, however, that (a) the execution and delivery of this Agreement shall not effect a novation of any of the Existing Security Agreements but shall be, to the fullest extent applicable, in modification, renewal, confirmation and extension of each Existing Security Agreement, and (b) the Liens, security interests and other interests in the collateral as described in each of the Existing Security Agreements (the "Original Collateral") granted under each of the Existing Security Agreements are and shall remain legal, valid, binding and enforceable with regard to such Original Collateral. Each Debtor party to any Existing Security Agreement hereby acknowledges and confirms the continuing existence and effectiveness of such Liens, security interests and other interests in the Original Collateral granted under the Existing Security Agreements, and further agrees that the execution and delivery of this Agreement and the other Loan Documents shall not in any way release, diminish, impair, reduce or otherwise affect such Liens, security interests and other interests in the Original Collateral granted under the Existing Security Agreements.

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 25



7.18 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN 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.

[Remainder of page intentionally left blank; signature pages follow.]

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Page 26



IN WITNESS WHEREOF, Debtors and Administrative Agent have executed this Agreement as of the date first above written.

## DEBTORS:

## PRIMEENERGY CORPORATION

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## PRIMEENERGY MANAGEMENT CORPORATION

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## PRIME OPERATING COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## EASTERN OIL WELL SERVICE COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## SOUTHWEST OILFIELD CONSTRUCTION COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Signature Page



## EOWS MIDLAND COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

## PRIME OFFSHORE LLC.

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President, Treasurer & Chief Financial Officer

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Signature Page



AMENDED, RESTATED AND CONSOLIDATED PLEDGE AND SECURITY AGREEMENT – Signature Page

COMPASS BANK
as Administrative Agent

By: /s/ Kathleen J. Bowen

Name: Kathleen J. Bowen

Title: Managing Director



SCHEDULE 1
Deposit Accounts, Securities Accounts and Commodity Accounts

<table><tr><td>Debtor</td><td>Account Type</td><td>Bank, Securities Intermediary, or Commodity Intermediary (as applicable)</td><td>ABA No. (as applicable)</td><td>Account No.</td><td>Account Name</td><td>Description</td></tr><tr><td>Prime Operating Company</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>3802548457</td><td>Prime Operating Company</td><td>Operating</td></tr><tr><td>Prime Operating Company</td><td>ZBA-Lockbox</td><td>BBVA Compass</td><td>314970664</td><td>3802548465</td><td>Prime Operating Company - Revenue</td><td>Lockbox</td></tr><tr><td>Prime Operating Company</td><td>ZBA-Lockbox</td><td>BBVA Compass</td><td>314970664</td><td>3802548473</td><td>Prime Operating Company - Jib</td><td>Lockbox</td></tr><tr><td>Prime Operating Company</td><td>ZBA-Control Disbursement</td><td>BBVA Compass</td><td>314970680</td><td>3805960246</td><td>Prime Operating Company Revenue CD</td><td>Control Disbursements</td></tr><tr><td>Prime Operating Company</td><td>ZBA-Control Disbursement</td><td>BBVA Compass</td><td>314970680</td><td>3802548499</td><td>Prime Operating Company A/P CD</td><td>Control Disbursements</td></tr><tr><td>PrimeEnergy Management Corporation</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>3802548507</td><td>PrimeEnergy Management Corporation</td><td>Operating</td></tr><tr><td>PrimeEnergy Management Corporation</td><td>ZBA-Control Disbursement</td><td>BBVA Compass</td><td>314970680</td><td>3802548515</td><td>PrimeEnergy Management Corp - Distributions</td><td>Control Disbursements</td></tr><tr><td>PrimeEnergy Corporation</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>3802548531</td><td>PrimeEnergy Corporation</td><td>Operating</td></tr><tr><td>Eastern Oil Well Services Company</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>3802548549</td><td>Eastern Oil Well Service Company</td><td>Operating</td></tr></table>

SCHEDULE1 - Page 1



<table><tr><td>Debtor</td><td>Account Type</td><td>Bank, Securities Intermediary, or Commodity Intermediary (as applicable)</td><td>ABA No. (as applicable)</td><td>Account No.</td><td>Account Name</td><td>Description</td></tr><tr><td>Southwest Oilfield Construction Company</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>380254856</td><td>Southwest Oilfield Construction Company</td><td>Operating</td></tr><tr><td>Eastern Oil Well Services Midland Company</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>380254856</td><td>Eastern Oil Well Service Midland Company</td><td>Operating</td></tr><tr><td>PrimeEnergy Corporation</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>3802548580</td><td>PrimeEnergy Corp- Flex Spending</td><td>Flexible spending reimbursements</td></tr><tr><td>PrimeEnergy Corporation</td><td>Checking</td><td>BBVA Compass</td><td>314970664</td><td>3802548598</td><td>PrimeEnergy Corp - Benefits</td><td>Health benefits reimbursement</td></tr><tr><td>Prime Operating Company</td><td>Checking</td><td>Bank of America</td><td>026009593</td><td>6694-3851</td><td>Prime Operating Company</td><td>Payroll</td></tr><tr><td>PrimeEnergy Management Corporation</td><td>Checking</td><td>Bank of America</td><td>026009593</td><td>6690-7577</td><td>PrimeEnergy Management Corporation</td><td>Payroll</td></tr><tr><td>PrimeEnergy Corporation</td><td>Checking</td><td>Bank of America</td><td>026009593</td><td>385015848189</td><td>PrimeEnergy Corporation</td><td>Payroll</td></tr><tr><td>Eastern Oil Well Services Company</td><td>Checking</td><td>Bank of America</td><td>026009593</td><td>6675-6411</td><td>Eastern Oil Well Service Company</td><td>Payroll</td></tr><tr><td>Eastern Oil Well Services Midland Company</td><td>Checking</td><td>Bank of America</td><td>026009593</td><td>941-817-6725</td><td>Eastern Oil Well Service Midland Company</td><td>Payroll</td></tr></table>

SCHEDULE1 – Page 2



## SCHEDULE2
Intellectual Property

PATENTS

Debtor ___ Patent Number ___ Country of Issue ___ Description/Name of Patent ___

None.

## TRADEMARKS

Debtor ___ Registration No. ___ Issue Date ___ Mark ___

None.

## COPYRIGHTS

Debtor ___ Registration No. ___ Date of Registration ___ Description of Copyright ___

None.

SCHEDULE 2 - Page 1



## SCHEDULE 3
List of Instruments, Securities and Other Investment Property

A. STOCKS:

<table><tr><td>Debtor</td><td>Issuer</td><td>Certificate Number</td><td>Number of Shares</td></tr><tr><td>PrimeEnergy Corporation</td><td>PrimeEnergy Management Corporation</td><td>11</td><td>1,000</td></tr><tr><td>PrimeEnergy Corporation</td><td>Prime Operating Company</td><td>1</td><td>1,000</td></tr><tr><td>PrimeEnergy Corporation</td><td>Eastern Oil Well Service Company</td><td>1</td><td>1,000</td></tr><tr><td>PrimeEnergy Corporation</td><td>Southwest Oilfield Construction Company</td><td>1</td><td>1,000</td></tr><tr><td>PrimeEnergy Corporation</td><td>EOWS Midland Company</td><td>1</td><td>1,000</td></tr></table>

B. BONDS:

<table><tr><td>Debtor</td><td>Issuer</td><td>Number</td><td>Face Amount</td><td>Coupon Rate</td><td>Maturity</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>

C. GOVERNMENT SECURITIES:

<table><tr><td>Debtor</td><td>Issuer</td><td>Number</td><td>Type</td><td>Face Amount</td><td>Coupon Rate</td><td>Maturity</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>

D. OTHER SECURITIES OR OTHER INVESTMENT PROPERTY
(CERTIFICATED AND UNCERTIFICATED):

<table><tr><td>Debtor</td><td>Issuer</td><td>Description of Collateral</td><td>Percentage Ownership Interest</td><td>Certificate Number:</td></tr><tr><td>PrimeEnergy Corporation</td><td>Prime Offshore LLC.</td><td>Membership Interests</td><td>100%</td><td></td></tr></table>

***[Add description of custody accounts or arrangements with securities intermediary, if applicable]***

SCHEDULE3 – Page 1



## SCHEDULE4
UCC Filing Jurisdictions

Debtor
PrimeEnergy Corporation

PrimeEnergy Management Corporation

Prime Operating Company

Eastern Oil Well Service Company

Southwest Oilfield Construction Company

EOWS Midland Company

Prime Offshore L.L.C.

Jurisdiction

Delaware

New York

Texas

West Virginia

Oklahoma

Texas

Delaware

## SCHEDULE 4 – Page 1



## All Debtors:

Chief Executive Office and Mailing Address:
9821 Katy Freeway Suite 1050
Houston, TX 77024

Location(s) of Books and Records (if different from principal place of business above):

Same as above.

Other Locations of Collateral:

A. Properties Owned by Debtor:

None.

B. Properties Leased by Debtor (include landlord's name):

9821 Katy Freeway Suite 1050
Houston, TX 77024

Memorial City Towers LTD (landlord)

5400 N Grand Blvd Suite 450
Oklahoma City, OK 73112

5400 Investors LLC(landlord)

One Petroleum Center
3300 N A Street Building 1 Suite 238
Midland, TX 79701

One Petroleum Center LLC (landlord)

C. Locations pursuant to Bailment or Consignment Arrangements for Debtor (indicate which and include name of warehouse operator or other bailee or consignee):

None.

SCHEDULE5 – Page 1



None.

SCHEDULE6 – Page 1



## SCHEDULE7
Identification Numbers

<table><tr><td>Debtor</td><td>Federal Employer Identification Number</td><td>State Organizational Identification Number</td></tr><tr><td>PrimeEnergy Corporation</td><td>84-0637348</td><td>790016</td></tr><tr><td>PrimeEnergy Management Corporation</td><td>13-2929065</td><td>424708</td></tr><tr><td>Prime Operating Company</td><td>76-0355677</td><td>0121592900</td></tr><tr><td>Eastern Oil Well Service Company</td><td>06-1313613</td><td>133998</td></tr><tr><td>Southwest Oilfield Construction Company</td><td>73-1411394</td><td>1900516436</td></tr><tr><td>EOWS Midland Company</td><td>06-1603694</td><td>0160993700</td></tr><tr><td>Prime Offshore L.L.C.</td><td>76-0688905</td><td>3408892</td></tr></table>

SCHEDULE7 – Page 1



<table><tr><td colspan="5">SCHEDULE8Commercial Tort Claims</td></tr><tr><td>Debtor</td><td>Case Name or Style</td><td>Case Number</td><td>Court in Which Pending</td><td></td></tr><tr><td>None.</td><td></td><td></td><td></td><td></td></tr></table>

SCHEDULE8 – Page 1



## EXHIBIT A

## [FORM OF] JOINDER AGREEMENT

THIS JOINDER AGREEMENT (this “Agreement”) is entered into as of ___, 201_, by the undersigned (“Additional Debtor”), being a Subsidiary or Affiliate of PrimeEnergy Corporation, a Delaware corporation (“Borrower”), in favor COMPASS BANK, as Administrative Agent for the Secured Parties (in such capacity, “Administrative Agent”), and is executed and delivered pursuant to that certain Third Amended and Restated Credit Agreement, dated as of February 15, 2017 (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Borrower, the Lenders party thereto, and Administrative Agent.

WHEREAS, in connection with the Credit Agreement, Borrower and certain of its Subsidiaries executed and delivered to Administrative Agent that certain Amended, Restated and Consolidated Pledge and Security Agreement, dated as of February 15, 2017 (as the same has been or may be amended, restated, supplemented or otherwise modified from time to time, the “Security Agreement”) in order to, among other things, induce the Secured Parties to make the Loans and other credit extensions under the Credit Agreement and the other Loan Documents and to make financial accommodations under Secured Swap Agreements and agreements related to Cash Management Services; and

WHEREAS, Additional Debtor (i) is a Subsidiary of Borrower, (ii) desires that the Secured Parties continue to make the Loans and other credit extensions under the Credit Agreement and the other Loan Documents and continue to make financial accommodations under Secured Swap Agreements and agreements related to Cash Management Services, (iii) will directly or indirectly benefit from the use by Borrower of the extensions of credit and financial accommodations for the purposes described in the Credit Agreement, the Secured Swap Agreements and the agreements related to Cash Management Service, and (iv) by and through the action of its governing body, has determined that transactions contemplated by the Credit Agreement, the other Loan Documents, Secured Swap Agreements, and agreements related to Cash Management Services may reasonably be expected to benefit, directly or indirectly, Additional Debtor.

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce the Secured Parties to make and continue to make the Loans and other credit extensions under the Credit Agreement and the other Loan Documents and to make and continue to make financial accommodations under Secured Swap Agreements and agreements related to Cash Management Services, Additional Debtor does hereby agree with Administrative Agent as follows:

1. Definitions. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Security Agreement.

2. Party to Security Agreement: Grant of Security Interest. Additional Debtor hereby acknowledges, agrees and confirms that, by its execution of this Agreement, Additional Debtor will be deemed to be a party to the Security Agreement and a “Debtor” for all purposes of the Security Agreement, and shall have all of the obligations of a Debtor thereunder as if it had executed the Security Agreement. Additional Debtor hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Debtors contained in the Security Agreement. Without limiting the generality of the foregoing terms of this Section 2, Additional Debtor hereby pledges, assigns and grants to Administrative Agent for the benefit of the Secured Parties a continuing security interest in all of Additional Debtor's right, title and interest in and to the Collateral of Additional Debtor to secure the prompt and complete payment and performance of the Secured Obligations; provided, the foregoing shall not include the Excluded Property.

## EXHIBIT A – Page 1



3. Representations and Warranties. Additional Debtor hereby makes each representation and warranty set forth in the Security Agreement with respect to itself and its Collateral.

4. Schedules. Schedules 1 through 8 to the Security Agreement shall be supplemented by the addition of Schedules 1 through 8 attached hereto as to Additional Debtor.

5. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic imaging means (e.g. "pdf" or "tif") shall be effective as delivery of a manually executed counterpart of this Agreement.

6. Loan Document. This Agreement is a Loan Document for all purposes and each reference in any Loan Document to the Security Agreement shall mean the Security Agreement as supplemented by this Agreement.

7. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN 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 BETWEEN THE PARTIES.

[The remainder of this page is left intentionally blank. Signature pages follows.]

EXHIBIT A – Page 2



IN WITNESS WHEREOF, Additional Debtor and Administrative Agent have executed this Agreement as of the date first above written.

ADDITIONAL DEBTOR:

By: ___

Name:

Title:



EXHIBITA - Page 4

COMPASS BANK

as Administrative Agent

By:

Name:

Title:



## PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (as may be amended, restated, supplemented or otherwise modified from time to time, this “Agreement”) is dated as of January 25, 2017 (the “Execution Date”), by and between PRIMENERGY CORPORATION, a Delaware corporation, PRIMENERGY MANAGEMENT CORPORATION, a New York corporation, PRIMENERGY ASSET AND INCOME FUND, LP. A-2, a Delaware limited Partnership, PRIMENERGY ASSET AND INCOME FUND, LP. A-3, a Delaware limited Partnership, PRIMENERGY ASSET AND INCOME FUND, LP. AA-2, a Delaware limited Partnership, PRIMENERGY ASSET AND INCOME FUND, LP. AAA-4, a Delaware limited Partnership, PRIME OPERATING COMPANY, a Texas limited liability company (“Seller”), on the one part, and GUIDON OPERATING LLC, a Delaware limited liability company (“Purchaser”), on the other part. Seller and Purchaser are sometimes referred to herein individually as a “Party” and collectively as the “Parties.”

## RECTTALS

WHEREAS, Seller is willing to sell to Purchaser, and Purchaser is willing to purchase from Seller, the Assets (as defined below), upon the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the mutual benefits derived and to be derived from this Agreement by each Party, Seller and Purchaser agree as follows:

1. Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell, transfer, convey, and assign the Assets to Purchaser and Purchaser agrees to purchase, accept, and pay for the Assets.

2. Assets. As used herein, the term “Assets” refers to all of Seller’s right, title and interest in and to the following:

(a) all oil and gas leases covering any of the lands described on Exhibit A (the "Lands"), together with such surface and subsurface rights described therein, all overriding royalty interests, nonparticipating royalties, reservation interests, carried interests, options, convertible interests, net profits interests and other similar interest and rights related thereto (the "Leases") the wellbore of the Rusty Nail #1HB well, API # 42-317-40375 (the "Well," and together with the Lands and Leases, the "Properties"), including the Leases and Wells described on Exhibit A, but excluding the Excluded Wellbores;

(b) the personal property, equipment, fixtures and improvements located on or used or held in connection with the Leases and Lands or used or held in connection with the Production (as defined below) attributable to the Leases, Lands or Well, including well pads, machinery, fixtures, tubulars, gathering systems, flow lines, pipelines, tank batteries, and other inventory attributable to the any of the Properties; but excluding all such items used in connection with Excluded Wellbores (the "Equipment");

(c) all rights and obligations existing under any contracts, agreements and instruments which relate, but only insofar as they relate, to the Properties (the "Contracts"), including, but not limited to, operating agreements, farmout agreements, rights of way, easements, servitudes, licenses, permits, surface leases, rights-of-way, surface use agreements, production sales and purchase contracts, oil gathering contracts, gas gathering and transportation contracts, gas processing contracts, saltwater disposal agreements; but excluding all interests in such Contracts as they apply to the Excluded Wellbores, provided, however, (i) Seller shall have a concurrent right to use any rights of way, easements, servitudes, licenses, permits, surface leases, rights-of-way, surface use agreements for use of existing facilities in connection with the Excluded Wellbores, and shall be responsible for all costs and expenses related thereto; and (ii) the term "Contracts" shall not include the Leases or other instruments constituting Seller's chain of title to the Leases;



(d) the oil, gas, casinhead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, products refined and manufactured therefrom or attributable thereto, and other minerals and the accounts and proceeds from the sale of all of the foregoing attributable to the Properties under the terms of the Leases or Contracts (the "Production") from and after the Effective Time, but excluding that produced from the Excluded Wellbores;

(e) all trade credits, accounts receivable, notes receivable, take or pay amounts receivable, insurance claims, and other receivables and general intangibles attributable to the Assets from and after the Effective Time, but excluding those attributable to the Excluded Wellbores; and

(f) all files, books, records (including tax records), data, documentation, databases, maps, well logs and data, and monuments of title maintained by, or to which Seller is entitled, including, without limitation, geophysical and seismic data and other documentary information, regarding the Properties, the Contracts and the Production to the extent the transfer of such data is not prohibited under any related contracts (the "Data"); provided, however, that the term "Data" shall not include any of Seller's files, records, or data that (i) relate to its business generally, (ii) are legal in nature (other than Leases, Contracts, and title opinions), (iii) relate to bids received from or records with respect to negotiations with, third parties pertaining to the sale of the Assets, (iv) the transfer of which is prohibited by contract or law or that would impose a transfer fee or penalty on Seller, and (v) relate to the Excluded Assets (the "Excluded Records"). To the extent any of the Data contain interpretations of Seller, Purchaser agrees to rely on such interpretations at its own risk.

3. Excluded Assets. Notwithstanding anything to the contrary in Section 2 or elsewhere in this Agreement, the “Assets” shall not include any rights with respect to the Excluded Assets. “Excluded Assets” means the following:

(a) all accounts receivable accruing to the Assets prior to the Effective Time;

(b) any Production from, or attributable to, the Assets with respect to all periods prior to the Effective Time, including, without limitation, all proceeds attributable thereto;

(c) any refunds or additional revenues accruing to the Assets and any adjustments for costs, expenses or taxes paid or borne by Seller, in each case, to the extent such refunds or revenues are attributable to the period prior to the Effective Time;

(d) except to the extent related to any Assumed Obligations, any and all proceeds from settlements of contract disputes with purchasers of Production or byproducts to the extent that such proceeds are attributable to periods of time prior to the Effective Time;

(e) except to the extent related to any Assumed Obligations, any rights and interests of Seller (i) under any policy or agreement of insurance or indemnity (including, without limitation, any rights, claims or causes of action or Seller against third parties under any indemnities or hold harmless agreements and any indemnities received in connection with Seller's prior acquisition of any of the Assets), to the extent that such rights and interests relate to losses, damages, claims, liabilities, debts, obligations or expenses arising out of, or in connection with, the ownership of the Assets prior to the Effective Time and (ii) under any bond;

(f) any of Seller’s computer software, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property;



(g) except to the extent related to any Assumed Obligations, all audit rights arising under any of the Contracts or otherwise with respect to the Assets for any period prior to the Effective Time or relating to any of the Excluded Assets;

(h) except to the extent related to any Assumed Obligations, all claims of Seller for refunds of or loss carry forwards with respect to (i) taxes on Production or any other taxes attributable to any period prior to the Effective Time, (ii) income or franchise taxes or (iii) any taxes attributable to the Excluded Assets;

(i) any leased equipment and other leased personal property if such property, or the contract pursuant to which it was leased, is (i) not freely transferable without payment of a fee or other consideration, unless Purchaser has agreed in writing to pay such fee or consideration, or (ii) cancelable with no more than a 30-day notice requirement;

(j) Seller’s right, title and interest in and to the wellbores set forth on Schedule 3 (the “Excluded Wellbores”) along with personal property, equipment, fixtures and improvements located on or used or held in connection with the Leases and Lands or used or held in connection with the Production attributable to the Leases or Lands, including well pads, machinery, fixtures, tubulars, gathering systems, flow lines, pipelines, tank batteries, and other inventory attributable to any of the Excluded Wellbores;

(k) All pooling or unitization agreements or declarations of pooling or unitization related to the Excluded Wellbores;

(l) All water, disposal or injection wells located on the Lands as of the Effective Time; and

(m) the Excluded Records.

4. Purchase Price. The purchase price for the Assets shall be THIRTY MILLION NINE HUNDRED FIFTY-FOUR THOUSAND FOUR HUNDRED EIGHTY-EIGHT AND 77/100 DOLLARS ($30,954,488.77) (the "Purchase Price"). The Purchase Price shall be adjusted as provided in Section 5, and the determination of the Adjusted Purchase Price shall be made as provided in Section 13.

5. Purchase Price Adjustments. Without limiting the foregoing, the Purchase Price shall be adjusted as follows, without duplication, with the resulting adjustments to such Purchase Price herein the "Adjusted Purchase Price": (i) upward by (A) any amounts agreed to by Seller and Purchaser; and (ii) downward by (A) all unpaid ad valorem, property, and similar taxes and assessments insofar as such unpaid taxes relate to periods prior to the Effective Time, and (B) all Expenses attributable to the Assets allocated to any period prior to the Effective Time that have been paid by Purchaser, (C) the Allocated Value for any Lease for which a consent is required but not yet obtained or subject to a preferable right not waived, and (D) and by any other amounts agreed to by Seller and Purchaser. "Expenses" means all operating expenses (including costs of insurance, rentals, shut-in payments, and overhead costs) and capital expenditures (including bonuses, broker fees, and other Lease acquisition costs, costs of drilling and completing wells, and costs of acquiring equipment) incurred in the ownership and operation of the Assets in the ordinary course of business, but excluding (without limitation) liabilities, losses, costs, expenses, and damages attributable to: (i) claims, investigations, administrative proceedings, arbitration or litigation directly or indirectly arising out of or resulting from actual or claimed personal injury, illness or death; property damage; environmental damage or contamination; other torts; private rights of action given under any law; or violation of any law; (ii) obligations to plug and/or abandon wells, dismantle, decommission or remove facilities, clear sites, and/or restore the surface around such wells or facilities; (iii) obligations to remediate any contamination of groundwater, surface water, soil, sediments, or Equipment; (iv) title and environmental claims; (v) claims of improper calculation or payment of royalties; (vi) gas balancing and other production balancing obligations; (vii) taxes; (viii) title and environmental curative actions; and (ix) any claims for indemnification, contribution, or reimbursement from any third party with respect to liabilities, losses, costs, and expenses of the type described in preceding clauses (i) through (viii), whether such claims are made pursuant to contract or otherwise.



6. Allocated Values. The Purchase Price shall be allocated among the Assets as set forth in Schedule 6 hereto (collectively, the "Allocated Values"). The Parties agree to be bound by the Allocated Values set forth in Schedule 6 for all purposes hereof. The Parties further agree that for the purpose of making the requisite filings under Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, the Purchase Price and any liabilities assumed by Purchaser under this Agreement that are treated as consideration for tax purposes shall be allocated among the Assets in a manner consistent with the Allocated Values, as set forth on Schedule 6 (the "Tax Allocation"). The Parties each agree to report, and to cause their respective affiliates (as applicable) to report, the federal, state, and local income and other tax consequences of the transactions contemplated hereby, and in particular, to report the information required by Section 1060(b) of the Code, and to jointly prepare Form 8594 (Asset Acquisition Statement under Section 1060 of the Code) as promptly as possible following the Effective Time and in a manner consistent with the Tax Allocation to take into account subsequent adjustments to the Purchase Price, including any adjustments pursuant to this Agreement, and shall not take any position inconsistent therewith upon examination of any tax return, in any refund claim, in any litigation, investigation or otherwise, unless required to do so by any laws after notice to and discussions with the other Party, or with such other Party's prior consent.

7. Effective Time. The sale of the Assets shall be effective as of 7:00 a.m. at the location of the Properties on January 1, 2017 (the "Effective Time").

8. Seller’s Representations. Each Seller (severally and not jointly) represents and warrants to Purchaser as of the date hereof:

(a) Existence. Seller is duly formed, validly existing and in good standing under the laws of its state of formation or incorporation, and has full legal power, right and authority to carry on its business as such in new being conducted and as contemplated to be conducted.

(b) Legal Power. Seller has the legal power and right to enter into and perform this Agreement and the transactions it contemplates for Seller. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with (i) any provision of Seller's governing documents; or (ii) any judgment, order, ruling or decree applicable to Seller as a party in interest or any law applicable to Seller's interest in any of the Assets, except (x) as would not, individually or in the aggregate, have a material adverse effect, or (y) as to rights to consent by, required notices to, filings with, approval or authorizations of, or other actions by any governmental authorities where the same are not required prior to the assignment of the related Asset, or which are customarily obtained subsequent to the sale or conveyance thereof ("Customary Post-Closing Consents").

(c) Execution. The execution, delivery and performance of this Agreement and the transactions it contemplates for Seller are duly and validly authorized by the requisite corporate or other action on the part of Seller. This Agreement has been duly executed and delivered by Seller (and all documents this Agreement requires be executed and delivered by Seller hereunder will be duly executed and delivered by Seller) and this Agreement constitutes, and the other documents will constitute, the valid and binding obligations of Seller, enforceable against Seller in accordance with their terms except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally as well as to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

(d) Litigation. (a) No litigation, arbitration, demands, investigations or other proceeding is pending or, to Seller's knowledge, threatened against Seller, and, to Seller's knowledge, no litigation, arbitration, demands, investigation or other proceeding is pending or threatened against the Properties,



before any court, arbitrator or governmental authority; and (b) neither Seller, its affiliates nor, to Seller's knowledge any of the Properties is subject to any outstanding injunction, judgment, order, decree or ruling relating to the Properties. There is no litigation, proceeding or investigation pending, or to Seller's knowledge, threatened against or affecting Seller that questions the validity or enforceability of this Agreement or any other document, instrument or agreements to be executed and delivered by Seller in connection with the transactions contemplated hereby.

(e) Contracts. (i) To the best of Seller's knowledge, Seller is not in breach or default in any material respect under any Contract. Seller has paid (or has caused its representative to pay) all expenses of the Properties under the Contracts, all Contracts are in full force and effect in all material respects, and Seller has provided Purchaser with true, complete and correct copies of each Contract.

(ii) Schedule 8(e)(ii) sets forth, to the best of Seller's knowledge and belief, all of the following Contracts, to which any of the Properties will be bound as of the Closing: (a) any agreement or contract for the sale, exchange, or other disposition of hydrocarbons produced from or attributable to Seller's interest in the Properties that is not cancelable without penalty or other material payment on not more than 30 days prior written notice; (b) any agreement of or binding upon Seller to sell, lease, farmout, or otherwise dispose of any interest in any of the Properties after the date hereof, other than conventional rights of reassignment arising in connection with Seller's surrender or release of any of the Properties; (c) any tax partnership agreement of or binding upon Seller that would be binding upon Purchaser or any of the Properties after Closing; (d) confidentiality agreements, areas of mutual interest or non-competition agreements, favored nations agreements or any agreements that purport to restrict, limit, or prohibit a person from engaging in any line of business or the manner in which, or the locations at which, Seller (or Purchaser, as successor in interest to Seller) conducts business; (e) contracts for the gathering, treatment, processing, storage, or transportation of hydrocarbons; (f) joint operating agreements, unit operating agreements, unit agreements, or other similar agreements; (g) indentures, mortgages or deeds of trust, loans, credit or note purchase agreements, sale-lease back agreements, guaranties, bonds, letters of credit, or similar financial agreements; and (h) other agreements, excluding the Leases, that could reasonably be expected to result in (A) aggregate payments by Seller (net to the interest of Seller) of more than $50,000 or (B) revenues (net to the interest of Seller) of more than $50,000 during the current or any subsequent calendar year.

(f) Compliance with Laws: Permits. To the best of Seller's knowledge, at all times during Seller's ownership of the Properties, the Properties have been operated in material compliance with, all applicable laws. There exists no continuing or uncured violation on the part of Seller or any of Seller's representatives of any license or permit which violation would singly or in the aggregate, adversely affect in any material respect the ownership, operation or value of the Properties.

(g) Environmental Laws. To the best of Seller's knowledge, (i) (A) There is no hazardous substance, contamination of groundwater, surface water, soil or otherwise at, on under or from the Properties with respect to which material remediation is presently required and (B) there has been no exposure of any person to hazardous substances in connection with or relating to the Properties or the ownership or operation thereof which could reasonably be expected to result in material, uncured violation of or material, uncured liabilities under applicable environmental laws; (ii) there are no actions, suits or proceedings pending of which Seller has received service or written notice, or to Seller's knowledge, threatened, before any governmental authority or arbitrator with respect to the Properties alleging material violations of, or material liabilities under, environmental laws, or claiming material remediation obligations; (iii) Seller has received no written notice from any governmental authority of any alleged or actual material violation or non-compliance with, or material liability under, any environmental law or of material non-compliance with the terms or conditions of any environmental permits, arising from, based upon, associated with or related to the Properties or the ownership or



operation thereof that remains unresolved as of the date hereof; and (iv) Seller has made available to Purchaser any site assessments, in each case, prepared by third parties, relating to the Properties that are in the possession or control of Seller and have been prepared with the five (5) years preceding the date hereof.

(h) Wells. There are no inactive wells that Seller is currently obligated by applicable law or contract to plug or abandon or that are currently subject to exceptions to a requirement to plug or abandon issued by a governmental authority.

(i) Consents and Preferential Purchase Rights. To the best of Seller's knowledge, except as set forth on Schedule 8(i) there are no consents or preferential purchase rights that are applicable in connection with the transactions contemplated by this Agreement.

(i) Liens and Encumbrances. To the best of Seller's knowledge, except as provided in the Contracts identified in Schedule 8(e)(ii), the Properties are not subject to any claim, lien, mortgage, security interest, pledge, charge, option, or encumbrance of any kind.

(k) No Operations. Except for the drilling of the Excluded Wellbores and the Well, Seller has not conducted oil and gas exploration, development or production operations on the Properties, or any lands pooled or unitized therewith.

(l) Commitments or Proposals. (a) Seller has incurred no expenses, and has made no commitments to make expenditures in connection with the ownership or operation of the Properties after the Effective Date, and (b) no proposals are currently outstanding by Seller or, to Seller's knowledge, other working interest owners to drill any well.

(m) Production Sales Contracts. There exist no agreements or arrangements for the sale of Seller's share of oil and gas produced from the Properties (including calls on, or other rights to purchase, production, whether or not the same are currently being exercised) other than (a) production sales contracts disclosed in Schedule or (b) agreements or arrangements which are cancelable on ninety (90) days notice or less without penalty or detriment.

(n) Payment of Expenses and Royalties: Leases. (i) To the best of Seller's knowledge, all expenses (including all bills for labor, materials and supplies used or furnished for use in connection with the Properties, and all taxes) relating to the ownership or operation by Seller of its interest in the Properties, have been, and are being, paid (timely, and before the same become delinquent) by Seller, except such expenses and taxes as are disputed in good faith by Seller and set forth on Schedule 8(n)(i). Seller is not delinquent with respect to its obligations to bear costs and expenses relating to the development and operation of the Properties. To the best of Seller's knowledge, all royalties, overriding royalties, compensatory royalties and other payments due from or in respect of production with respect to the Properties, have been or will be, prior to the Closing, properly and correctly paid. (ii) To the best of Seller's knowledge, all Leases have been maintained in according to their terms, in compliance with the agreements to which the Leases are subject, are presently in full force and effect, and there has not occurred any event, fact or circumstance which, with the lapse of time or the giving of notice, or both, would constitute such a breach or default of the Leases on behalf of the Seller or with respect to any other parties, and Seller has not received a notice from a lessor or other third party that Seller is in default of any such Lease.

(o) Commitments or Proposals. (a) Seller has incurred no expenses, and has made no commitments to make expenditures in connection with the ownership or operation of the Properties after the Effective Date, other than routine expenses incurred in the normal operation of the Excluded Wellbores; and (b) no proposals are currently outstanding by Seller or, to Seller's knowledge, other working interest owners to drill additional wells on the Properties, or to deepen, plug back, or rework any Excluded Wellbores, or to abandon any Excluded Wellbore.



(p) Hedging Transactions. There are no outstanding hedging transactions applicable to the Properties.

(q) Broker’s Fees. No broker or finder is entitled to any brokerage or finder’s fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller for which Purchaser has or will have any liabilities or obligations (contingent or otherwise).

(r) Taxes. All ad valorem, property, production, severance, excise and similar taxes based upon or measured by the ownership of any of the Properties that have become due and payable during the period prior to the Effective Time have been timely and properly paid.

(s) Suspense Funds. No third party funds or other proceeds of production attributable to the Properties are held in suspense by Seller or by the applicable operator of the Wells.

(t) Non-Consent Operations. Except as to the Well, no operations are being conducted or have been conducted on the Properties with respect to which Seller has elected to be a non-consenting party under the applicable governing agreement and with respect to which all of Seller’s rights have not yet reverted to it.

(u) Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to Seller’s knowledge, threatened against Seller.

9. Purchaser’s Representations. Purchaser represents and warrants to Seller as of the date hereof:

(a) Purchaser’s Existence. Purchaser is duly formed, validly existing and in good standing under the laws of the State of Delaware, and has full legal power, right and authority to carry on its business as such is now being conducted and as contemplated to be conducted.

(b) Legal Power. Purchaser has the legal power and right to enter into and perform this Agreement and the transactions it contemplates for Purchaser. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with (i) any provision of Purchaser’s governing documents; or (ii) any judgment, order, ruling or decree applicable to Purchaser as a party in interest or any law applicable to Purchaser’s interest in any of the Assets after the transfer hereunder, except (x) as would not, individually or in the aggregate, have a material adverse effect, or (y) as to Customary Post-Closing Consents.

(c) Execution. The execution, delivery and performance of this Agreement and the transactions it contemplates for Purchaser are duly and validly authorized by the requisite corporate or other action on the part of Purchaser. This Agreement has been duly executed and delivered by Purchaser (and all documents this Agreement requires be executed and delivered by Purchaser hereunder will be duly executed and delivered by Purchaser) and this Agreement constitutes, and the other documents will constitute, the valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms except as such enforceability may be limited by applicable bankruptcy or other similar laws affecting the rights and remedies of creditors generally as well as to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

(d) Independent Investigation. Purchaser has been afforded an opportunity to (i) examine the Assets, including the Data, and such materials and documents as it has requested to be provided to it by Seller, (ii) discuss with representatives of Seller such materials and the nature and operation of the Assets and (iii) investigate the condition of the Properties and Contracts. In entering into this Agreement,



Purchaser has relied solely on the express representations and covenants of Seller in this Agreement, its independent investigation of, and judgment with respect to, the Equipment and the other Assets and the advice of its own legal, tax, economic, environmental, engineering, geological and geophysical advisors and not on any comments or statements of any representatives of, or consultants or advisors engaged by, Seller.

(e) Litigation. There is no litigation, proceeding or investigation pending, or to Purchaser's knowledge, threatened against or affecting Purchaser that questions the validity or enforceability of this Agreement or any other document, instrument or agreements to be executed and delivered by Purchaser in connection with the transactions contemplated hereby.

(f) Broker's Fees. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Purchaser for which Seller has or will have any liabilities or obligations (contingent or otherwise).

(g) Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to Purchaser's knowledge, threatened against Purchaser

(h) Qualifications. As of the Execution Date, Purchaser is qualified to own and assume operatorship (or to continue operatorship) of the Properties, and the consummation of the transactions contemplated by this Agreement will not cause Purchaser to be disqualified as such owner or operator. Prior to the Execution Date, Purchaser has obtained and will maintain in effect, lease bonds and any other surety bonds as may be required by, and in accordance with, all applicable laws governing the ownership and operation of the Properties. Purchaser will file any and all required reports necessary for the aforementioned operations with all governmental authorities having jurisdiction over such operations. To Purchaser's knowledge, there are no matters or circumstances applicable to Purchaser that would preclude or inhibit unconditional approval by governmental authorities of the assignment of the Properties from the Seller to Purchaser.

(i) Financing. As of the Execution Date, Purchaser has sufficient cash, available lines of credit or other sources of immediately available funds (in United States dollars) to enable Purchaser to pay the Adjusted Purchase Price to the Seller on the Execution Date and to pay all expenses incurred by Purchaser in connection with this Agreement and the transactions contemplated hereby.

(j) Investment. Purchaser is an experienced and knowledgeable investor in the oil and gas business. Prior to entering into this Agreement, Purchaser was advised by and has relied solely on its own legal, tax and other professional counsel concerning this Agreement, the Assets and the value thereof. In making the decision to enter into this Agreement and consummate the transactions contemplated hereby, Purchaser has relied solely on the basis of its own independent valuation and due diligence investigation of the Assets.

## 10. Closing.

(a) Consumption of the purchase and sale transaction as contemplated by this Agreement (the "Closing") shall occur contemporaneously with the execution of this Agreement and shall be conditioned upon the following:

(i) The Parties shall execute and deliver an assignment in the form of the Assignment and Bill of Sale attached hereto as Exhibit B (the "Assignment and Bill of Sale") for the conveyance of the Assets from Seller to Purchaser, save and except any Leases identified on Schedule 8(i) upon which consents and/or preferential right waivers have yet to be obtained. For the avoidance of doubt, at Closing Seller will deliver and receive consideration for (i) those Leases not subject to any consent or preferential right, (ii) those Leases subject to a consent that has been obtained or waived, (iii) those Leases subject to a preferential right that has been waived, or (iv) those Leases subject to a consent or preferential right requirement that has been waived by Purchaser.



(ii) Purchaser shall deliver to Seller in immediately available funds and pursuant to any wiring instructions provided by Seller an amount equal to the Purchase Price less any amounts withheld because of the failure to obtain a consent or waiver of a preferential right. Each Seller appoints Prime Operating Company to receive all payments of the Purchase Price, and shall hold Purchaser harmless from any claim for payments so delivered. Prime Operating Company shall deliver to each Seller its allocated share of the Purchase Price.

(iii) Seller shall deliver a certificate of non-foreign status in form and substance satisfactory to Purchaser.

(iv) The Parties shall deliver such additional documents as are customary in similar transactions as might be reasonably requested by the other Party.

(b) Closing shall occur on or before January 23, 2017. Should Closing fail to occur by January 25, 2017, this Agreement shall terminate and will be of no further force and effect.

(c) After Closing, if, as and when consents to assign or waivers of a preferential right in form and substance satisfactory to Purchaser are obtained as to a Lease identified on Schedule 8(i), Purchaser shall pay to Seller the Allocated Value attributable to such Lease. Leases for which consents or waivers of a preferential right have not been obtained within thirty (30) days following Closing shall be excluded from this Agreement, unless Purchaser waives obtaining consent or waiver. Likewise, if, as and when consents to assign or waivers of preferential rights are obtained, Seller shall, upon delivery of consideration allocated to the affected Lease(s), provide an additional assignment of said Lease(s) to Purchaser, in the same form as Exhibit B.

11. Allocation of Expenses and Revenues. Seller shall be entitled to all amounts realized from and accruing to the Assets prior to the Effective Time including the right to all Production, storage, processing and inventory and shall be responsible for all Expenses for the ownership, development and operation of the Assets prior to the Effective Time. Purchaser shall be entitled to any amounts realized from and accruing to the Assets on or after the Effective Time and shall be responsible for all Expenses for the ownership, development and operation of the Assets on or after the Effective Time.

12. Taxes. Severance and other production taxes attributable to the Production shall be the obligation of the Party entitled to such Production. All other property taxes and ad valorem taxes assessed against the Properties shall be prorated between Seller and Purchaser as of the Effective Time if and as paid, whether before or after the post-closing accounting (as set forth in Section 13)

13. Post-Closing Accounting. A post-Closing accounting shall be held no later than ninety (90) days after the date hereof. The Final Settlement Statement shall be prepared by Purchaser and approved by both Parties. Such account shall be settled between the Parties by the payment of cash, as appropriate, pursuant to a final settlement statement setting forth any adjustments to the Purchase Price made in accordance with Section 5 and taking into account any payments related to such matters made as of the date hereof (the "Final Settlement Statement").

14. Survival. All of the covenants, agreements, representations and warranties (other than the Fundamental Representations) made by the Parties in this Agreement shall survive the Closing, in each case, for a period of 12 months, and they shall not be merged into or superseded by the Assignment and Bill of Sale or other documents delivered hereunder. The representations and warranties set forth in Sections 8(a), 8(b), 8(c), 8(q), 9(a), 9(b), 9(c) and 9(f) (the "Fundamental Representations") shall survive the Closing indefinitely, and they shall not be merged into or superseded by the Assignment and Bill of Sale or other documents delivered hereunder.



15. Disclaimers. OTHER THAN THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT AND IN THE ASSIGNMENT AND BILL OF SALE, SELLER MAKES NO, AND EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) TITLE TO ANY OF THE ASSETS, (II) THE CONTENTS, CHARACTER OR NATURE OF ANY DESCRIPTION MEMORANDUM, OR ANY REPORT OF ANY PERTOLEUM ENGINEERING CONSULTANT, OR ANY GEOLOGICAL OR SEISMIC DATA OR INTERPRETATION, RELATING TO THE ASSETS, (III) THE QUANTITY, QUALITY, OR RECOVERABILITY OF PERTOLEUM SUBSTANCES IN OR FROM THE ASSETS, (IV) THE EXISTENCE OF ANY PROSPECT, RECOMPLETION, INFILL, OR STEP-OUT DRILLING OPPORTUNITIES, (V) ANY ESTIMATES OF THE VALUE OF THE ASSETS OR FUTURE REVENUES GENERATED BY THE ASSETS, (VI) THE PRODUCTION OF PERTOLEUM SUBSTANCES FROM THE ASSETS, OR WHETHER PRODUCTION HAS BEEN CONTINUOUS, OR IN PAYING QUANTITIES, OR ANY PRODUCTION OR DECLINARIES, (VII) THE MAINTENANCE, REPAIR, CONDITION, ENVIRONMENTAL CONDITION, QUALITY, SUSTABILITY, DESIGN, OR MARKETABILITY OF THE ASSETS, (VIII) INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT, (IX) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE AVAILABLE OR COMMUNICATED TO PURCHASER OR ITS AFFILIATES, OR ITS OR THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES, OR ADVISORS IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND ANY DOCUMENTS EXECUTED HEREUNDER OR ANY DISCUSSION OR PRESENTATION RELATING THERETO OR (X) COMPLIANCE WITH ANY ENVIRONMENTAL LAW, AND FURTHER DISCLAIM ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OF ANY EQUIPMENT, IT BEING EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES THAT THE ASSETS ARE BEING TRANSFERRED "AS IS, WHERE IS," WITH ALL FAULTS AND DEFECTS, AND THAT PURCHASER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS PURCHASER DEEMS APPROPRIATE.

## 16. Assumed and Retained Obligations.

(a) Subject to Seller’s indemnity obligations set forth in Section 18, Purchaser hereby assumes all duties, obligations and liabilities of every kind and character with respect to the Assets or the ownership or operation thereof occurring at or after the Effective Time arising out of (i) the terms and conditions of the Contracts or Leases comprising all or any part of the Assets; (ii) the physical condition of the Assets; (iii) obligations to properly plug and abandon or re-plug or re-abandon or remove wells, flowlines, gathering lines or other facilities, equipment or other personal property or fixtures comprising part of the Assets; (iv) obligations to restore the surface of the Properties and obligations to bring the Properties into compliance with applicable environmental laws (including conducting any remediation activities that may be required on or otherwise in connection with activities on the Properties); and (v) any other duty, obligation, event, condition, or liability expressly assumed by Purchaser under the terms of this Agreement or any document executed in connection herewith (the “Assumed Obligations”).

(b) Subject to Purchaser’s indemnity obligations set forth in Section 17, Seller hereby retains all duties, obligations and liabilities of every kind and character with respect to (i) the items in subparts (i) - (v) in Section 16(a) above to the extent occurring prior to the Effective Time, (ii) actions, suits or proceedings against Seller or with respect to the Assets that are pending or threatened in writing as of the Closing Date; (iii) any personal injury or death occurring on or attributable to the Assets prior to



the Closing Date; (iv) the payment or mis-payment of royalties, rentals and other similar payments prior to the Closing Date; (v) the payment or mis-payment of any property taxes and/or ad valorem taxes prorated and allocable to Seller pursuant Section 12; and (vi) the Excluded Assets (collectively, the "Retained Obligations").

17. Purchaser's Indemnification. PURCHASER SHALL HEREAFTER RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS SELLER AND SELLER'S INTEREST HOLDERS, PARTNERS, MEMBERS, MANAGERS, AFFILIATES, AND ITS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, MANAGERS, EMPLOYEES, AGENTS, SPONSORS, PARTNERS, REPRESENTATIVES, MEMBERS, SHAREHOLDERS, AFFILIATES, SUBSIDIARIES, SUCCESSORS, HEIRS AND ASSIGNS (COLLECTIVELY, THE "SELLER INDEMNITIES") FROM AND AGAINST ANY AND ALL LOSSES AS A RESULT OF, ARISING OUT OF, OR RELATED TO (I) ANY BREACH OF ANY REPRESENTATION OR WARRANTY OF PURCHASER CONTAINED HEREIN OR IN ANY CERTIFICATE, DOCUMENT OR OTHER INSTRUMENT DELIVERED BY OR ON BEHALF OF PURCHASER IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY, TO THE EXTENT AND ONLY UNTIL THE TERMINATION DATE OF EACH SUCH REPRESENTATION OR WARRANTY; (II) ANY BREACH OF OR FAILURE BY PURCHASER TO PERFORM ANY COVENANT OR OBLIGATION CONTAINED HEREIN, TO THE EXTENT AND ONLY UNTIL THE TERMINATION DATE OF EACH SUCH COVENANT OR OBLIGATION; AND (III) ANY OF PURCHASER'S ASSUMED OBLIGATIONS, REGARDLESS OF WHETHER CAUSED OR CONTRIBUTED TO BY THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL FAULT OF ANY OF THE SELLER INDEMNITIES, BUT EXCLUDING SELLER INDEMNITIES' GROSS NEGLIGENCE AND WILLFUL MISCONDUCT, WHICH INDEMNIFICATION OBLIGATION SHALL SURVIVE INDEBILITY. FROM AND AFTER THE DATE HEREOF, INDEMNIFICATION UNDER THIS SECTION 17 SHALL BE SELLER'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO ANY BREACH HEREUNDER. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IN THE EVENT THAT A CLAIM FOR INDEMNIFICATION IS TIMELY MADE WITHIN THE APPLICABLE SURVIVAL PERIOD SET FORTH ABOVE, SUCH SURVIVAL PERIOD SHALL BE EXTENDED (SOLELY WITH RESPECT TO SUCH CLAIM FOR INDEMNIFICATION TIMELY MADE WITHIN THE APPLICABLE SURVIVAL PERIOD SET FORTH ABOVE) UNTIL THE FINAL RESOLUTION OF SUCH CLAIM.

18. Seller's Indemnification. SELLER SHALL HEREAFTER RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS PURCHASER AND PURCHASER'S INTEREST HOLDERS, PARTNERS, MEMBERS, MANAGERS, AFFILIATES, AND ITS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, MANAGERS, EMPLOYEES, AGENTS, SPONSORS, PARTNERS, REPRESENTATIVES, MEMBERS, SHAREHOLDERS, AFFILIATES, SUBSIDIARIES, SUCCESSORS, HEIRS AND ASSIGNS (COLLECTIVELY, THE "PURCHASER INDEMNITIES") FROM AND AGAINST ANY AND ALL LOSSES AS A RESULT OF, ARISING OUT OF, OR RELATED TO (I) ANY BREACH OF ANY REPRESENTATION OR WARRANTY OF SELLER CONTAINED HEREIN OR IN ANY CERTIFICATE, DOCUMENT OR OTHER INSTRUMENT DELIVERED BY OR ON BEHALF OF SELLER IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY, TO THE EXTENT AND ONLY UNTIL THE TERMINATION DATE OF EACH SUCH REPRESENTATION OR WARRANTY; (II) ANY BREACH OF OR FAILURE BY SELLER TO PERFORM ANY COVENANT OR OBLIGATION CONTAINED HEREIN, TO THE EXTENT AND ONLY UNTIL THE TERMINATION DATE OF EACH SUCH COVENANT OR OBLIGATION, AND (III) ANY OF SELLER'S RETAINED OBLIGATIONS, REGARDLESS OF WHETHER CAUSED OR CONTRIBUTED TO BY THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF ANY OF THE PURCHASER INDEMNITIES, BUT EXCLUDING PURCHASER INDEMNITIES' GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, WHICH INDEMNIFICATION OBLIGATION SHALL SURVIVE INDEBILITY. FROM AND AFTER THE DATE HEREOF, INDEMNIFICATION UNDER THIS



SECTION 18 SHALL BE PURCHASER'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO ANY BREACH HEREUNDER. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IN THE EVENT THAT A CLAIM FOR INDEMNIFICATION IS TIMELY MADE WITHIN THE APPLICABLE SURVIVAL PERIOD SET FORTH ABOVE, SUCH SURVIVAL PERIOD SHALL BE EXTENDED (SOLELY WITH RESPECT TO SUCH CLAIM FOR INDEMNIFICATION TIMELY MADE WITHIN THE APPLICABLE SURVIVAL PERIOD SET FORTH ABOVE) UNTIL THE FINAL RESOLUTION OF SUCH CLAIM.

19. Claim Notice. To make a claim under Section 17 or Section 18 (as applicable), the Party entitled to indemnification (the "Indemnified Party") must notify the Party having an obligation under Section 17 or Section 18 (as applicable) (the "Indemnifying Party") of its claim under this Section 19 (a "Claim"), including the specific details of and specific basis under this Agreement for its claim (the "Claim Notice"). The Indemnifying Party shall have 30 days from its receipt of the Claim Notice (a) to cure the Losses complained of, (b) to admit its liability for those Losses, or (c) to dispute the claim for those Losses. If the Indemnifying Party does not notify the Indemnified Party within this 30-day period that it has cured the Losses or that it disputes the claim for those Losses, the amount of those Losses shall conclusively be deemed a liability of the Indemnifying Party.

20. Exclusive Remedy. Notwithstanding anything to the contrary contained in this Agreement, from and after the date hereof, Seller's and Purchaser's sole and exclusive remedy against each other with respect to the purchase and sale of the Assets shall be pursuant to the express provisions of this Agreement and the Assignment and Bill of Sale.

21. WAIVER OF CONSUMER RIGHTS, PURCHASER HEREBY WAIVES ITS RIGHTS UNDER THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE, OF THE TEXAS BUSINESS AND COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF PURCHASER'S OWN SELECTION, PURCHASER HEREBY VOLUNTARILY CONSENTS TO THIS WAIVER. TO EVIDENCE ITS ABILITY TO GRANT SUCH WAIVER, PURCHASER HEREBY REPRESENTS AND WARRANTS TO SELLER THAT PURCHASER (A) IS IN THE BUSINESS OF SEEKING OR ACQUIRING, BY PURCHASE OR LEASE, GOODS OR SERVICES FOR COMMERCIAL OR BUSINESS USE, (B) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTION CONTEMPLATED HEREBY, AND (C) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION.

22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original instrument, but all such counterparts together shall constitute but one agreement.

23. Binding Agreement. This Agreement shall bind and inure to the Parties hereto and their respective successors and assigns.

24. Notices. All notices that are required or may be given pursuant to this Agreement shall be sufficient in all respects if given in writing, in English and delivered personally, by facsimile or by recognized courier service, as follows:

If to Seller:

PrimeEnergy Corporation
9821 Katy Freeway, Ste. 1050
Houston, TX 77024
Attention: Kevin M. Fortney
Telephone: 713.735.0000
Facsimile: 713.735.0090



If to Purchaser:

Guidon Operating LLC
400 E. Las Colinas Blvd., Suite 900
Irving, Texas 75039
Attention: Land Department
Telephone: (972) 427-1698
Facsimile: (469) 677-1783

Either Party may change its address for notice by notice to the other in the manner set forth above. All notices shall be deemed to have been duly given at the time of receipt by the Party to which such notice is addressed.

25. Sales or Use Tax, Recording Fees and Similar Taxes and Fees. Notwithstanding anything to the contrary in this Agreement, Purchaser shall bear any sales, use, excise, real property transfer or gain, gross receipts, goods and services, registration, capital, documentary, stamp or transfer taxes, recording fees, and similar taxes and fees incurred and imposed upon, or with respect to, the property transfers or other transactions contemplated hereby. Should Seller or any affiliate thereof pay any amount for which Purchaser is liable under this Section 25, Purchaser shall, promptly following receipt of Seller's invoice, describing the amount in reasonable detail, reimburse the amount paid. If such transfers are exempt from any such taxes or fees upon the filing of an appropriate certificate or other evidence of exemption, Purchaser shall timely furnish to Seller such certificate or evidence.

26. Expenses. Except as otherwise provided in this Agreement, all expenses incurred by Seller in connection with or related to the authorization, preparation or execution of this Agreement, and the exhibits hereto, and all other matters related hereto, including all fees and expenses of counsel, accountants, brokers and financial advisers employed by Seller, shall be borne solely and entirely by Seller, and all such expenses incurred by Purchaser shall be borne solely and entirely by Purchaser.

## 27. Records.

(a) As soon as practicable, but in no event later than 30 days after the date hereof, Seller shall deliver or cause to be delivered to Purchaser any Data that is in the possession of Seller or its affiliates, subject to the next sentence. Seller may retain the originals of those records relating to tax and accounting matters and provide Purchaser, at its request, with copies of such records other than records that pertain solely to income tax matters related to the Assets. Seller may retain copies of any other records.

(b) Purchaser, for a period of two years following the date hereof, shall:

(i) retain the Data;

(ii) provide Seller, its affiliates, and each of their respective representatives with reasonable access to the records during normal business hours for review and copying at Seller's expense; and

(iii) provide Seller, its affiliates, and each of their respective representatives with reasonable access, during normal business hours, to (A) materials received or produced relating to Seller's obligations under this Agreement, in each case, for review and copying at Seller's expense and (B) to Purchaser's personnel for the purpose of discussing any such matter or claim.

28. Governing Law. This Agreement and the legal relations between the Parties shall be governed by and construed in accordance with the laws of the State of Texas, without regard to principles of conflicts of laws that would direct the application of the laws of another jurisdiction.



29. Jurisdiction: Jury Waiver. THE PARTIES CONSENT TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE OF TEXAS FOR ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE OTHER DOCUMENTS EXECUTED PURSUANT TO OR IN CONNECTION WITH THIS AGREEMENT. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR THE OTHER DOCUMENTS EXECUTED PURSUANT TO OR IN CONNECTION WITH THIS AGREEMENT SHALL BE LITIGATED (IF AT ALL) ONLY IN THE DISTRICT COURTS OF TEXAS IN DALLAS COUNTY OR (IF IT HAS JURISDICTION) THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS LOCATED IN DALLAS COUNTY, TEXAS. EACH PARTY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT, OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.

30. Entire Agreement. This Agreement and the documents to be executed hereunder and the Exhibits attached hereto constitute the entire agreement among the Parties pertaining to the subject matter hereof, and supersede all prior agreements, understandings, negotiations, and discussions, whether oral or written, of the Parties pertaining to the subject matter hereof; provided, however, any confidentiality, non-disclosure or similar agreements executed prior to the date hereof by the Parties shall continue to survive pursuant to the terms of such agreement(s).

31. Further Assurances. After Closing, each Party agrees to take such further actions and to execute, acknowledge and deliver all such further documents as are reasonably requested by the other Parties for carrying out the purposes of this Agreement or of any document delivered pursuant to this Agreement.

32. No Third-Party Beneficiaries. Nothing in this Agreement shall entitle any person other than Purchaser and Seller to any claim, cause of action, remedy or right of any kind, except the rights expressly provided to the persons described in this Agreement.

33. Severability. If any provision of this Agreement, or any application thereof, is held invalid, illegal, or unenforceable in any respect under any law, this Agreement shall be reformed to the extent necessary to conform, in each case consistent with the intention of the Parties, to such law, and, to the extent such provision cannot be so reformed, then such provision (or the invalid, illegal, or unenforceable application thereof) shall be deemed deleted from (or prohibited under) this Agreement, as the case may be, and the validity, legality, and enforceability of the remaining provisions contained herein (and any other application of such provision) shall not in any way be affected or impaired thereby.

34. Time of the Essence. Time is of the essence in this Agreement. If the date specified in this Agreement for giving any notice or taking any action is not a business day (or if the period during which any notice is required to be given or any action taken expires on a date which is not a business day), then the date for giving such notice or taking such action (and the expiration of such period during which notice is required to be given or action taken) shall be the next day which is a business day.

35. Limitation on Damages. Notwithstanding anything to the contrary contained herein, neither Purchaser nor Seller, nor any of their respective affiliates shall be entitled to consequential, special, or punitive damages in connection with this Agreement and the transactions contemplated hereby (other than consequential, special, or punitive damages suffered by third party for which responsibility is allocated between the Parties pursuant to this Agreement) and Purchaser and Seller, for themselves and on behalf of their respective affiliates, hereby expressly waive any right to consequential, special, or punitive damages in connection with this Agreement and the transactions contemplated hereby (other than consequential, special, or punitive damages suffered by third party for which responsibility is allocated between the Parties pursuant to this Agreement).



## 36. Limitations as to Excluded Wellbors.

(a) As part of the consideration for the purchase of the Assets, Seller acknowledges that it retains no right to drill any additional wells on the Leases, even to replace an Excluded Wellbore that is lost for mechanical or any other reason. Furthermore, Seller will have no right to deepen or recomplete an Excluded Wellbore. Seller may plug back an Excluded Wellbore and may rework an Excluded Wellbore in any zone from which such Excluded Wellbore is producing as of the Effective Time. In connection with the retention of the Excluded Wellbors, Seller also will retain:

(i) all related personal property and equipment and the right to produce the Excluded Wellbors and save and sell the production attributable to said Excluded Wellbors, subject to the terms of this Agreement;

(ii) Subject to all the terms of this Agreement, sufficient rights in the Leases to produce the Excluded Wellbors under the applicable Texas Railroad Commission rules; and

(iii) Equal and concurrent access to the surface of the Lands, in accordance with the terms of the Leases, for ingress and egress to operate the Excluded Wellbors and performing other functions reasonably necessary to produce hydrocarbons from the Excluded Wellbors.

(b) After Closing, if there are existing joint operating agreements binding on the Leases Seller will use its best efforts, to obtain on or before April 1, 2017:

(i) a valid and properly executed release of the Leases from the terms of such joint operating agreements except as to the Excluded Wellbors, in a form acceptable to Purchaser in its sole discretion, so that Purchaser may operate the undeveloped portions of the Leases free and clear of the applicable joint operating agreement or agreements; or

(ii) a valid and properly executed amendment to the applicable joint operating agreement or agreements, in a form acceptable to Purchaser in its sole discretion, providing for:

(1) Purchaser to operate the wells drilled by Purchaser on the Leases, notwithstanding that Seller remains as operator of the Excluded Wellbors; and

(2) Waiving any claims by the remaining working interest owners with respect to the maintenance of uniform interest provisions in the applicable agreements, if any. The document referred to in (i) or (ii), as applicable will be referred to as the “OA Instrument.”

(c) In the event Seller fails to deliver the OA Instruments as required, Seller will hold Purchaser harmless from and against any claims by working interest owners under any joint operating agreements arising or resulting from the conveyance of the Leases to Purchaser, including but not limited to claims for violation of the maintenance of uniform interest provision under any such joint operating agreement.

(d) Seller agrees that it will provide all reasonable support requested by Purchaser for obtaining permits, field rules, determinations, approvals, and any other action from the Texas Railroad Commission, including but not limited to Rule 37 and Rule 38 density exceptions and Statewide Rule 40(d) (16 Texas Admin. Code §3.40(d)) exceptions necessary to permit duplicate assignment of acreage, that may be necessary or useful in the formation of units and/or the drilling of any wells on the Leases by Purchaser, . Such support may include, but is not limited to, the submission of support and waiver letters to the RRC. Any requested filings or letters shall be provided within fourteen (14) days following the request.



(i) If an Excluded Wellbore that is the last producing well on a Lease or a segregated portion of a Lease that is treated separately for purposes of lease maintenance is shut-in or fails to produce for fourteen (14) consecutive days, Seller must notify Purchaser in writing as soon as reasonably possible, but in no event later than seven (7) days after such fourteen (14) day period (such notice, an “Event Notice”). The Event Notice shall state whether Seller intends to take steps to attempt to return the Excluded Wellbore to production.

(ii) Upon receipt of an Event Notice stating that Seller will not take steps to attempt to return the relevant Excluded Wellbore to production, Purchaser will have the option to receive an assignment of Seller's interest in the applicable Excluded Wellbore and assume operations of the affected Excluded Wellbore by giving Seller written notice within fourteen (14) days of receiving the Event Notice, and paying Seller the Salvage Value, unless Seller demonstrates to Purchaser's reasonable satisfaction that the event that is the subject of the Event Notice has been or will be cured. The term "Salvage Value" means the excess, if any, of the value of the personal property and equipment associated with the applicable Excluded Wellbore, but specifically excluding any personal property and/or equipment which is still being utilized by Seller, less the estimated cost of plugging the Excluded Wellbore and restoring the surface of the affected portion of the Land. If the estimated cost of plugging exceeds the value of the personal property and equipment, no money will change hands upon this assignment and Purchaser will assume the obligation to properly plug and abandon the Excluded Wellbore. If Purchaser exercises its option to acquire such Excluded Wellbore the assignment from the Seller to Purchaser will be in the form of the Excluded Wellbore assignment attached as Exhibit "C". The obligations under this Section 36 will terminate three (3) years after the Effective Time.

(f) If, within three (3) years after the Effective Time, Seller (i) extends or renews any Lease covering any portion of the Lands, or (ii) takes a new lease covering any interest previously covered by a Lease that has terminated or expired and covers any portion of the Lands within two years of the date such Lease terminated, expired, or would have terminated absent the renewal or extension; or (iii) acquires additional undivided interests in the Leases; to the extent such additional interests cover the Lands (any such new lease, renewal, extension or additional undivided interest on Lands will be referred to herein as an “Interest” or collectively as “Interests”), Seller shall, within thirty (30) days of finalizing the acquisition, offer to the Purchaser the right to purchase the Interest by paying the Seller’s costs (such costs to include, but are not necessarily limited to, lease bonus, option payments, broker fees, filing fees and cost of third party title examination). If an acquisition of Interests includes Interests in Outgoing Lands and other lands, the Seller will only be required to offer the Interests in Lands. When less than all tracts covered by an acquisition of several Interests is offered, the Seller’s cost applicable to the Interests offered will be that portion of the total cost equal to the ratio of the offered Interests to the total acquisition on a net acre basis. If two or more Interests are included in a single notice, the Purchaser will have the right to make separate elections as to each of the acquired Interests.

(i) An offer made pursuant to this provision must be in writing and include sufficient information for the Purchaser to reasonably evaluate the offer, including, a complete description of the acquired Interest and information specifying the number of gross and net acres, existing overriding royalties or other burdens affecting the Interest, the purchase price and the terms of the acquisition, as well as the actual acquisition costs, the obligations required to earn such interest, including bonus considerations or equivalent if other than cash, broker's fees, recording fees, and rentals, and any other information the acquiring party deems relevant to the acquisition of the Interest. The Purchaser the offer will have thirty (30) days (the "Acceptance Period") following receipt of such notice in which to elect to participate in the acquisition and to submit payment to the Seller. Payment shall be made by wire transfer of immediately available funds to an account designated by the Seller. The failure to reply in writing to an offer and submit payment within the time period specified herein will be deemed to be a refusal to participate.



(ii) If the Purchaser elects to accept the offer, the acquiring party shall assign the Interest to the Purchaser within ten (10) business days of receiving the purchaser's payment, free and clear of any burdens other than those incurred by the acquiring party to acquire the Interest. Failure of the Purchaser to (i) respond to an acquisition notice, or (ii) pay the costs within the Acceptance Period will be deemed an election not to acquire a share of the Interest.

(iii) If an Interest is to be earned by drilling a well or wells or shooting seismic, the Purchaser must ratify all appropriate agreements within the Acceptance Period and agree to participate in and pay for in such required operations. If the Purchaser fails to ratify such agreements or fails to pay for its share of such Interest, the Seller shall hold such interest free and clear of any further obligations under this Agreement.

(iv) Notwithstanding anything herein to the contrary, the provisions set forth in this Section 36 will not apply to any acquisitions which (i) result from a merger, consolidation, reorganization with, by, or between a parent company, subsidiary, or affiliated company of either of the parties, or (ii) result from a merger or acquisition of the stock of another company or all of an entity or partnership or an acquisition of all or substantially all of the assets of an entity by the acquiring party, whether by cash, like-kind exchange, stock purchase or otherwise.

(g) Seller and Purchaser shall each maintain their own surface facilities and equipment. If any Party damages the surface facilities or equipment of the other Party, the Party damaging the surface facilities or equipment shall be responsible for any costs to repair or replace any such surface facilities or equipment. Each Party shall be responsible for repairing any damage to jointly used roads or easements caused by its operations.

37. No Recourse. Notwithstanding anything herein or in any agreement, instrument or document delivered in connection with this Agreement, the Assignment or any associated agreement, (i) Seller hereby acknowledges, and agrees, that no person other than Purchaser, including any current or former director, officer, employee, member, manager, director, partner, investor, shareholder, agent, representative or affiliate (the "Purchaser Non-Recourse Parties"), shall have any liability to Seller, and Seller shall have no recourse against any person other than Purchaser in connection with any liability, claim or cause of action arising out of, or in relation to, this Agreement, the Assignment and Bill of Sale, the transactions contemplated hereby and thereby and any instruments, documents or discussions in connection therewith, whether pursuant to any attempt to pierce the corporate veil, any claims for fraud, negligence or misconduct or any other claims otherwise available or asserted at law or in equity. Seller acknowledges and agrees that the Purchaser Non-Recourse Parties have participated in and will continue to participate in (directly or indirectly) investments in the oil and gas and exploration and production industry that may, are or will be competitive with the Assets and Seller's business ("Purchaser Other Investments"). Not in limitation of the foregoing, Seller hereby expressly waives any potential conflicts of interest, and none of the Purchaser Non-Recourse Parties shall have any liability to Seller under this Agreement or the transactions contemplated hereby in connection with such Purchaser Other Investments, and (ii) Purchaser hereby acknowledges, and agrees, that no person other than Seller, including any current or former director, officer, employee, member, manager, director, partner, investor, shareholder, agent, representative or affiliate (the "Seller Non-Recourse Parties"), shall have any liability to Purchaser, and Purchaser shall have no recourse against any person other than Seller in connection with any liability, claim or cause of action arising out of, or in relation to, this Agreement, the Assignment and Bill of Sale, the transactions contemplated hereby and thereby and any instruments, documents or discussions in connection therewith, whether pursuant to any attempt to pierce the corporate veil, any claims for fraud, negligence or misconduct or any other claims otherwise available or asserted at law or in equity. Purchaser acknowledges and agrees that the Seller Non-Recourse Parties have participated in and will continue to participate in (directly or indirectly) investments in the oil and gas and exploration and production industry that may, are or will be competitive with the Assets and Purchaser's business ("Seller's Other Investments"). Not in limitation of the foregoing, Purchaser hereby expressly waives any potential conflicts of interest, and none of the Seller Non-Recourse Parties shall have any liability to Purchaser under this Agreement or the transactions contemplated hereby in connection with such Seller Other Investments.

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IN WITNESS WHEREOF, Seller and Purchaser have executed and delivered this Agreement as of the date first set forth above. 

## SELLER: 

## PRIMEENERGY CORPORATION 

By: /s/ Beverly A. Cummings Name: Beverly A. Cummings Title: Executive Vice President 

## PRIMEENERGY MANAGEMENT CORPORATION 

By: /s/ Beverly A. Cummings Name: Beverly A. Cummings Title: Executive Vice President 

## PRIMEENERGY ASSET & INCOME FUND, L.P. A-2 

By: PRIMEENERGY MANAGEMENT CORPORATION, its General Partner 

By: /s/ Beverly A. Cummings Name: Beverly A. Cummings Title: Executive Vice President 

## PRIMEENERGY ASSET & INCOME FUND, L.P. A-3 

By: PRIMEENERGY MANAGEMENT CORPORATION, its General Partner 

By: /s/ Beverly A. Cummings Name: Beverly A. Cummings Title: Executive Vice President 

## PRIMEENERGY ASSET & INCOME FUND, L.P. AA-2 

By: PRIMEENERGY MANAGEMENT CORPORATION, its General Partner 

By: /s/ Beverly A. Cummings Name: Beverly A. Cummings Title: Executive Vice President



## PRIMEENERGY ASSET & INCOME FUND, L.P. AA-4

By: PRIMEENERGY MANAGEMENT CORPORATION, its General Partner

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President

## PRIME OPERATING COMPANY

By: /s/ Beverly A. Cummings
Name: Beverly A. Cummings
Title: Executive Vice President

## PURCHASER:

## GUIDON OPERATING LLC

By: /s/ Jay P. Still
Name: Jay P. Still
Title: President and Chief Executive Officer

Exhibit B – Form of Assignment and Bill of Sale



<table><tr><td>Lessor</td><td>Lessee</td><td>Lease Executed Date</td><td>Lease Date</td><td>County</td><td>Section</td><td>Block</td><td>Survey</td><td>Tract</td><td>Lease Vol/Pg</td></tr><tr><td>JP Morgan Chase Bank, Trustee</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/554</td></tr><tr><td>Ronald J. Nail Revocable Trust, et al</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/557</td></tr><tr><td>Mallard Royalty Partners</td><td>PrimeEnergy Corporation</td><td>12/20/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/563</td></tr><tr><td>Mallard Royalty Partners</td><td>PrimeEnergy Corporation</td><td>12/20/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/566</td></tr><tr><td>Burley Revocable Living Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/572</td></tr><tr><td>Burley Revocable Living Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/575</td></tr><tr><td>J.H.B. Oil and Gas Company, LLC</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/581</td></tr><tr><td>J.H.B. Oil and Gas Company, LLC</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/584</td></tr><tr><td>Sharon Lynn Gilbert GST Exempt Trust and the Sharon Lynn Gilbert Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/590</td></tr><tr><td>Sharon Lynn Gilbert GST Exempt Trust and the Sharon Lynn Gilbert Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/593</td></tr><tr><td>Dennis Barrie Stimson GST Exempt Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/599</td></tr><tr><td>Dennis Barrie Stimson GST Exempt Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/602</td></tr><tr><td>Morris Jerome Stimson GST Exempt Trust and Stimson Energy Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/608</td></tr><tr><td>Morris Jerome Stimson GST Exempt Trust and Stimson Energy Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>330/611</td></tr><tr><td>J.H. Nail, Jr., et al Trust, Texas American Bank, Trustee</td><td>Brazos Petroleum Company</td><td>1/14/1985</td><td>4/1/1985</td><td>Martin</td><td>2</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SW/4</td><td>254/13</td></tr><tr><td>Ronald J. Nail Revocable Trust, et al</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/560</td></tr><tr><td>Mallard Royalty Partners</td><td>PrimeEnergy Corporation</td><td>12/20/2011</td><td>3/7/2012</td><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/569</td></tr><tr><td>Burley Revocable Living Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>330/578</td></tr></table>



<table><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>



<table><tr><td rowspan="2">Exchange Oil &amp; Gas Corporation</td><td rowspan="2">The Superior Oil Company</td><td rowspan="2">10/5/1983</td><td rowspan="2">11/16/1983</td><td rowspan="2">Martin</td><td rowspan="2">14</td><td rowspan="2">36 TIN</td><td rowspan="2">T&amp;P Ry. Co. Sy.</td><td rowspan="2">SE/4</td><td rowspan="2">234/229</td></tr><tr></tr><tr><td>Exchange Oil &amp; Gas Corporation</td><td>The Superior Oil Company</td><td>10/5/1983</td><td>11/16/1983</td><td>Martin</td><td>19</td><td>36 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>W/2</td><td>234/233</td></tr><tr><td>Marjorie E. Bentley and husband, John J. Bentley</td><td>Clean D. Atchison and Gertie Marie Atchison</td><td>1/30/1980</td><td>3/4/1980</td><td>Martin</td><td>20</td><td>36 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>PT NE/4 Lying North of IH20</td><td>193/435</td></tr><tr><td rowspan="3">J.H. Nail, Jr., et al Trust, Texas American Bank, Trustee</td><td rowspan="3">Orseth &amp; Robinson, Inc.</td><td rowspan="3">1/13/1984</td><td rowspan="3">3/21/1984</td><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>238/443</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>356/106</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>356/106</td></tr><tr><td rowspan="3">Burley Revocable Living Trust</td><td rowspan="3">PrimeEnergy Corporation</td><td rowspan="3">9/17/2012</td><td rowspan="3">11/5/2012</td><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>356/112</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>356/112</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>356/112</td></tr><tr><td rowspan="3">Ronald J. Nail Revocable Trust, et al</td><td rowspan="3">PrimeEnergy Corporation</td><td rowspan="3">7/26/2012</td><td rowspan="3">11/5/2012</td><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>361/662</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>361/662</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>361/662</td></tr><tr><td rowspan="3">J.H.B. Oil &amp; Gas Company, LLC</td><td rowspan="3">PrimeEnergy Corporation</td><td rowspan="3">11/8/2012</td><td rowspan="3">1/2/2013</td><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>398/82</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>398/82</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>398/82</td></tr><tr><td rowspan="3">The Flex Family Trust</td><td rowspan="3">PrimeEnergy Corporation</td><td rowspan="3">3/15/2013</td><td rowspan="3">1/17/2014</td><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>398/82</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>398/82</td></tr><tr><td>Martin</td><td>28</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td><td>398/82</td></tr></table>



<table><tr><td rowspan="2">Morris Jerome Stimson GST Exempt Trust</td><td rowspan="2">PrimeEnergy Corporation</td><td rowspan="2">3/15/2013</td><td rowspan="2">1/17/2014</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td rowspan="2">398/92</td></tr><tr><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td></tr><tr><td rowspan="2">Mallard Royalty Partners</td><td rowspan="2">PrimeEnergy Corporation</td><td rowspan="2">12/1/2013</td><td rowspan="2">3/7/2014</td><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SW/4</td><td rowspan="2">403/425</td></tr><tr><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SW/4</td></tr><tr><td rowspan="2">Sharon Lynn Gilbert, Individually and Sharon Lynn Gilbert GST Exempt Trust</td><td rowspan="2">PrimeEnergy Corporation</td><td rowspan="2">2/27/2014</td><td rowspan="2">4/16/2014</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td rowspan="2">407/67</td></tr><tr><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NE/4</td></tr><tr><td rowspan="2">Nathan Heidelberg, Jr. a married man dealing in his sole and separate property</td><td rowspan="2">Brazos Petroleum Company</td><td rowspan="2">9/1/1983</td><td rowspan="2">10/13/1983</td><td rowspan="2">Martin</td><td rowspan="2">29</td><td rowspan="2">35 T1N</td><td rowspan="2">T&amp;P Ry. Co. Sy.</td><td rowspan="2">SW/4</td><td rowspan="2">233/97</td></tr><tr></tr><tr><td rowspan="2">Nathan Heidelberg, a widower</td><td rowspan="2">Brazos Petroleum Company</td><td rowspan="2">9/1/1983</td><td rowspan="2">10/13/1983</td><td rowspan="2">Martin</td><td rowspan="2">29</td><td rowspan="2">35 T1N</td><td rowspan="2">T&amp;P Ry. Co. Sy.</td><td rowspan="2">SW/4</td><td rowspan="2">233/103</td></tr><tr></tr><tr><td rowspan="2">Harlow Royalties, Inc.</td><td rowspan="2">Panther Petroleum Inc.</td><td rowspan="2">9/6/1983</td><td rowspan="2">9/19/1983</td><td rowspan="2">Martin</td><td rowspan="2">29</td><td rowspan="2">35 T1N</td><td rowspan="2">T&amp;P Ry. Co. Sy.</td><td rowspan="2">SW/4</td><td rowspan="2">232/269</td></tr><tr></tr><tr><td rowspan="2">Sue Henson Standefer, a married woman dealing in her sole and separate property</td><td rowspan="2">Brazos Petroleum Company</td><td rowspan="2">9/20/1983</td><td rowspan="2">10/24/1983</td><td rowspan="2">Martin</td><td rowspan="2">29</td><td rowspan="2">35 T1N</td><td rowspan="2">T&amp;P Ry. Co. Sy.</td><td rowspan="2">SW/4</td><td rowspan="2">233/280</td></tr><tr></tr><tr><td rowspan="2">Ruby Henson Haggard, a married woman dealing in her sole and separate property</td><td rowspan="2">Brazos Petroleum Company</td><td rowspan="2">9/20/1985</td><td rowspan="2">11/14/1983</td><td rowspan="2">Martin</td><td rowspan="2">29</td><td rowspan="2">35 T1N</td><td rowspan="2">T&amp;P Ry. Co. Sy.</td><td rowspan="2">SW/4</td><td rowspan="2">234/94</td></tr><tr></tr></table>



<table><tr><td rowspan="2">Kentex Mineral Company</td><td rowspan="2">Brazos Petroleum Company</td><td rowspan="2">1/11/1984</td><td rowspan="2">2/9/1984</td><td>Martin</td><td>29</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td><td rowspan="2">237/95</td></tr><tr><td>Martin</td><td>29</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NW/4</td></tr><tr><td rowspan="5">Nathan Heidelberg</td><td rowspan="5">Palomino Oil Co.</td><td rowspan="5">6/6/1983</td><td rowspan="5">9/7/1983</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>W/2 SE/4</td><td rowspan="5">232/7</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NW/4</td></tr><tr><td rowspan="5">Nathan Heidelberg, Jr.</td><td rowspan="5">Palomino Oil Co.</td><td rowspan="5">6/6/1983</td><td rowspan="5">10/6/1983</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td><td rowspan="5">232/656</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 NE/4</td></tr><tr><td rowspan="5">John M. McWhorter and wife, Loretta McWhorter</td><td rowspan="5">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="5">10/12/1979</td><td rowspan="5">11/19/1979</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td><td rowspan="5">189/472</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 NE/4</td></tr></table>



<table><tr><td rowspan="2"></td><td rowspan="2"></td><td rowspan="2"></td><td rowspan="2" colspan="5">Exhibit A to PSA</td></tr><tr></tr><tr><td rowspan="2">Ralph B. McWhorter, a single man</td><td rowspan="2">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="2">10/17/1979</td><td rowspan="2">1/4/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>W/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td rowspan="4">W.D. McWhorter and wife, Nora R. McWhorter</td><td rowspan="4">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="4">10/17/1979</td><td rowspan="4">1/4/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td rowspan="4">Grace Brown McWhorter LeMonds, a widow</td><td rowspan="4">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="4">10/17/1979</td><td rowspan="4">1/4/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td rowspan="4">Grace Brown McWhorter LeMonds, a widow</td><td rowspan="4">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="4">10/17/1979</td><td rowspan="4">1/4/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td rowspan="4">Grace Brown McWhorter LeMonds, a widow</td><td rowspan="4">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="4">10/17/1979</td><td rowspan="4">1/4/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td></tr></table>



<table><tr><td rowspan="4">Sue Henson Standefer</td><td rowspan="4">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="4">10/7/1980</td><td rowspan="4">10/30/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 SE/4</td><td rowspan="4">201/605</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NW/4</td></tr><tr><td>Martin</td><td>31</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 NE/4</td></tr><tr><td rowspan="4">Ruby Henson Haggard, dealing in her sole and separate property</td><td rowspan="4">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="4">10/7/1980</td><td rowspan="4">12/23/1980</td><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4</td><td rowspan="4">202/805</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 SE/4</td></tr><tr><td>Martin</td><td>30</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr><tr><td>Martin</td><td>31</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NW/4</td></tr><tr><td rowspan="2">George W. Glass and wife, Mabel Holt Glass, et al</td><td rowspan="2">Texaco, Inc.</td><td rowspan="2">11/26/1969</td><td rowspan="2">2/17/1970</td><td>Martin</td><td>31</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td rowspan="2">124/129</td></tr><tr><td>Martin</td><td>31</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 NW/4</td></tr><tr><td rowspan="2">Katherine M. Caton, a widow</td><td rowspan="2">Robert B. Ross &amp; Associates, Inc.</td><td rowspan="2">10/12/1979</td><td rowspan="2">11/19/1979</td><td>Martin</td><td>31</td><td>35 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>E/2 NE/4</td><td rowspan="2">189/466</td></tr><tr><td>Martin</td><td>38</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SE/4</td></tr><tr><td rowspan="10">James H. Nail, Jr., Trustee</td><td rowspan="10">Houston Production Company</td><td rowspan="10">12/29/1979</td><td rowspan="10">2/6/1980</td><td>Martin</td><td>38</td><td>38 TIN</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SE/4</td><td rowspan="10">192/355</td></tr><tr><td>Martin</td><td>1</td><td>38 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>NW/4 SE/4</td></tr><tr><td>Martin</td><td>1</td><td>38 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>NE/4 SE/4</td></tr><tr><td>Martin</td><td>2</td><td>38 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SW/4</td></tr><tr><td>Martin</td><td>2</td><td>38 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SW/4</td></tr><tr><td>Martin</td><td>6</td><td>37 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SW/4</td></tr><tr><td>Martin</td><td>6</td><td>37 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SW/4</td></tr><tr><td>Martin</td><td>6</td><td>37 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr><tr><td>Martin</td><td>6</td><td>37 TIS</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td></tr></table>



<table><tr><td>Gerald Fitz-Gerald</td><td>John L Cox</td><td>8/12/1969</td><td>8/12/1969</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>121/175</td></tr><tr><td>Luther Bohanon</td><td>John L Cox</td><td>8/3/1969</td><td>8/25/1969</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>121/235</td></tr><tr><td>Midwest Oil Corporation</td><td>John L Cox</td><td>7/31/1969</td><td>8/25/1969</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>121/238</td></tr><tr><td>Ben J. Shaw</td><td>John L Cox</td><td>8/23/1969</td><td>8/25/1969</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>121/257</td></tr><tr><td>Juana Henke</td><td>John L Cox</td><td>8/8/1969</td><td>9/23/1969</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>121/476</td></tr><tr><td>Loyd Hasting and wife, Mildred Hasting</td><td>Andrew Hancock</td><td>12/29/1969</td><td>1/30/1970</td><td>Martin</td><td>39</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4</td><td>123/461</td></tr><tr><td>Robert E. Smyth and wife, Dorothy Smyth</td><td>Andrew Hancock</td><td>3/2/1970</td><td>3/18/1970</td><td>Martin</td><td>39</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4</td><td>124/492</td></tr><tr><td>Earl L Henke, Duardian of the Estate of Mary Mitchell Henke, a minor</td><td>John L Cox</td><td>3/2/1970</td><td>3/25/1970</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>125/84</td></tr><tr><td>Joe Canon and wife, Verna Marie Canon</td><td>Andrew Hancock</td><td>5/1/1970</td><td>5/11/1970</td><td>Martin</td><td>39</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4</td><td>126/350</td></tr><tr><td>W.C. Hines</td><td>Mark Woodside</td><td>6/4/1984</td><td>7/6/1984</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>242/405</td></tr><tr><td>C.E. Edgerton</td><td>Mark Woodside</td><td>6/4/1984</td><td>7/6/1984</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>242/407</td></tr><tr><td>Rosemary Ferrell, a widow</td><td>Mark Woodside</td><td>6/11/1984</td><td>7/6/1984</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>242/409</td></tr><tr><td>Alfred F. Anderson and Goldie E. Anderson, husband and wife</td><td>Mark W. Woodside</td><td>7/3/1984</td><td>7/19/1984</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>243/11</td></tr><tr><td>E. Hayes Sieber, a single man, Et al</td><td>Trinity Production Company</td><td>7/30/1984</td><td>10/11/1984</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>246/473</td></tr><tr><td>RepublicBank First National Midland, Sole Trustee of the Jessie Blevins Crump Family Trust</td><td>Brazos Petroleum Company</td><td>6/24/1985</td><td>7/15/1985</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>259/458</td></tr><tr><td>RepublicBank First National Midland, Trustee</td><td>Brazos Petroleum Company</td><td>7/8/1985</td><td>8/12/1985</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>260/539</td></tr></table>



<table><tr><td>Texas American Bank Fort Worth, N.A. and David C. Blevins, Co-Trustees of the Joe and Jesse Crump Fund</td><td>Brazos Petroleum Company</td><td>6/24/1985</td><td>11/22/1985</td><td>Martin</td><td>39</td><td>35 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4</td><td>265/238</td></tr><tr><td>Claude S. Williams and wife, Janis Williams, and Lou Ella Sparks, a feme sole</td><td>Andrew Hancock</td><td>10/10/1969</td><td>11/13/1969</td><td>Martin</td><td>46</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/83.75 acs of W/2</td><td>122/264</td></tr><tr><td rowspan="6">Clyde E. Thomas, Jr. and wife, Jane Eden Thomas</td><td rowspan="6">Max H. Christensen</td><td rowspan="6">12/2/1969</td><td rowspan="6">1/12/1970</td><td>Martin</td><td>46</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/83.75 acs of W/2</td><td></td></tr><tr><td>Martin</td><td>46</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SW/4 NE/4</td><td></td></tr><tr><td>Martin</td><td>46</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>S/2 SE/4 NW/4</td><td></td></tr><tr><td>Martin</td><td>46</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NE/4 SW/4</td><td></td></tr><tr><td>Martin</td><td>46</td><td>37 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 NW/4 SE/4</td><td></td></tr><tr><td>Martin</td><td>38</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SE/4</td><td></td></tr><tr><td rowspan="6">James H. Nail, Jr., Trustee</td><td rowspan="6">Houston Production Company</td><td rowspan="6">12/29/1979</td><td rowspan="6">2/6/1980</td><td>Martin</td><td>38</td><td>38 T1N</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SE/4</td><td></td></tr><tr><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>NW/4 SE/4</td><td></td></tr><tr><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>NE/4 SE/4</td><td></td></tr><tr><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>SE/4 SW/4</td><td></td></tr><tr><td>Martin</td><td>2</td><td>38 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SW/4</td><td></td></tr><tr><td>Martin</td><td>6</td><td>37 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>SW/4 SW/4</td><td></td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>6</td><td>37 T1S</td><td>T&amp;P Ry. Co. Sy.</td><td>N/2 SW/4</td><td></td></tr></table>



## Gas Contracts

1. Casinghead Gas Contract dated September 26, 1983, between Brazos Petroleum Company and Phillips Petroleum Company, filed of record in Volume 233, Page 748.

2. Casinghead Gas Contract dated January 25, 1984, between Brazos Petroleum Company and Phillips Petroleum Company, filed of record in Volume 239, Page 137.

3. Amendmentary Agreement dated April 30, 1984, between Brazos Petroleum Company and Phillips Petroleum Company, filed of record in Volume 242, Page 436.

4. Amendmentary Agreement dated June 25, 1984, between Brazos Petroleum Company and Phillips Petroleum Company, filed of record in Volume 245, Page 350.

5. Casinghead Gas Contract dated November 11, 1984, between Brazos Petroleum Company and Phillips Petroleum Company, filed of record in Volume 251, Page 451.

6. Gas Purchase Contract dated February 1, 1985, between Brazos Petroleum Company and Northern Gas Products Company, unrecorded.

7. Casinghead Gas Contract dated April 1, 1985, between James B. Lewis Land & Oil Co., Seller, and Northern Gas Products Company, Buyer, unrecorded.

8. Casinghead Gas Contract dated April 3, 1985, between The Superior Oil Company and Phillips Petroleum Company, filed of record in Volume 257, Page 725.

9. Casinghead Gas Contract dated February 11, 1986, between Brazos Petroleum Company and Phillips 66 Natural Gas Company, filed of record in Volume 270, Page 712.

10. Gas Purchase Contract dated February 1, 1994, between Prime Operating Company and GPM Gas Corporation, a Memorandum of which is recorded in Volume 41, Page 181.

11. Gas Purchase Contract dated September 20, 1999, between Prime Operating Company and GPM Gas Corporation (BEN 0478-00R)

12. Amendment to Gas Purchase Contract dated January 1, 2002, between Prime Operating Company and Duke Energy Field Services, LP (BEN047800R)

13. Amendment to Gas Purchase Contract dated September 1, 2005, between Prime Operating Company and Duke Energy Field Services, LP (BEN047800R)

14. Amendment to Gas Purchase Contract dated January 28, 2009, effective December 1, 2008, between Prime Operating Company and DCP Midstream, LP (BEN 0478-00R)



15. Amendment to Gas Purchase Contract dated effective October 1, 2013, between Prime Operating Company and DCP Midstream, LP (BEN 0478-00R)

16. Gas Purchase Contract dated May 09, 2006 between Prime Operating Company and WTG Gas Processing (41-00033-20060509 GPC)

17. Gas Purchase Contract dated December 17, 2010 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (40-00074 GPC)

18. Amendment to Gas Purchase Contract dated January 20, 2011 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (40-00074 GPC)

19. Amendment to Gas Purchase Contract dated February 06, 2012 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (40-00074 GPC)

20. Amendment to Gas Purchase Contract dated February 06, 2012 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (40-00074 GPC)

21. Amendment to Gas Purchase Contract dated May 04, 2012 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (40-00074 GPC)

22. Amendment to Gas Purchase Contract dated March 25, 2013 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (40-00074 GPC)

23. Gas Purchase Contract dated October 01, 2013 between Endeavor Energy Resources, L.P., and WTG Gas Processing (41-2013-22 GPC)

24. Amendment to Gas Purchase Contract dated July 15, 2014 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (41-2013-22 GPC)

25. Amendment to Gas Purchase Contract dated November 15, 2014 between Endeavor Energy Resources, L.P., and WTG Gas Processing, L.P. (41-2013-22 GPC)

## Agreements:

26. Trade Letter Agreement dated May 12, 1983, by and between Exxon Company, U.S.A. and Palomino Oil Company, and Amendments dated August 29, 1983 with Palomino Oil Co., and Amendments dated August 29 and 30, 1983 with Brazos Petroleum Company.

27. Farmout Letter dated June 29, 1983, by and between Palomino Oil Co. and Brazos Petroleum Company.



28. Operating Agreement dated August 22, 1983, between Lewis & Atkins Oil & Gas, Inc., Operator, and Hasting Prospect Working Interest Owners, Non-Operators (Hasting)

29. Operating Agreement dated September 8, 1983, between Brazos Petroleum Company, Operator, and Saturn Energy Company, et al, Non-Operators (Margie Bentley)

30. Tangent Drilling Program (1984-2) Limited Partnership Agreement.

31. Tangent Drilling Program (1984-3) Limited Partnership Agreement.

32. Farmout Contract Agreement, by and between Amoco Production Company and The Superior Oil Company, dated January 13, 1984.

33. Joint Venture Agreement for Sprayer Development 1984 Joint Venture and Brazos 1984-A Participation and Nominee Agreement, both dated May 1, 1984.

34. Operating Agreement dated September 4, 1984, by and between Brazos Petroleum Company, Operator, and Clint Hurt & Associates, Inc., et al, as Non-Operators.

35. Farmout Operating Agreement, by and between The Superior Oil Company and Brazos Petroleum Company, dated August 10, 1984, as amended October 29, 1984.

36. Farmout Agreement dated October 31, 1984, by and between Texaco, Inc. and James B. Lewis Land & Oil Co.

37. Operating Agreement dated November 1, 1984, between Brazos Petroleum Company, Operator, and Clint Hurt & Associates, et al, Non-Operators (Strain, Harlow)

38. Operating Agreement dated March 9, 1985, between Brazos Petroleum Company, Operator, and Brazos 1984-N, LTD., et al, Non-Operators (Heidelberg)

39. Joint Venture Agreement dated December 18, 1984, by and between Brazos Petroleum Company and Harbour Energy, Ltd.

40. Operating Agreement dated May 8, 1985, by and between Brazos Petroleum Company, Operator, and Brazos 1984-B, Ltd., et al, Non-Operators (Stinson-Burley and N/2 SW/4 Section 28)

41. Letter Agreement dated June 28, 1985, by and between Brazos Petroleum Company and LSSCOTrading Company, Inc.

42. Operating Agreement dated July 1, 1985, between Brazos Petroleum Company, Operator, and David Meyer, et al, Non-Operators (Heidelberg, Nathan)

43. Operating Agreement dated July 10, 1985, between James B. Lewis Land & Oil Co, Operator, and Glass Prospect, Phase I Working Interest Owners, Non-Operators (Glass)



44. Letter Agreement dated December 12, 1985, by and between Brazos Petroleum Company and Tangent Oil & Gas, Inc.

45. Turnkey Agreement dated December 17, 1985, and amended December 17, 1985, between Brazos Petroleum Company and Tangent Oil & Gas, Inc.

46. Operating Agreement dated February 26, 1986, by and between Brazos Petroleum Company and Tangent Oil & Gas, Inc.

47. Operating Agreement dated March 19, 1986, by and between Brazos Petroleum Company, Operator, and Melba Davis Whately, et al, Non-Operators (Stinson-Burley)

48. Letter Agreement re: amendment to Strain Ranch Prospect JOA dated January 9, 1987, between Brazos Petroleum Company, and Brazos 1984-A Joint Venture, et al. (Strain)

49. Letter Agreement dated August 26, 2011, between PrimeEnergy Corporation and Endeavor Energy Resources, LP (Tenneco Nail JV)

50. Letter Agreement dated February 13, 2012, between PrimeEnergy Corporation and Endeavor Energy Resources, LP (Nail Ranch JV)

51. Letter Agreement dated September 10, 2015, between PrimeEnergy Corporation and Endeavor Energy Resources, LP, (Nail Area)

## END OF SCHEDULE



NONE.

END OF SCHEDULE



<table><tr><td>API#</td><td>Well Name</td><td>Well#</td><td>Operator</td><td>Section</td><td>BLK</td><td>TWP</td><td>Survey</td><td>Abstract</td><td>County</td><td>State</td></tr><tr><td>42-317-33325</td><td>ANDERSON</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>39</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0060</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32720</td><td>BENTLEY, MARGIE</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>20</td><td>36</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0836</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33203</td><td>BURLEY</td><td>3</td><td>PRIME OPERATING COMPANY</td><td>2</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0750</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33216</td><td>GLASS 31 - “B”</td><td>4</td><td>PRIME OPERATING COMPANY</td><td>31</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0284</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33210</td><td>GLASS 31 - A-</td><td>3</td><td>PRIME OPERATING COMPANY</td><td>31</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0284</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33208</td><td>GLASS 31 - A-</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>31</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0284</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32995</td><td>HARLOW</td><td>2</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0055</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32996</td><td>HARLOW</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0055</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32748</td><td>HASTING</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>39</td><td>37</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0231</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32948</td><td>HEIDELBERG</td><td>8</td><td>PRIME OPERATING COMPANY</td><td>30</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32949</td><td>HEIDELBERG</td><td>7</td><td>PRIME OPERATING COMPANY</td><td>30</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33116</td><td>HEIDELBERG</td><td>6</td><td>PRIME OPERATING COMPANY</td><td>30</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33166</td><td>HEIDELBERG</td><td>4</td><td>PRIME OPERATING COMPANY</td><td>30</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33165</td><td>HEIDELBERG</td><td>5</td><td>PRIME OPERATING COMPANY</td><td>30</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32788</td><td>HEIDELBERG</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>30</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-38764</td><td>HEIDELBERGA</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0627</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-38811</td><td>HEIDELBERGA</td><td>2</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0055</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-37426</td><td>NAIL-P - 1”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>1</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0291</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-38133</td><td>NAIL-P - 2”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>2</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0705</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-37664</td><td>NAIL-P - 38”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>38</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0754</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-37465</td><td>NAIL-P - 6”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>6</td><td>37</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0752</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-39488</td><td>NAIL-P “1A”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>1</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0291</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-39489</td><td>NAIL-P “1B”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>1</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0291</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-39496</td><td>NAIL-P “2A”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>2</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0705</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33164</td><td>NATHAN</td><td>4</td><td>PRIME OPERATING COMPANY</td><td>31</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0060</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-32905</td><td>RAMSEY</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0055</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-37736</td><td>RAMSEY “29A”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0055</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-38152</td><td>RAMSEY “29B”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>29</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0055</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33121</td><td>STIMSON-BURLEY</td><td>2802</td><td>PRIME OPERATING COMPANY</td><td>28</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0700</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-39193</td><td>STIMSON-BURLEY</td><td>2803</td><td>PRIME OPERATING COMPANY</td><td>28</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0700</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33331</td><td>STIMSON-BURLEY - A-</td><td>2</td><td>PRIME OPERATING COMPANY</td><td>28</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0700</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33330</td><td>STIMSON-BURLEY - A-</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>28</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0700</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-39972</td><td>STIMSON-BURLEY - A-</td><td>4</td><td>PRIME OPERATING COMPANY</td><td>28</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0700</td><td>Martin</td><td>Texas</td></tr></table>



<table><tr><td colspan="11">Schedule 3Excluded Wellbores</td></tr><tr><td>42-317-33006</td><td>STRAIN “14”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>14</td><td>36</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0805</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33001</td><td>STRAIN “19”</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>19</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0050</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33068</td><td>STRAIN “19”</td><td>2</td><td>PRIME OPERATING COMPANY</td><td>19</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0050</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33067</td><td>STRAIN “19”</td><td>4</td><td>PRIME OPERATING COMPANY</td><td>19</td><td>35</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0050</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33083</td><td>TENNECO-NAIL</td><td>102</td><td>PRIME OPERATING COMPANY</td><td>1</td><td>38</td><td>TIS</td><td>T&amp;P RR CO SVY</td><td>A0291</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33104</td><td>TENNECO-NAIL</td><td>602</td><td>PRIME OPERATING COMPANY</td><td>6</td><td>37</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0752</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33099</td><td>TENNECO-NAIL-A-</td><td>3801</td><td>PRIME OPERATING COMPANY</td><td>38</td><td>38</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0754</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33301</td><td>WILLIAMS</td><td>1</td><td>PRIME OPERATING COMPANY</td><td>46</td><td>37</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0933</td><td>Martin</td><td>Texas</td></tr><tr><td>42-317-33350</td><td>WILLIAMS</td><td>2</td><td>PRIME OPERATING COMPANY</td><td>46</td><td>37</td><td>TIN</td><td>T&amp;P RR CO SVY</td><td>A0933</td><td>Martin</td><td>Texas</td></tr></table>

End of Schedule 3—Excluded Wellbores



<table><tr><td>Lessor</td><td>Lessee</td><td>Lease Executed Date</td><td>Lease Recorded Date</td><td>County</td><td>Section</td><td>Block</td><td>Survey</td><td>Tract</td><td>Value</td><td>Attributable Net Acres PRIMENERGY</td><td>Price Per Acre</td><td>Allocated Value</td></tr><tr><td>Exchange Oil &amp; Gas Corporation</td><td>The Superior Oil Company</td><td>10/5/1983</td><td>11/16/1983</td><td>Martin</td><td>19</td><td>35 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>W/2</td><td>234/233</td><td>22.4650</td><td>$14,000.00</td><td>$314,510.00</td></tr><tr><td>Exchange Oil &amp; Gas Corporation</td><td>The Superior Oil Company</td><td>10/5/1983</td><td>11/16/1983</td><td>Martin</td><td>14</td><td>36 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>234/229</td><td>7.8300</td><td>$14,000.00</td><td>$109,620.00</td></tr><tr><td>Burley Revocable Living Trust</td><td>PrimeEnergy Corporation</td><td>9/17/2012</td><td>11/5/2012</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>NW/4</td><td>234/229</td><td>8.1838</td><td>$14,000.00</td><td>$114,572.65</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td>Ronald J. Nail Revocable Trust, et al</td><td>PrimeEnergy Corporation</td><td>7/26/2012</td><td>11/5/2012</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td>J.H.B. Oil &amp; Gas Company, LLC</td><td>PrimeEnergy Corporation</td><td>11/8/2012</td><td>1/2/2013</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td>The Flex Family Trust</td><td>PrimeEnergy Corporation</td><td>3/15/2013</td><td>1/17/2014</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td>Simson Energy Trust</td><td>PrimeEnergy Corporation</td><td>3/15/2013</td><td>1/17/2014</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td>Morris Jerome Simson GSI Exempt Trust</td><td>PrimeEnergy Corporation</td><td>3/15/2013</td><td>1/17/2014</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td></td><td></td><td></td><td></td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>236/106</td><td>1.6919192</td><td>$13,650.00</td><td>$23,094.70</td></tr><tr><td>JP Morgan Chase Bank, Trustee</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>Ronald J. Nail Revocable Trust, et al</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>Mallard Royalty Partners</td><td>PrimeEnergy Corporation</td><td>12/20/2011</td><td>3/7/2012</td><td>Martin</td><td>28</td><td>38 T1N</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>Mallard Royalty Partners</td><td>PrimeEnergy Corporation</td><td>12/20/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>Burley Revocable Living Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>Burley Revocable Living Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>J.H.B. Oil &amp; Gas Company, LLC</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>Sharon Lynn Gilbert GSI Exempt Trust</td><td>PrimeEnergy Corporation</td><td>9/1/2011</td><td>3/7/2012</td><td>Martin</td><td>1</td><td>38 T1S</td><td>T&amp;P Rv. Co. Sy.</td><td>SE/4</td><td>336/554</td><td>3.380536869</td><td>$26,000.00</td><td>$87,893.96</td></tr><tr><td>and the Sharon Lynn Gilbert Trust</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr></table>



## SUBSIDIARIES

PrimeEnergy Management Corporation, a New York corporation, 100% owned by PrimeEnergy Corporation.

Prime Operating Company, a Texas corporation, 100% owned by PrimeEnergy Corporation.

Eastern Oil Well Service Company, a West Virginia corporation, 100% owned by PrimeEnergy Corporation.

Southwest Oilfield Construction Company, an Oklahoma corporation, 100% owned by PrimeEnergy Corporation.

EO W S Midland Company, a Texas corporation, 100% owned by PrimeEnergy Corporation.

Prime Offshore L.L.C., a Delaware limited liability company, 100% owned by PrimeEnergy Corporation.



621 SEVENTEENTH STREET
TELEPHONE (303) 623-9147

SUITE 1550

FAX (303) 623-4258

DENVER, COLORADO 80293

CONSENT OF RYDER SCOTT COMPANY, L.P.

We consent to the filing of our summary reserve report dated March 20, 2017, as Exhibit 23 to the PrimeEnergy Corporation annual report on Form 10-K for the year ended December 31, 2016 and to any reference made to us on that form 10-K.

Very Truly Yours,

/s/ Ryder Scott Company, L.P.

Ryder Scott Company, L.P.

Denver, Colorado
April 10, 2017



## CERTIFICATIONS

I, Charles E. Drimal, Jr., Chief Executive Officer of PrimeEnergy Corporation, certify that:

1. I have reviewed this Annual report on Form 10-K for the year ended December 31, 2016 of PrimeEnergy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 17, 2017

/S CHARLESE. DRIMAL, JR.

Charles E. Drimal, Jr.

Chief Executive Officer

PrimeEnergy Corporation



## CERTIFICATIONS

I, Beverly A. Cummings, Chief Financial Officer of PrimeEnergy Corporation, certify that:

1. I have reviewed this Annual report on Form 10-K for the year ended December 31, 2016 of PrimeEnergy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/S BEVERLY A. CUMMINGS

Beverly A. Cummings

Chief Financial Officer

PrimeEnergy Corporation



# CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of PrimeEnergy Corporation (the "Company") on Form 10-K for the period ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles E. Drimal Jr., Chief Executive Officer of PrimeEnergy Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



# CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of PrimeEnergy Corporation (the "Company") on Form 10-K for the period ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Beverly A. Cummings, Chief Financial Officer of PrimeEnergy Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



621 SEVENTEENTH STREET SUITE 1550 DENVER, COLORADO 80293 TELEPHONE (303) 623-9147

March 20, 2017

PrimeEnergy Corporation
One Landmark Square
Stamford, Connecticut 06901

Dear Ms. Beverly A. Cummings,

At your request, Ryder Scott Company, L.P. (Ryder Scott) has prepared an estimate of the proved reserves, future production, and income attributable to certain leasehold and royalty interests of PrimeEnergy Corporation and 100 percent of its Partnership Interests (PrimeEnergy) as of December 31, 2016. The subject properties are located in the states of Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, West Virginia and Wyoming. The reserves and income data were estimated based on the definitions and disclosure guidelines of the United States Securities and Exchange Commission (SEC) contained in Title 17, Code of Federal Regulations, Modernization of Oil and Gas Reporting, Final Rule released January 14, 2009 in the Federal Register (SEC regulations). Our third party study, completed on March 20, 2017 and presented herein, was prepared for public disclosure by PrimeEnergy in filings made with the SEC in accordance with the disclosure requirements set forth in the SEC regulations.

The properties evaluated by Ryder Scott represent 100 percent of the total net proved liquid hydrocarbon reserves and 100 percent of the total net proved gas reserves of PrimeEnergy as of December 31, 2016.

The estimated reserves and future net income amounts presented in this report, as of December 31, 2016 are related to hydrocarbon prices. The hydrocarbon prices used in the preparation of this report are based on the average prices during the 12-month period prior to the “as of date” of this report, determined as the unweighted arithmetic averages of the prices in effect on the first-day-of-the-month for each month within such period, unless prices were defined by contractual arrangements, as required by the SEC regulations. Actual future prices may vary significantly from the prices required by SEC regulations; therefore, volumes of reserves actually recovered and the amounts of income actually received may differ significantly from the estimated quantities presented in this report. The results of this study are summarized as follows.



# SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold and Royalty Interests of
PrimeEnergy Corporation and 100% of Partnership Interests
As of December 31, 2016

<table><tr><td rowspan="2"></td><td colspan="5">Proved</td></tr><tr><td colspan="2">Developed</td><td colspan="2">Other *</td><td>Total</td></tr><tr><td>Net Remaining Reserves</td><td>Producing</td><td>Non-Producing</td><td>Undeveloped</td><td>Deductions</td><td>Proved</td></tr><tr><td>Oil/Condensate — Barrels</td><td>2,966,864</td><td>140,635</td><td>642,507</td><td>0</td><td>3,750,006</td></tr><tr><td>Plant Products — Barrels</td><td>1,189,877</td><td>75,110</td><td>158,715</td><td>0</td><td>1,423,702</td></tr><tr><td>Gas — Mcf</td><td>11,309,659</td><td>1,691,732</td><td>2,002,547</td><td>0</td><td>15,003,938</td></tr><tr><td>Income Data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Future Gross Revenue</td><td>$ 165,262,170</td><td>$ 10,637,433</td><td>$ 33,305,356</td><td>$ 0</td><td>$ 209,204,959</td></tr><tr><td>Deductions</td><td>114,706,549</td><td>3,722,548</td><td>15,191,313</td><td>1,003,510</td><td>134,623,920</td></tr><tr><td>Future Net Income (FNI)</td><td>$ 50,555,621</td><td>$ 6,914,885</td><td>$ 18,114,043</td><td>$ (1,003,510)</td><td>$ 74,581,039</td></tr><tr><td>Discounted FNI @ 10%</td><td>$ 43,215,544</td><td>$ 4,351,868</td><td>$ 10,403,121</td><td>$ (740,134)</td><td>$ 57,230,399</td></tr></table>

* “Other Deductions” incorporate contractual net cash flow adjustments as provided by PrimeEnergy.

Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes are reported on an “as sold basis” expressed in thousands of cubic feet (Mcf) at the official temperature and pressure bases of the areas in which the gas reserves are located.

The estimates of the reserves, future production, and income attributable to properties in this report were prepared using the economic software package PHDWin Petroleum Economic Evaluation Software, a copyrighted program of TRC Consultants L.C. The program was used at the request of PrimeEnergy. Ryder Scott has found this program to be generally acceptable, but notes that certain summaries and calculations may vary due to rounding and may not exactly match the sum of the properties being summarized. Furthermore, one line economic summaries may vary slightly from the more detailed cash flow projections of the same properties, also due to rounding. The rounding differences are not material.

The future gross revenue is after the deduction of production taxes. The deductions incorporate the normal direct costs of operating the wells, ad valorem taxes, certain contractual net cash flow adjustments owed to others, completion costs, development costs and certain abandonment costs net of salvage. The future net income is before the deduction of state and federal income taxes and general administrative overhead, and has not been adjusted for outstanding loans that may exist, nor does it include any adjustment for cash on hand or undistributed income. Liquid hydrocarbon reserves account for approximately 83 percent and gas reserves account for the remaining 17 percent of total future gross revenue from proved reserves. There is also an immaterial amount of “other company future gross revenue” that is attributable to small net profits interests.

The discounted future net income shown above was calculated using a discount rate of 10 percent per annum compounded annually. Future net income was discounted at four other discount rates which were also compounded annually. These results are shown in summary forms as follows.



<table><tr><td rowspan="2">Discount Rate</td><td colspan="2">Discounted Future Net Income</td></tr><tr><td>As of December 31, 2016</td><td></td></tr><tr><td>Percent</td><td>Total</td><td></td></tr><tr><td>5</td><td>$ 65,805,133</td><td></td></tr><tr><td>15</td><td>$ 50,680,209</td><td></td></tr><tr><td>20</td><td>$ 45,632,122</td><td></td></tr><tr><td>25</td><td>$ 41,626,834</td><td></td></tr></table>

The results shown above are presented for your information and should not be construed as our estimate of fair market value.

## Reserves Included in This Report

The proved reserves included herein conform to the definition as set forth in the Securities and Exchange Commission’s Regulations Part 210.4-10(a). An abridged version of the SEC reserves definitions from 210.4-10(a) entitled “Petroleum Reserves Definitions” is included as an attachment to this report.

The various reserve status categories are defined under the attachment entitled “Petroleum Reserves Status Definitions and Guidelines” in this report. The proved developed non-producing reserves included herein consist of the behind pipe category.

No attempt was made to quantify or otherwise account for any accumulated gas production imbalances that may exist. The proved gas volumes presented herein do not include volumes of gas consumed in operations as reserves.

Reserves are “estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations.” All reserve estimates involve an assessment of the uncertainty relating the likelihood that the actual remaining quantities recovered will be greater or less than the estimated quantities determined as of the date the estimate is made. The uncertainty depends chiefly on the amount of reliable geologic and engineering data available at the time of the estimate and the interpretation of these data. The relative degree of uncertainty may be conveyed by placing reserves into one of two principal classifications, either proved or unproved. Unproved reserves are less certain to be recovered than proved reserves, and may be further sub-classified as probable and possible reserves to denote progressively increasing uncertainty in their recoverability. At PrimeEnergy’s request, this report addresses only the proved reserves attributable to the properties evaluated herein.

Proved oil and gas reserves are “those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward.” The proved reserves included herein were estimated using deterministic methods. The SEC has defined reasonable certainty for proved reserves, when based on deterministic methods, as a “high degree of confidence that the quantities will be recovered.”

Proved reserve estimates will generally be revised only as additional geologic or engineering data become available or as economic conditions change. For proved reserves, the SEC states that “as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to the estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.” Moreover, estimates of proved reserves may be revised as a result of future operations, effects of regulation by governmental agencies or geopolitical or economic risks. Therefore, the proved reserves included in this report are estimates only and should not be construed as being exact quantities, and if recovered, the revenues therefrom, and the actual costs related thereto, could be more or less than the estimated amounts.



PrimeEnergy Corporation
March 20, 2017
Page 4

PrimeEnergy’s operations may be subject to various levels of governmental controls and regulations. These controls and regulations may include, but may not be limited to, matters relating to land tenure and leasing, the legal rights to produce hydrocarbons, drilling and production practices, environmental protection, marketing and pricing policies, royalties, various taxes and levies including income tax and are subject to change from time to time. Such changes in governmental regulations and policies may cause volumes of proved reserves actually recovered and amounts of proved income actually received to differ significantly from the estimated quantities.

The estimates of proved reserves presented herein were based upon a detailed study of the properties in which PrimeEnergy owns an interest; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities that may exist nor were any costs included for potential liabilities to restore and clean up damages, if any, caused by past operating practices.

## Estimates of Reserves

The estimation of reserves involves two distinct determinations. The first determination results in the estimation of the quantities of recoverable oil and gas and the second determination results in the estimation of the uncertainty associated with those estimated quantities in accordance with the definitions set forth by the Securities and Exchange Commission’s Regulations Part 210.4-10(a). The process of estimating the quantities of recoverable oil and gas reserves relies on the use of certain generally accepted analytical procedures. These analytical procedures fall into three broad categories or methods: (1) performance-based methods; (2) volumetric-based methods; and (3) analogy. These methods may be used individually or in combination by the reserve evaluator in the process of estimating the quantities of reserves. Reserve evaluators must select the method or combination of methods which in their professional judgment is most appropriate given the nature and amount of reliable geoscience and engineering data available at the time of the estimate, the established or anticipated performance characteristics of the reservoir being evaluated, and the stage of development or producing maturity of the property.

In many cases, the analysis of the available geoscience and engineering data and the subsequent interpretation of this data may indicate a range of possible outcomes in an estimate, irrespective of the method selected by the evaluator. When a range in the quantity of reserves is identified, the evaluator must determine the uncertainty associated with the incremental quantities of the reserves. If the reserve quantities are estimated using the deterministic incremental approach, the uncertainty for each discrete incremental quantity of the reserves is addressed by the reserve category assigned by the evaluator. Therefore, it is the categorization of reserve quantities as proved, probable and/or possible that addresses the inherent uncertainty in the estimated quantities reported. For proved reserves, uncertainty is defined by the SEC as reasonable certainty wherein the “quantities actually recovered are much more likely than not to be achieved.” The SEC states that “probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered.” The SEC states that “possible reserves are those additional reserves that are less certain to be recovered than probable reserves and the total quantities ultimately recovered from a project have a low probability of exceeding proved plus probable plus possible reserves.” All quantities of reserves within the same reserve category must meet the SEC definitions as noted above.



Estimates of reserves quantities and their associated reserve categories may be revised in the future as additional geoscience or engineering data become available. Furthermore, estimates of reserves quantities and their associated reserve categories may also be revised due to other factors such as changes in economic conditions, results of future operations, effects of regulation by governmental agencies or geopolitical or economic risks as previously noted herein.

The proved reserves for the properties included herein were estimated by performance methods, the volumetric method, analogy, or a combination of methods. Essentially all of the proved producing reserves attributable to producing wells and/or reservoirs were estimated by performance methods. These performance methods include, but may not be limited to, decline curve analysis and material balance which utilized extrapolations of historical production and pressure data available through December 2016 in those cases where such data were considered to be definitive. The data utilized in this analysis were furnished to Ryder Scott by PrimeEnergy or obtained from public data sources and were considered sufficient for the purpose thereof.

Approximately 70 percent of the proved developed non-producing and undeveloped reserves included herein were estimated by analogy. The data utilized in this analysis were considered sufficient for the purpose thereof. Approximately 30 percent of the proved developed non-producing and undeveloped reserves included herein were estimated by the volumetric method. The volumetric analysis utilized pertinent well and seismic data furnished to Ryder Scott by PrimeEnergy or which we have obtained from public data sources that were available through December 2016. The data utilized from the well and seismic data incorporated into our volumetric analysis were considered sufficient for the purpose thereof.

To estimate economically recoverable proved oil and gas reserves and related future net cash flows, we consider many factors and assumptions including, but not limited to, the use of reservoir parameters derived from geological, geophysical and engineering data that cannot be measured directly, economic criteria based on current costs and SEC pricing requirements, and forecasts of future production rates. Under the SEC regulations 210.4-10(a)(22)(v) and (26), proved reserves must be anticipated to be economically producible from a given date forward based on existing economic conditions including the prices and costs at which economic producibility from a reservoir is to be determined. While it may reasonably be anticipated that the future prices received for the sale of production and the operating costs and other costs relating to such production may increase or decrease from those under existing economic conditions, such changes were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation.

PrimeEnergy has informed us that they have furnished us all of the material accounts, records, geological and engineering data, and reports and other data required for this investigation. In preparing our forecast of future proved production and income, we have relied upon data furnished by PrimeEnergy with respect to property interests owned, production and well tests from examined wells, normal direct costs of operating the wells or leases, other costs such as transportation and/or processing fees, ad valorem and production taxes, certain contractual adjustments, repletion and development costs, development plans, abandonment costs after salvage, product prices based on the SEC regulations, adjustments or differentials to product prices, geological structural and isochore maps, well logs, core analyses, and pressure measurements. Ryder Scott reviewed such factual data for its reasonableness; however, we have not conducted an independent verification of the data furnished by PrimeEnergy. We consider the factual data used in this report appropriate and sufficient for the purpose of preparing the estimates of reserves and future net revenues herein.

In summary, we consider the assumptions, data, methods and analytical procedures used in this report appropriate for the purpose hereof, and we have used all such methods and procedures that we consider necessary and appropriate to prepare the estimates of reserves herein. The proved reserves included herein were determined in conformance with the United States Securities and Exchange Commission (SEC) Modernization of Oil and Gas Reporting; Final Rule, including all references to Regulation S-X and Regulation S-K, referred to herein collectively as the "SEC Regulations." In our opinion, the proved reserves presented in this report comply with the definitions, guidelines and disclosure requirements as required by the SEC regulations.



## Future Production Rates

For wells currently on production, our forecasts of future production rates are based on historical performance data. If no production decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to depletion of the reserves. If a decline trend has been established, this trend was used as the basis for estimating future production rates.

Test data and other related information were used to estimate the anticipated initial production rates for those wells or locations that are not currently producing. For reserves not yet on production, sales were estimated to commence at an anticipated date furnished by PrimeEnergy. Wells or locations that are not currently producing may start producing earlier or later than anticipated in our estimates due to unforeseen factors causing a change in the timing to initiate production. Such factors may include delays due to weather, the availability of rigs, the sequence of drilling, completing and/or recompleting wells and/or constraints set by regulatory bodies.

The future production rates from wells currently on production or wells or locations that are not currently producing may be more or less than estimated because of changes including, but not limited to, reservoir performance, operating conditions related to surface facilities, compression and artificial lift, pipeline capacity and/or operating conditions, producing market demand and/or allowances or other constraints set by regulatory bodies.

## Hydrocarbon Prices

The hydrocarbon prices used herein are based on SEC price parameters using the average prices during the 12-month period prior to the “as of date” of this report, determined as the unweighted arithmetic averages of the prices in effect on the first-day-of-the-month for each month within such period, unless prices were defined by contractual arrangements. For hydrocarbon products sold under contract, the contract prices, including fixed and determinable escalations, exclusive of inflation adjustments, were used until expiration of the contract. Upon contract expiration, the prices were adjusted to the 12-month unweighted arithmetic average as previously described.

PrimeEnergy furnished us with the above mentioned average prices in effect on December 31, 2016. These initial SEC hydrocarbon prices were determined using the 12-month average first-day-of-the-month benchmark prices appropriate to the geographic area where the hydrocarbons are sold. These benchmark prices are prior to the adjustments for differentials as described herein. The table below summarizes the “benchmark prices” and “price reference” used for the geographic area included in the report.

The product prices that were actually used to determine the future gross revenue for each property reflect adjustments to the benchmark prices for gravity, quality, local conditions, gathering and transportation fees and/or distance from market, referred to herein as “differentials.” The differentials used in the preparation of this report were furnished to us by PrimeEnergy.

In addition, the table below summarizes the net volume weighted benchmark prices adjusted for differentials and referred to herein as the “average realized prices.” The average realized prices shown in the table below were determined from the total future gross revenue before production taxes and the total net reserves for the geographic area and presented in accordance with SEC disclosure requirements for each of the geographic areas included in the report.

RYDER SCOTT COMPANY PETROLEUM CONSULTANTS



<table><tr><td>Geographic Area</td><td>Product</td><td>Price Reference</td><td>Average Benchmark Prices</td><td>Average Realized Prices</td></tr><tr><td>North America</td><td>Oil/Condensate</td><td>WTI Cushing</td><td>$42.75/bbl</td><td>$ 43.28/bbl</td></tr><tr><td>United States</td><td>NGL</td><td>WTI Cushing</td><td>$42.75/bbl</td><td>$ 14.84/bbl</td></tr><tr><td></td><td>Gas</td><td>Henry Hub</td><td>$2.49/MMBTU</td><td>$ 2.54/Mcf</td></tr></table>

The effects of derivative instruments designated as price hedges of oil and gas quantities are not reflected in our individual property evaluations.

## Costs

Operating costs for the leases and wells in this report were furnished by PrimeEnergy and are based on the operating expense reports of PrimeEnergy and include only those costs directly applicable to the leases or wells, as well as certain contractual cash flow adjustments shown as operating costs. The operating costs include a portion of general and administrative costs allocated directly to the leases and wells. For operated properties, the operating costs include an appropriate level of corporate general administrative and overhead costs. The operating costs for non-operated properties include the COPAS overhead costs that are allocated directly to the leases and wells under terms of operating agreements. The operating costs furnished to us were accepted as factual data and reviewed by us for their reasonableness; however, we have not conducted an independent verification of the operating cost data used by PrimeEnergy. No deduction was made for loan repayments, interest expenses, or exploration and development prepayments that were not charged directly to the leases or wells.

Development costs were furnished to us by PrimeEnergy and are based on authorizations for expenditure for the proposed work or actual costs for similar projects. The development costs furnished to us were accepted as factual data and reviewed by us for their reasonableness; however, we have not conducted an independent verification of these costs. The estimated net cost of abandonment after salvage was included for properties where abandonment costs net of salvage were significant. The estimates of the net abandonment costs furnished by PrimeEnergy were accepted without independent verification.

The proved developed non-producing and undeveloped reserves in this report have been incorporated herein in accordance with PrimeEnergy's plans to develop these reserves as of December 31, 2016. The implementation of PrimeEnergy's development plans as presented to us and incorporated herein is subject to the approval process adopted by PrimeEnergy's management. As the result of our inquiries during the course of preparing this report, PrimeEnergy has informed us that the development activities included herein have been subjected to and received the internal approvals required by PrimeEnergy's management at the appropriate local, regional and/or corporate level. In addition to the internal approvals as noted, certain development activities may still be subject to specific partner AFE processes, Joint Operating Agreement (JOA) requirements or other administrative approvals external to PrimeEnergy. Additionally, PrimeEnergy has informed us that they are not aware of any legal, regulatory or political obstacles that would significantly alter their plans. While these plans could change from those under existing economic conditions as of December 31, 2016, such changes were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation.

RYDER SCOTT COMPANY PETROLEUM CONSULTANTS



PrimeEnergy Corporation
March 20, 2017
Page 8

Current costs used by PrimeEnergy were held constant throughout the life of the properties.

## Standards of Independence and Professional Qualification

Ryder Scott is an independent petroleum engineering consulting firm that has been providing petroleum consulting services throughout the world since 1937. Ryder Scott is employee-owned and maintains offices in Houston, Texas; Denver, Colorado; and Calgary, Alberta, Canada. We have over eighty engineers and geoscientists on our permanent staff. By virtue of the size of our firm and the large number of clients for which we provide services, no single client or job represents a material portion of our annual revenue. We do not serve as officers or directors of any privately-owned or publicly-traded oil and gas company and are separate and independent from the operating and investment decision-making process of our clients. This allows us to bring the highest level of independence and objectivity to each engagement for our services.

Ryder Scott actively participates in industry-related professional societies and organizes an annual public forum focused on the subject of reserves evaluations and SEC regulations. Many of our staff have authored or co-authored technical papers on the subject of reserves related topics. We encourage our staff to maintain and enhance their professional skills by actively participating in ongoing continuing education.

Prior to becoming an officer of the Company, Ryder Scott requires that staff engineers and geoscientists have received professional accreditation in the form of a registered or certified professional engineer's license or a registered or certified professional geoscientist's license, or the equivalent thereof, from an appropriate governmental authority or a recognized self-regulating professional organization.

We are independent petroleum engineers with respect to PrimeEnergy. Neither we nor any of our employees have any financial interest in the subject properties and neither the employment to do this work nor the compensation is contingent on our estimates of reserves for the properties which were reviewed.

The results of this study, presented herein, are based on technical analysis conducted by teams of geoscientists and engineers from Ryder Scott. The professional qualifications of the undersigned, the technical person primarily responsible for overseeing the evaluation of the reserves information discussed in this report, are included as an attachment to this letter.

## Terms of Usage

The results of our third party study, presented in report form herein, were prepared in accordance with the disclosure requirements set forth in the SEC regulations and intended for public disclosure as an exhibit in filings made with the SEC by PrimeEnergy.

We have provided PrimeEnergy with a digital version of the original signed copy of this report letter. In the event there are any differences between the digital version included in filings made by PrimeEnergy and the original signed report letter, the original signed report letter shall control and supersede the digital version.

The data and work papers used in the preparation of this report are available for examination by authorized parties in our offices. Please contact us if we can be of further service.

RYDER SCOTT COMPANY PETROLEUM CONSULTANTS



Very truly yours,

RYDER SCOTT COMPANY, L.P.
TBPE Firm Registration No. F-1580

[Seal]

/s/ James L. Baird
James L. Baird, P.E.
Colorado License No. 41521
Managing Senior Vice President

/s/ Richard J. Marshall
Richard J. Marshall, P.E. [Seal]
Colorado License No. 23260
Vice President

JLB-RJM (FWZ)/p1

RYDER SCOTT COMPANY PETROLEUM CONSULTANTS



## Professional Qualifications of Primary Technical Person

The conclusions presented in this report are the result of technical analysis conducted by teams of geoscientists and engineers from Ryder Scott Company, L.P. Richard J. Marshall was the primary technical person responsible for overseeing the estimate of the future net reserves and income.

Mr. Marshall, an employee of Ryder Scott Company L.P. (Ryder Scott) beginning in 1981, is a Vice President responsible for coordinating and supervising staff and consulting engineers of the company in ongoing reservoir evaluation studies. Before joining Ryder Scott, Mr. Marshall served in a number of engineering positions with Texaco, Phillips Petroleum, and others. For more information regarding Mr. Marshall's geographic and job specific experience, please refer to the Ryder Scott Company website at www.ryderscott.com/Experience/Employees.

Mr. Marshall earned a B.S. in Geology from the University of Missouri in 1974 and a M.S. in Geological Engineering from the University of Missouri at Rolla in 1976. Mr. Marshall is a registered Professional Engineer in the State of Colorado. He is a member of the Society of Petroleum Engineers, Wyoming Geological Association, Rocky Mountain Association of Geologists and the Society of Petroleum Evaluation Engineers.

Based on Mr. Marshall's educational background, professional training and more than 30 years of practical experience in the estimation and evaluation of petroleum reserves, Mr. Marshall has attained the professional qualifications as a Reserves Estimator and Reserves Auditor as set forth in Article III of the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the Society of Petroleum Engineers as of February 19, 2007.

RYDER SCOTT COMPANY PETROLEUM CONSULTANTS