Document:

exv10w26

 

EXHIBIT 10.26

 

CREDIT AGREEMENT

BETWEEN

PRIME
OFFSHORE L.L.C. 

AND

GUARANTY BANK, FSB, AS AGENT

AND A LENDER

JUNE 29, 2006

 

REVOLVING LINE OF CREDIT OF UP TO $200,000,000

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page	 
	ARTICLE I DEFINITIONS AND INTERPRETATION	 	 	1	 
	 
	 	1.1	 	Terms Defined Above	 	 	1	 
	 
	 	1.2	 	Additional Defined Terms	 	 	1	 
	 
	 	1.3	 	Undefined Financial Accounting Terms	 	 	15	 
	 
	 	1.4	 	References	 	 	15	 
	 
	 	1.5	 	Articles and Sections	 	 	15	 
	 
	 	1.6	 	Number and Gender	 	 	15	 
	 
	 	1.7	 	Incorporation of Exhibits	 	 	15	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE II TERMS OF FACILITY	 	 	15	 
	 
	 	2.1	 	Revolving Line of Credit	 	 	15	 
	 
	 	2.1A.	 	Facility A and B Revolving Line of Credit	 	 	15	 
	 
	 	2.1B.	 	Facility C Revolving Line of Credit	 	 	16	 
	 
	 	2.2	 	Letter of Credit Facility	 	 	16	 
	 
	 	2.3	 	Use of Loan Proceeds and Letters of Credit	 	 	18	 
	 
	 	2.4	 	Interest	 	 	18	 
	 
	 	2.5	 	Repayment of Loans and Interest	 	 	19	 
	 
	 	2.6	 	Outstanding Amounts	 	 	19	 
	 
	 	2.7	 	Time, Place, and Method of Payments	 	 	19	 
	 
	 	2.8	 	Pro Rata Treatment; Adjustments	 	 	19	 
	 
	 	2.9	 	Borrowing Base Determinations	 	 	20	 
	 
	 	2.10	 	Mandatory Prepayments	 	 	21	 
	 
	 	2.11	 	Voluntary Prepayments and Conversions of Loans	 	 	22	 
	 
	 	2.12	 	Commitment Fee	 	 	22	 
	 
	 	2.13	 	Facility Fee	 	 	22	 
	 
	 	2.14	 	Letter of Credit Fee	 	 	22	 
	 
	 	2.15	 	Loans to Satisfy Obligations of Borrower	 	 	22	 
	 
	 	2.16	 	Security Interest in Accounts; Right of Offset	 	 	23	 
	 
	 	2.17	 	General Provisions Relating to Interest	 	 	23	 
	 
	 	2.18	 	Yield Protection	 	 	24	 
	 
	 	2.19	 	Limitation on Types of Loans	 	 	26	 
	 
	 	2.20	 	Illegality	 	 	26	 
	 
	 	2.21	 	Regulatory Change	 	 	27	 
	 
	 	2.22	 	Limitations on Interest Periods	 	 	27	 
	 
	 	2.23	 	Letters in Lieu of Transfer Orders	 	 	27	 
	 
	 	2.24	 	Power of Attorney	 	 	27	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE III CONDITIONS	 	 	28	 
	 
	 	3.1	 	Receipt of Loan Documents and Other Items	 	 	28	 
	 
	 	3.2	 	Each Loan and Letter of Credit	 	 	30	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE IV REPRESENTATIONS AND WARRANTIES	 	 	32	 
	 
	 	4.1	 	Due Authorization	 	 	32	 

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	 	 	 	 	 	 	Page	 
	 
	 	4.2	 	Limited Liability Company Existence	 	 	32	 
	 
	 	4.3	 	Valid and Binding Obligations	 	 	32	 
	 
	 	4.4	 	Security Instruments	 	 	33	 
	 
	 	4.5	 	Title to Assets	 	 	33	 
	 
	 	4.6	 	No Material Misstatements	 	 	33	 
	 
	 	4.7	 	Liabilities, Litigation, and Restrictions	 	 	33	 
	 
	 	4.8	 	Authorizations; Consents	 	 	33	 
	 
	 	4.9	 	Compliance with Laws	 	 	33	 
	 
	 	4.10	 	ERISA	 	 	34	 
	 
	 	4.11	 	Environmental Laws	 	 	34	 
	 
	 	4.12	 	Compliance with Federal Reserve Regulations	 	 	35	 
	 
	 	4.13	 	Investment Company Act Compliance	 	 	35	 
	 
	 	4.14	 	Public Utility Holding Company Act Compliance	 	 	35	 
	 
	 	4.15	 	Proper Filing of Tax Returns; Payment of Taxes Due	 	 	35	 
	 
	 	4.16	 	Refunds	 	 	35	 
	 
	 	4.17	 	Gas Contracts	 	 	35	 
	 
	 	4.18	 	Intellectual Property	 	 	35	 
	 
	 	4.19	 	Casualties or Taking of Property	 	 	36	 
	 
	 	4.20	 	Locations of Borrower	 	 	36	 
	 
	 	4.21	 	Subsidiaries	 	 	36	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE V AFFIRMATIVE COVENANTS	 	 	36	 
	 
	 	5.1	 	Maintenance and Access to Records	 	 	36	 
	 
	 	5.2	 	Quarterly Financial Statements; Compliance Certificates	 	 	36	 
	 
	 	5.3	 	Ryder Scott Company Reserve Evaluation	 	 	36	 
	 
	 	5.4	 	Status of Shareholder Loans	 	 	37	 
	 
	 	5.5	 	Log Sections, Maps and Test Dates	 	 	37	 
	 
	 	5.6	 	Annual Financial Statements	 	 	37	 
	 
	 	5.7	 	Oil and Gas Reserve Reports	 	 	37	 
	 
	 	5.8	 	Title Opinions; Title Defects and Mortgages	 	 	37	 
	 
	 	5.9	 	Notices of Certain Events	 	 	37	 
	 
	 	5.10	 	Letters in Lieu of Transfer Orders; Division Orders	 	 	39	 
	 
	 	5.11	 	Additional Information	 	 	39	 
	 
	 	5.12	 	Compliance with Laws	 	 	39	 
	 
	 	5.13	 	Payment of Assessments and Charges	 	 	39	 
	 
	 	5.14	 	Maintenance of Limited Liability Company Existence and	 	 	 	 
	 
	 	 	 	Good Standing	 	 	39	 
	 
	 	5.15	 	Payment of Notes; Performance of Obligations	 	 	40	 
	 
	 	5.16	 	Further Assurances	 	 	40	 
	 
	 	5.17	 	Initial Fees and Expenses of Counsel to Agent	 	 	40	 
	 
	 	5.18	 	Subsequent Fees and Expenses of Agent	 	 	40	 
	 
	 	5.19	 	Operation of Oil and Gas Properties	 	 	40	 
	 
	 	5.20	 	Maintenance and Inspection of Properties	 	 	40	 
	 
	 	5.21	 	Maintenance of Insurance	 	 	41	 
	 
	 	5.22	 	INDEMNIFICATION	 	 	41	 
	 
	 	5.23	 	Future Subsidiaries	 	 	42	 
	 
	 	5.24	 	Hedging	 	 	42	 
	 
	 	5.25	 	Flow Line Permit	 	 	42	 

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	 	 	 	 	 	 	Page	 
	ARTICLE VI NEGATIVE COVENANTS	 	 	42	 
	 
	 	6.1	 	Indebtedness	 	 	42	 
	 
	 	6.2	 	Contingent Obligations	 	 	43	 
	 
	 	6.3	 	Liens	 	 	43	 
	 
	 	6.4	 	Sales of Assets	 	 	43	 
	 
	 	6.5	 	Leasebacks	 	 	43	 
	 
	 	6.6	 	Loans or Advances	 	 	43	 
	 
	 	6.7	 	Investments	 	 	43	 
	 
	 	6.8	 	Dividends and Distributions	 	 	44	 
	 
	 	6.9	 	Issuance of Stock; Changes in Limited Liability Structure	 	 	44	 
	 
	 	6.10	 	Transactions with Affiliates	 	 	44	 
	 
	 	6.11	 	Lines of Business	 	 	44	 
	 
	 	6.12	 	ERISA Compliance	 	 	44	 
	 
	 	6.13	 	FWOE Partners L.P	 	 	44	 
	 
	 	6.14	 	Interest Coverage Ratio	 	 	44	 
	 
	 	6.15	 	Tangible Net Worth	 	 	45	 
	 
	 	6.16	 	General and Administrative Expenses	 	 	45	 
	 
	 	6.17	 	Minimum Liquidity	 	 	45	 
	 
	 	6.18	 	Put Right Agreement	 	 	45	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE VII EVENTS OF DEFAULT	 	 	45	 
	 
	 	7.1	 	Enumeration of Events of Default	 	 	45	 
	 
	 	7.2	 	Remedies	 	 	47	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE VIII THE AGENT	 	 	48	 
	 
	 	8.1	 	Appointment	 	 	48	 
	 
	 	8.2	 	Waivers, Amendments	 	 	48	 
	 
	 	8.3	 	Delegation of Duties	 	 	48	 
	 
	 	8.4	 	Exculpatory Provisions	 	 	49	 
	 
	 	8.5	 	Reliance by Agent	 	 	49	 
	 
	 	8.6	 	Notice of Default	 	 	49	 
	 
	 	8.7	 	Non-Reliance on Agent and Other Lenders	 	 	50	 
	 
	 	8.8	 	Indemnification	 	 	50	 
	 
	 	8.9	 	Restitution	 	 	51	 
	 
	 	8.10	 	Agent in Its Individual Capacity	 	 	51	 
	 
	 	8.11	 	Successor Agent	 	 	51	 
	 
	 	8.12	 	Applicable Parties	 	 	52	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE IX MISCELLANEOUS	 	 	52	 
	 
	 	9.1	 	Transfers; Participations	 	 	52	 
	 
	 	9.2	 	Survival of Representations, Warranties, and Covenants	 	 	53	 
	 
	 	9.3	 	Notices and Other Communications	 	 	54	 
	 
	 	9.4	 	Parties in Interest	 	 	54	 
	 
	 	9.5	 	Rights of Third Parties	 	 	54	 
	 
	 	9.6	 	Renewals; Extensions	 	 	54	 
	 
	 	9.7	 	No Waiver; Rights Cumulative	 	 	55	 

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	 	 	 	 	 	 	Page	 
	 
	 	9.8	 	Survival Upon Unenforceability	 	 	55	 
	 
	 	9.9	 	Amendments; Waivers	 	 	55	 
	 
	 	9.10	 	Controlling Agreement	 	 	55	 
	 
	 	9.11	 	Disposition of Collateral	 	 	55	 
	 
	 	9.12	 	USA Patriot Act Notice	 	 	55	 
	 
	 	9.13	 	GOVERNING LAW	 	 	55	 
	 
	 	9.14	 	JURISDICTION AND VENUE	 	 	56	 
	 
	 	9.15	 	WAIVER OF RIGHTS TO JURY TRIAL	 	 	56	 
	 
	 	9.16	 	ENTIRE AGREEMENT	 	 	56	 
	 
	 	9.17	 	Counterparts	 	 	56	 

LIST OF EXHIBITS

	 	 	 	 	 
	Exhibit I

	 	-
	 	Form of Note
	Exhibit I(A)

	 	-
	 	Form of Note
	Exhibit II

	 	-
	 	Form of Borrowing Request
	Exhibit III

	 	-
	 	Form of Compliance Certificate
	Exhibit IV

	 	-
	 	Form of Opinion of Counsel
	Exhibit V

	 	-
	 	Facility Amounts
	Exhibit VI

	 	-
	 	Form of Assignment Agreement

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CREDIT AGREEMENT

     This CREDIT AGREEMENT is made and entered into this 29th day of June, 2006,
by and between PRIME OFFSHORE L.L.C. a Delaware limited liability
company (the “Borrower”), with
each lender that is signatory hereto or becomes a signatory hereto as provided in Section 9.1
(individually, together with its successors and assigns, a
“Lender” and collectively together with
their respective successors and assigns, the
“Lenders”) and GUARANTY BANK, FSB, a federal savings
bank, as agent for the Lenders (in such capacity together with its successors in such capacity
pursuant to the terms hereof, the “Agent”).

WITNESSETH:

     In consideration of the mutual covenants and agreements herein contained, the Borrower
and the Lender hereby agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

     1.1 Terms Defined Above. As used in this
Credit Agreement, the terms “Agent,”
“Borrower” and “Lender” shall have the meaning assigned to them hereinabove.

     1.2 Additional Defined Terms . As used in this Credit Agreement, each of the
following terms shall have the meaning assigned thereto in this Section, unless the context
otherwise requires:

     “Additional Costs” shall mean costs which the Lenders determine are
attributable to its obligation to make or its making or maintaining any LIBO Rate
Loan, or any reduction in any amount receivable by the Lenders in respect of any
such obligation or any LIBO Rate Loan, resulting from any Regulatory Change which
(a) changes the basis of taxation of any amounts payable to the Lenders under this
Agreement or the Note in respect of any LIBO Rate Loan (other than taxes imposed on
the overall net income of the Lender), (b) imposes or modifies any reserve, special
deposit, minimum capital, capital rates, or similar requirements relating to any
extensions of credit or other assets of, or any deposits with or other liabilities
of, the Lenders (including LIBO Rate Loans and Dollar deposits in the London
interbank market in connection with LIBO Rate Loans), or any commitments of the
Lenders hereunder, (c) increases the Assessment Rate, or (d) imposes any other
condition affecting this Agreement or any of such extensions of credit, liabilities,
or commitments.

     “Adjusted LIBO Rate” shall mean, for any LIBO Rate Loan, an interest
rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
determined by the Lender to be equal to the sum of the LIBO Rate for such Loan plus
the Applicable Margin, but in no event exceeding the Highest Lawful Rate.

  

 

     “Affiliate” shall mean any Person directly or indirectly controlling, or under common control
with, the Borrower and includes any Subsidiary of the Borrower and any “affiliate” of the Borrower
within the meaning of Reg. §240.12b-2 of the Securities Exchange Act of 1934, as amended, with
“control,” as used in this definition, meaning possession, directly or indirectly, of the power to
direct or cause the direction of management, policies or action through ownership of voting
securities, contract, voting trust, or membership in management or in the group appointing or
electing management or otherwise through formal or informal arrangements or business
relationships.

     “Agreement” shall mean this Credit Agreement, as it may be amended, supplemented, or restated
from time to time.

     “Applicable Lending Office” shall mean, for each type of Loan, the lending office of
the Lender (or an affiliate of the Lender) designated for such type of Loan on the signature pages
hereof or such other office of the Lender (or an affiliate of the Lender) as the Lender may from
time to time specify to the Borrower as the office by which Loans of such type are to be made and
maintained.

     “Applicable Margin” shall mean as to each LIBO Rate Loan 2.00% for Facility A and
3.50% for Facility B and 2.75% for Facility C.

     “Assessment Rate” shall mean, for any Interest Period, the average rate (rounded
upwards if necessary to the nearest 1/100 of 1%) charged by the Federal Deposit Insurance
Corporation (or any successor thereto) to the Lender for deposit insurance for Dollar time
deposits with the Lender at the Principal Office during such Interest Period, as determined by the
Lender.

     “Assignment Agreement” shall mean an Assignment Agreement, substantially in the form
of Exhibit VI, with appropriate insertions.

     “Available Commitment” (A) for Facility A, shall mean, at any time, an amount equal
to the remainder, if any, of (a) the Borrowing Base in effect at such time minus (b) the Loan
Balance for Facility A at such time, (B) for Facility B, shall mean, at any time, an amount equal
to the remainder, if any, of (a) the Borrowing Base in effect at such time, minus (b) the Loan
Balance for Facility B at such time and (c) for Facility C shall mean, at any time, an amount
equal to the remainder, if any, of (a) the Borrowing Base in effect at such time minus (b) the
Loan Balance for Facility C at such time.

     “Base Rate” shall mean, at any time, the rate of interest per annum then most recently
established by the Lender as its base rate, which rate may not be the lowest rate of interest
charged by the Lender to its borrowers. Each change in any interest rate provided for herein based
upon the Base Rate resulting from a change in the Base Rate shall take effect without notice to the
Borrower at the time of such change in the Base Rate.

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     “Benefited Lender” shall have the meaning assigned to such term in Section 2.8(c).

     “Borrowing Base” shall mean, at any time, the amount determined by the Lender in accordance
with Section 2.9 and then in effect.

     “Borrowing Request” shall mean each written request, in substantially the form
attached hereto as Exhibit II, by the Borrower to the Agent for a borrowing, conversion, or
prepayment pursuant to Sections 2.1 or 2.11, each of which shall:

     (a) be signed by a Responsible Officer of the Borrower;

     (b) when requesting a borrowing, be accompanied by a
Compliance Certificate or acknowledgment that Borrower is in
compliance;

     (c) specify the amount and type of Loan requested, and,
as applicable, the Loan to be converted or prepaid and the date of
the borrowing, conversion, or prepayment (which shall be a
Business Day);

     (d) when requesting a Floating Rate Loan, be delivered
to the Lender no later than 5:00 p.m., Central Standard or Daylight
Savings Time, as the case may be, on the Business Day preceding
the day of the requested borrowing, conversion, or prepayment;

     (e) when requesting a LIBO Rate Loan, be delivered to
the Lender no later than 10:00 a.m., Central Standard or Daylight
Savings Time, as the case may be, three Business Days preceding
the requested borrowing, conversion, or prepayment and designate
the Interest Period requested with respect to such Loan.

     “Business Day” shall mean (a) for all purposes other than as covered by clause (b) of this
definition, a day other than a Saturday, Sunday, legal holiday for commercial banks under the laws
of the State of Texas, or any other day when banking is suspended in the State of Texas, and (b)
with respect to all requests, notices, and determinations in connection with, and payments of
principal and interest on, LIBO Rate Loans, a day which is a Business Day described in clause (a)
of this definition and which is a day for trading by and between banks for Dollar deposits in the
London interbank market.

     “Casualty Event” shall mean the damage, destruction or condemnation, as the case may be, of
Property of any person.

     “Closing Date” shall mean the effective date of this Agreement.

     “Code” shall mean the United States Internal Revenue Code of 1986, as amended from time to
time.

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     “Collateral” shall mean the Mortgaged Properties and any other Property now or at any time
used or intended as security for the payment or performance of all or any portion of the
Obligations.

     “Commitment” shall mean the obligation of the Lenders, subject to applicable provisions of
this Agreement, to make Loans to or for the benefit of the Borrower pursuant to Section 2.1 and to
issue Letters of Credit pursuant to Section 2.2.

     “Commitment Fee” shall mean each fee payable to the Lenders by the Borrower pursuant
to Section 2.12.

     “Commitment Period” shall mean the period from and including the Closing Date to but
not including the Commitment Termination Date.

     “Commitment Termination Date” shall mean July 1, 2009 for Facility A and January 1,
2008 for Facility B and Facility C.

     “Commodity Hedge Agreement” shall mean any crude oil, natural gas, or other
hydrocarbon floor, collar, cap, price protection, or swap agreement, in form and substance with a
Person acceptable to the Lender.

     “Commonly Controlled Entity” shall mean any Person which is under common control with
the Borrower within the meaning of Section 4001 of ERISA.

     “Completion Commitment” shall mean the commitment of PrimeEnergy Corporation
described in the Completion and Liquidity Maintenance Agreement of even date herewith by and
between PrimeEnergy Corporation, Borrower and Agent.

     “Compliance Certificate” shall mean each certificate, substantially in the form
attached hereto as Exhibit III, executed by a Responsible Officer of the Borrower and furnished to
the Lender from time to time in accordance with Sections 5.2 and 5.6.

     “Contingent Obligation” shall mean, as to any Person, without duplication, any
obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends, or other obligations of any other Person (for purposes of
this definition, a “primary
obligation”) in any manner, whether directly or indirectly, including, without limitation, any
obligation of such Person, regardless of whether such obligation is contingent, (a) to purchase
any primary obligation or any Property constituting direct or indirect security therefore, (b) to
advance or supply funds (i) for the purchase or payment of any primary obligation, or (ii) to
maintain working or equity capital of any other Person in respect of any primary obligation, or
otherwise to maintain the net worth or solvency of any other Person, (c) to purchase Property,
securities or services

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primarily for the purpose of assuring the owner of any primary obligation of the ability of the
Person primarily liable for such primary obligation to make payment thereof, or (d) otherwise to
assure or hold harmless the owner of any such primary obligation against loss in respect thereof,
with the amount of any Contingent Obligation being deemed to be equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith.

     “Default” shall mean any event or occurrence which with the lapse of time or the giving of
notice or both would become an Event of Default.

     “Default Rate” shall mean a per annum interest rate equal to the Base Rate plus five percent
(5%), but in no event exceeding the Highest Lawful Rate.

     “Dollars”
and “$” shall mean dollars in lawful currency of the United States of America.

     “EBITDAX” shall mean, for any period, Net Income for such period plus interest expense,
federal and state income taxes, depreciation, amortization, exploration expenses and other
non-cash expenses, less non-cash gains for such period deducted in the determination of net income
for such period.

     “Environmental Complaint” shall mean any written complaint, order, directive, claim,
citation, notice of environmental report or investigation, or other notice by any Governmental
Authority or any other Person with respect to (a) air emissions, (b) spills, releases, or
discharges to soils, any improvements located thereon, surface water, groundwater, or the sewer,
septic, waste treatment, storage, or disposal systems servicing any Property of the Borrower, (c)
solid or liquid waste disposal, (d) the use, generation, storage, transportation, or disposal of
any Hazardous Substance, or (e) other environmental, health, or safety matters affecting any
Property of the Borrower or the business conducted thereon.

     “Environmental Laws” shall mean (a) the following federal laws as they may be cited,
referenced, and amended from time to time: the Clean Air Act, the Clean Water Act, the Safe
Drinking Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the
Endangered Species Act, the Resource Conservation and Recovery Act, the Hazardous Materials
Transportation Act, the Superfund Amendments and Reauthorization Act, and the Toxic Substances
Control Act; (b) any and all equivalent environmental statutes of any state in which Property of
the Borrower is situated, as they may be cited, referenced and amended from time to time; (c) any
rules or regulations promulgated under or adopted pursuant to the above federal and state laws;
and (d) any other equivalent federal, state, or local statute or any requirement, rule,
regulation, code, ordinance, or order adopted pursuant thereto, including, without limitation,
those relating to the generation, transportation,

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treatment, storage, recycling, disposal, handling, or release of Hazardous Substances.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time
to time, and the regulations thereunder and interpretations thereof.

     “Event of Default” shall mean any of the events specified in Section 7.1.

     “Facility Amount” shall mean, for each Lender, the amount set forth opposite the name of such
Lender on Exhibit V under the caption “Facility Amounts,” as modified from time to time to
reflect assignments permitted by Section 9.1 or otherwise pursuant to the terms hereof and
to give effect to any written request of the Borrower (any such request being irrevocable, absent
written agreement of the Agent and the Required Lenders, which written agreement may be expressly
conditioned on the payment of a fee (other than with respect to a reduction) by the Borrower to
the Agent, for the account of the Lenders) to a reduction in the sum of the then existing Facility
Amounts of the Lenders.

     “Facility Fee” shall mean the fee payable to the Agent for the benefit of Lenders by the
Borrower pursuant to Section 2.13.

     “Final Maturity” shall mean July 1, 2009, for Facility A and January 1, 2008 for Facility B
and Facility C.

     “Financial Statements” shall mean statements of the financial condition of the
Borrower and FWOE Partners L.P. as at the point in time and for the period indicated and consisting
of at least a balance sheet and related statements of operations, common stock and other
stockholders’ equity, and cash flows for the Borrower and, when required by applicable provisions
of this Agreement to be audited, accompanied by the unqualified certification of an independent
certified public accountants acceptable to the Lender, all of which shall be prepared in accordance
with GAAP consistently applied and in comparative form with respect to the corresponding period of
the preceding fiscal period.

     “Fixed Rate Loan” shall mean any LIBO Rate Loan.

     “Floating Rate” shall mean an interest rate per annum equal to the Base Rate from time to
time in effect plus 0.50% percent for Facility A and Base Rate plus 1.50% percent for Facility B
and Base Rate plus 1.00% for Facility C, but in no event exceeding the Highest Lawful Rate.

     “Floating Rate Loan” shall mean any Loan and any portion of the Loan Balance which
the Borrower has requested, in the initial Borrowing Request for such Loan or a subsequent
Borrowing Request for such portion of the Loan

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Balance, bearing interest at the Floating Rate, or which pursuant to the terms hereof is otherwise
required to bear interest at the Floating Rate.

     “GAAP” shall mean generally accepted accounting principles established by the Financial
Accounting Standards Board or the American Institute of Certified Public Accountants and in effect
in the United States from time to time.

     “Governmental Authority” shall mean any nation, country, commonwealth, territory,
government, state, county, parish, municipality, or other political subdivision and any entity
exercising executive, legislative, judicial, regulatory, or administrative functions of or
pertaining to government.

     “Hazardous Substances” shall mean flammables, explosives, radioactive materials,
hazardous wastes, asbestos, or any material containing asbestos, polychlorinated biphenyls (PCBs),
toxic substances or related materials, petroleum, petroleum products, associated oil or natural
gas exploration, production, and development wastes, or any substances defined as “hazardous
substances,” “hazardous materials,” “hazardous wastes,” or “toxic substances” under the
Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund
Amendments and Reauthorization Act, as amended, the Hazardous Materials Transportation Act, as
amended, the Resource Conservation and Recovery Act, as amended, the Toxic Substances Control Act,
as amended, or any other law or regulation now or hereafter enacted or promulgated by any
Governmental Authority.

     “Highest Lawful Rate” shall mean the maximum non-usurious interest rate, if any (or,
if the context so requires, an amount calculated at such rate), that at any time or from time to
time may be contracted for, taken, reserved, charged, or received under applicable laws of the
State of Texas or the United States of America, whichever authorizes the greater rate, as such laws
are presently in effect or, to the extent allowed by applicable law, as such laws may hereafter be
in effect and which allow a higher maximum non-usurious interest rate than such laws now allow.

     “Indebtedness” shall mean, as to any Person, without duplication, (a) all liabilities
(excluding reserves for deferred income taxes, deferred compensation liabilities, and other
deferred liabilities and credits) which in accordance with GAAP would be included in determining
total liabilities as shown on the liability side of a balance sheet, (b) all obligations of such
Person evidenced by bonds, debentures, promissory notes, or similar evidences of indebtedness, (c)
all other indebtedness of such Person for borrowed money, and (d) all obligations of others, to
the extent any such obligation is secured by a Lien on the assets of such Person (whether or not
such Person has assumed or become liable for the obligation secured by such Lien). (Provided,
however, Indebtedness shall not include unsecured advances by members and/or shareholders).

 - 7 - 

 

     “Insolvency Proceeding” shall mean application (whether voluntary or instituted by
another Person) for or the consent to the appointment of a receiver, trustee, conservator,
custodian, or liquidator of any Person or of all or a substantial part of the Property of such
Person, or the filing of a petition (whether voluntary or instituted by another Person) commencing
a case under Title 11 of the United States Code, seeking liquidation, reorganization, or
rearrangement or taking advantage of any bankruptcy, insolvency, debtor’s relief, or other similar
law of the United States, the State of Texas, or any other jurisdiction.

     “Intellectual Property” shall mean patents, patent applications, trademarks,
tradenames, copyrights, technology, know-how, and processes.

     “Interest Expense” shall mean, for any period, the total interest expense (including, without
limitation, interest expense attributable to capitalized leases) of the Borrower for such period,
determined in accordance with GAAP.

     “Interest Period” shall mean, subject to the limitations set forth in Section 2.22, with
respect to any LIBO Rate Loan, a period commencing on the date such Loan is made or converted from
a Loan of another type pursuant to this Agreement or the last day of the next preceding Interest
Period with respect to such Loan and ending on the numerically corresponding day in the calendar
month that is one, two, or three months thereafter, as the Borrower may request in the Borrowing
Request for such Loan.

     “Investment” in any Person shall mean any stock, bond, note, or other evidence of
Indebtedness, or any other security (other than current trade and customer accounts) of,
investment or partnership interest in or loan to, such Person.

     “L/C Exposure” shall mean, at any time, the aggregate maximum amount available to be drawn
under outstanding Letters of Credit at such time.

     “Letter of Credit” shall mean any standby letter of credit issued by the Lender for the
account of the Borrower pursuant to Section 2.2.

     “Letter of Credit Application” shall mean the standard letter of credit application
employed by the Lender from time to time in connection with letters of credit, provided that in
the event of a conflict between the terms of each Letter of Credit Application and this Agreement,
this Agreement shall control.

     “Letter of Credit Fee” shall mean each fee payable to the Lender by the Borrower
pursuant to Section 2.14 upon or in connection with the issuance of a Letter of Credit.

     “LIBO Rate” shall mean, with respect to any Interest Period for any LIBO Rate Loan, the
lesser of (a) the rate per annum equal to the average of the offered quotations appearing on
Bloomberg Professional LIBOR Index Page (or if such

 - 8 - 

 

Bloomberg Professional LIBOR Index Page shall not be available, any successor or similar service
selected by the Lender and the Borrower) as of approximately 10:00 a.m., Central Standard or
Central Daylight Time, as the case may be, on the day two Business Days prior to the first day of
such Interest Period for Dollar deposits in an amount comparable to the principal amount of such
LIBO Rate Loan and having a term comparable to the Interest Period for such LIBO Rate Loan, or (b)
the Highest Lawful Rate. If neither such Bloomberg Professional LIBOR Index Page nor any successor
or similar service is available, the term “LIBO Rate” shall mean, with respect to any Interest
Period for any LIBO Rate Loan, the lesser of (a) the rate per annum quoted by the Lender at
approximately 11:00 a.m., London time (or as soon thereafter as practicable) two Business Days
prior to the first day of the Interest Period for such LIBO Rate Loan for the offering by the
Lender to leading banks in the London interbank market of Dollar deposits in an amount comparable
to the principal amount of such LIBO Rate Loan and having a term comparable to the Interest Period
for such LIBO Rate Loan, or (b) the Highest Lawful Rate.

     “LIBO Rate Loan” shall mean any Loan and any portion of the Loan Balance which the
Borrower has requested, in the initial Borrowing Request for such Loan or a subsequent Borrowing
Request for such portion of the Loan Balance, bearing interest at the Adjusted LIBO Rate and which
is permitted by the terms hereof to bear interest at the Adjusted LIBO Rate.

     “Lien” shall mean any interest in Property securing an obligation owed to, or a claim by, a
Person other than the owner of such Property, whether such interest is based on common law,
statute, or contract, and including, but not limited to, the lien or security interest arising from
a mortgage, ship mortgage, encumbrance, pledge, security agreement, conditional sale or trust
receipt, or a lease, consignment, or bailment for security purposes (other than true leases or true
consignments), liens of mechanics, materialmen, and artisans, maritime liens and reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, leases,
and other title exceptions and encumbrances affecting Property which secure an obligation owed to,
or a claim by, a Person other than the owner of such Property (for the purpose of this Agreement,
the Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject
to a conditional sale agreement, financing lease, or other arrangement pursuant to which title to
the Property has been retained by or vested in some other Person for security purposes), and the
filing or recording of any financing statement or other security instrument in any public office.

     “Limitation Period” shall mean, any period while any amount remains owing on the Note
and interest on such amount, calculated at the applicable interest rate, plus any fees or other
sums payable under any Loan Document and deemed to be interest under applicable law, would exceed
the amount of interest which would accrue at the Highest Lawful Rate.

 - 9 - 

 

     “Liquidity Agreement” shall mean the agreement of PrimeEnergy Corporation described
in the Completion and Liquidity Maintenance Agreement that agreement of even date herewith, by and
between PrimeEnergy Corporation, Borrower and the Lender.

     “Loan” shall mean any loan made by the Lender to or for the benefit of the Borrower pursuant
to this Agreement and any payment made by the Lender under a Letter of Credit.

     “Loan Balance” shall mean, for Facility A, at any time, the outstanding principal balance of
the amount owed on Facility A at such time, plus the L/C Exposure at such time, excluding L/C
Exposure for L/C’s issued for Commodity Hedge Agreements, (b) for Facility B, at any time, the
outstanding principal balance of the amount owed on Facility B at such time, plus the L/C Exposure
at such time, excluding L/C Exposure for L/C’s issued for Commodity Hedge Agreements, and (c) for
Facility C, at any time, the outstanding principal balance of the amount owed on Facility C at
such time.

     “Loan Documents” shall mean this Agreement, the Note, the Letter of Credit
Applications, the Letters of Credit, the Security Instruments, and all other documents and
instruments now or hereafter delivered pursuant to the terms of or in connection with this
Agreement, the Note, the Letter of Credit Applications, the Letters of Credit, or the Security
Instruments, and all renewals and extensions of, amendments and supplements to, and restatements
of, any or all of the foregoing from time to time in effect.

     “Material Adverse Effect” shall mean (a) any adverse effect on the business,
operations, properties, or financial condition of the Borrower, which substantially increases the
risk that any of the Obligations will not be repaid as and when due, or (b) any substantially
adverse effect upon the Collateral.

     “Mortgaged Properties” shall mean all Oil and Gas Properties and pipelines and
related facilities of the Borrower subject to a perfected first priority Lien in favor of the
Lender for the benefit of the Lenders, subject only to Permitted Liens, as security for the
Obligations.

     “Multiemployer Plan” shall mean a Plan which is a multiemployer plan as defined in
Section 4001 (a)(3) of ERISA.

     “Net Income” shall mean, for any period, the net income (or loss) of the Borrower for such
period, determined in accordance with GAAP.

     “Notes” shall mean, collectively, each of the promissory notes of the Borrower payable to a
Lender in the amount of the Facility Amount of such Lender in the form attached hereto as
Exhibit I and Exhibit 1(A) with all blanks in such form completed appropriately,
together with all renewals, extensions for any period, increases, and rearrangements thereof.

 - 10 - 

 

     “Obligations” shall mean, without duplication, (a) all Indebtedness evidenced by the Note,
(b) the Reimbursement Obligations, (c) the undrawn, unexpired amount of all outstanding Letters of
Credit, (d) the obligation of the Borrower for the payment of Commitment Fees, Facility Fees,
Letter of Credit Fees, and Engineering Fees, (e) all obligations and liabilities whether now
existing or hereafter arising of the Borrower to the Lender in connection with any Commodity Hedge
Agreement or Rate Management Transaction (which if done with a third party, acceptable to the
Agent, will rank pari passu with all other items listed in this definition), including Letters of
Credit issued outside of this facility for Commodity Hedge Agreements or Rate Management
Transactions, and (f) all other obligations and liabilities of the Borrower to the Lender, now
existing or hereafter incurred, under, arising out of or in connection with any Loan Document, and
to the extent that any of the foregoing includes or refers to the payment of amounts deemed or
constituting interest, only so much thereof as shall have accrued, been earned and which remains
unpaid at each relevant time of determination.

     “Oil and Gas Properties” shall mean fee, leasehold, or other interests in or under
mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with respect to
Properties situated in the United States or offshore from any State of the United States,
including, without limitation, overriding royalty and royalty interests, leasehold estate
interests, net profits interests, production payment interests, and mineral fee interests,
together with contracts executed in connection therewith and all tenements, hereditaments,
appurtenances and Properties appertaining, belonging, affixed, or incidental thereto.

     “PBGC” shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A
of Title IV of ERISA or any entity succeeding to any or all of its functions under ERISA.

     “Percentage Share” shall mean, as to each Lender, the percentage such Lender’s
Facility Amount constitutes the sum of the Facility Amounts of all Lenders as such percentage is
shown in Exhibit V.

     “Permitted Liens” shall mean (a) Liens for taxes, assessments, or other governmental charges
or levies not yet due or which (if foreclosure, distraint, sale, or other similar proceedings shall
not have been initiated) are being contested in good faith by appropriate proceedings, and such
reserve as may be required by GAAP shall have been made therefor, (b) Liens in connection with
workers’ compensation, unemployment insurance or other social security (other than Liens created by
Section 4068 of ERISA), old-age pension, or public liability obligations which are not yet due or
which are being contested in good faith by appropriate proceedings, if such reserve as may be
required by GAAP shall have been made therefore, (c) Liens in favor of vendors, carriers,
warehousemen, repairmen, mechanics, workmen, materialmen, construction, or similar Liens arising by
operation of law in the ordinary course of business in respect of obligations which are not yet due
or which are being contested in good faith by

 - 11 - 

 

appropriate proceedings, if such reserve as may be required by GAAP shall have been made therefore,
(d) Liens in favor of operators and non-operators under joint operating agreements or similar
contractual arrangements arising in the ordinary course of the business of the Borrower to secure
amounts owing, which amounts are not yet due or are being contested in good faith by appropriate
proceedings, if such reserve as may be required by GAAP shall have been made therefore, (e) Liens
under production sales agreements, division orders, operating agreements, and other agreements
customary in the oil and gas business for processing, producing, and selling hydrocarbons securing
obligations not constituting Indebtedness and provided that such Liens do not secure obligations to
deliver hydrocarbons at some future date without receiving full payment therefore within 90 days of
delivery, (f) easements, rights of way, restrictions, and other similar encumbrances, and minor
defects in the chain of title which are customarily accepted in the oil and gas financing industry,
none of which interfere with the ordinary conduct of the business of the Borrower or materially
detract from the value or use of the Property to which they apply, (h) Liens in favor of the Agent
and other Liens expressly permitted under the Security Instruments and (i) Liens not to exceed
$50,000.

“Person” shall mean an individual, corporation, partnership, trust, unincorporated
organization, limited liability company, government, any agency or political subdivision of any
government, or any other form of entity.

“Plan” shall mean, at any time, any employee benefit plan which is covered by ERISA and in
respect of which the Borrower or any Commonly Controlled Entity is (or, if such plan were
terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” as
defined in Section 3(5) of ERISA.

“Principal Office” shall mean the principal office of the Lender in Dallas, Texas, presently
located at 833 Douglas Avenue, Dallas, 

Texas 75225.

“Prohibited Transaction” shall have the meaning assigned to such term in Section 4975
of the Code.

“Project Fields” shall mean the South Padre Island area fields 1113, 1059, 1060, 1073 and
1133 and North Padre Island area field 998.

“Property” shall mean any interest in any kind of property or asset, whether real, personal
or mixed, tangible or intangible.

“Rate Management Transaction” shall mean any transaction (including an agreement with
respect thereto) now existing or hereafter entered into between Borrower and Lenders which is a
rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or
equity index swap, equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction, forward

 - 12 - 

 

transaction, currency swap transaction, cross-currency rate swap transaction, currency option or
any other similar transaction (including any option with respect to any of these transactions) or
any combination thereof, whether linked to on or more interest rates, foreign currencies,
commodity prices, equity prices or other financial measures.

     “Regulation D” shall mean Regulation D of the Board of Governors of the Federal Reserve
System, as the same may be amended or supplemented from time to time.

     “Regulatory Change” shall mean the passage, adoption, institution, or amendment of
any federal, state, local, or foreign Requirement of Law (including, without limitation,
Regulation D), or any interpretation, directive, or request (whether or not having the force of
law) of any Governmental Authority or monetary authority charged with the enforcement,
interpretation, or administration thereof, occurring after the Closing Date and applying to a
class of banks including the Lender.

     “Reimbursement Obligation” shall mean the obligation of the Borrower to provide to
the Lenders or reimburse the Lenders for any amounts payable, paid, or incurred by the Lenders
with respect to Letters of Credit.

     “Release of Hazardous Substances” shall mean any emission, spill, release, disposal,
or discharge, except in accordance with a valid permit, license, certificate, or approval of the
relevant Governmental Authority, of any Hazardous Substance into or upon (a) the air, (b) soils or
any improvements located thereon, (c) surface water or groundwater, or (d) the sewer or septic
system, or the waste treatment, storage, or disposal system servicing any Property of the
Borrower.

     “Reorganization” shall mean, with respect to any Multiemployer Plan, that such Plan is in
reorganization within the meaning of such term in Section 4241 of ERISA.

     “Reportable Event” shall mean any of the events set forth in Section 4043(b) of
ERISA, other than those events as to which the thirty-day notice period is waived under
subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. §2615.

     “Required Lenders” shall mean, Lenders (including the Agent) holding more than 66
2/3% of the then Loan Balance, or, if there is no Loan Balance, Lenders (including the Agent)
having more than 66 2/3% of the aggregate amount of the Commitments.

     “Requirement of Law” shall mean, as to any Person, the certificate or articles of
incorporation and by-laws or other organizational or governing documents of such Person, and any
applicable law, treaty, ordinance, order, judgment, rule, decree, regulation, or determination of
an arbitrator, court, or

 - 13 - 

 

other Governmental Authority, including, without limitation, rules, regulations, orders, and
requirements for permits, licenses, registrations, approvals, or authorizations, in each case as
such now exist or may be hereafter amended and are applicable to or binding upon such Person or
any of its Property or to which such Person or any of its Property is subject.

     “Reserve Report” shall mean each report delivered to the Lender pursuant to Section 5.7.

     “Responsible Officer” shall mean, as to any Person, its President, Chief Executive
Officer, Chief Operating Officer or any Vice President.

     “Security Instruments” shall mean the security instruments executed and delivered in
satisfaction of the condition set forth in 

Section 3.1(f), and all other documents and instruments
at any time executed as security for all or any portion of the Obligations, as such instruments
may be amended, restated, or supplemented from time to time.

     “Single Employer Plan” shall mean any Plan which is covered by Title IV of ERISA, but
which is not a Multiemployer Plan.

     “Subordinated Debt” shall mean the debt described in the Subordination Agreement.

     “Subordination Agreement” shall mean that agreement between Borrower, PrimeEnergy
Corporation and the Agent dated of even date herewith.

     “Subsidiary” shall mean, as to any Person, a corporation of which shares of stock having
ordinary voting power (other than stock 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
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.

     “Superfund Site” shall mean those sites listed on the Environmental Protection Agency
National Priority List and eligible for remedial action or any comparable state registries or list
in any state of the United States.

     “Tangible Net Worth” shall mean (a) total assets, as would be reflected on a balance
sheet of the Borrower prepared in accordance with GAAP, exclusive of Intellectual Property,
experimental or organization expenses, franchises, licenses, permits, and other intangible assets,
treasury stock, unamortized underwriters’ debt discount and expenses, and goodwill minus (b) total
liabilities, as would be reflected on a balance sheet of the Borrower prepared in accordance with
GAAP exclusive of Subordinated Debt.

     “Transferee” shall mean any Person to which any Lender has sold, assigned, transferred, or
granted a participation in any of the Obligations, as

 - 14 - 

 

authorized pursuant to Section 9.1, and any Person acquiring, by purchase,
assignment, transfer, or participation, from any such purchaser, assignee,
transferee, or participant, any part of such Obligations.

     “UCC” shall mean the Uniform Commercial Code as from time to time in effect in the
State of Texas.

     1.3 Undefined Financial Accounting Terms. Undefined financial accounting terms
used in this Agreement shall be defined according to GAAP at the time in effect.

     1.4 References. References in this Agreement to Exhibit, Article, or Section numbers
shall be to Exhibits, Articles, or Sections of this Agreement, unless expressly stated to the
contrary. References in this Agreement to “hereby,” “herein,” “hereinafter,” “hereinabove,”
“hereinbelow,” “hereof,” “hereunder” and words of similar import shall be to this Agreement in
its entirety and not only to the particular Exhibit, Article, or Section in which such
reference
appears.

     1.5 Articles and Sections. This Agreement, for convenience only, has been divided
into Articles and Sections; and it is understood that the rights and other legal relations of
the
parties hereto shall be determined from this instrument as an entirety and without regard to
the
aforesaid division into Articles and Sections and without regard to headings prefixed to such
Articles or Sections.

     1.6 Number and Gender. Whenever the context requires, reference herein made to
the single number shall be understood to include the plural; and likewise, the plural shall be
understood to include the singular. Definitions of terms defined in the singular or plural
shall be
equally applicable to the plural or singular, as the case may be, unless otherwise indicated.
Words denoting sex shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the general but shall
be
construed as cumulative.

     1.7 Incorporation of Exhibits. The Exhibits attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for all purposes.

ARTICLE II

TERMS OF FACILITY

     2.1 Revolving Line of Credit.

          2.1 A. Facility A and B Revolving Line of Credit, (a) Upon the terms and conditions
(including, without limitation, the right of the Lender to decline to make any Loan so long as any
Default or Event of Default exists) and relying on the representations and warranties contained in
this Agreement, each Lender severally agrees, during the Commitment Period, to make Loans, in
immediately available funds at the Applicable Lending Office or the Principal Office, to or for the
benefit of the Borrower in an amount not to exceed at any time outstanding the lesser of the
Borrowing Base or the Percentage Share of such Lender of the Borrowing Base

 - 15 - 

 

then in effect for Facility A and Facility B, Loans shall be made from time to time on any
Business Day designated by the Borrower following receipt by the Agent of a Borrowing Request.

          (b) Subject to the terms of this Agreement, during the Commitment Period,
the Borrower may borrow, repay, and reborrow and convert Loans of one type or with one
Interest Period into Loans of another type or with a different Interest Period. Except for
prepayments made pursuant to Section 2.10, each borrowing, conversion, and prepayment of
principal of Loans shall be in an amount at least equal to $100,000. Each borrowing,
prepayment, or conversion of or into a Loan of a different type or, in the case of a LIBO Rate
Loan, having a different Interest Period, shall be deemed a separate borrowing, conversion, and
prepayment for purposes of the foregoing, one for each type of Loan or Interest Period.
Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of
LIBO Rate Loans having the same Interest Period shall be at least equal to $100,000; and if any
LIBO Rate Loan would otherwise be in a lesser principal amount for any period, such Loan shall
be a Floating Rate Loan during such period.

          (c) The Loans shall be made and maintained at the Applicable Lending Office
or the Principal Office and shall be evidenced by the Notes.

          (d) Not later than 2:00 p.m., Central Standard or Central Daylight Time, as the
case may be, on the date specified for each borrowing, the Lenders shall make available, in
immediately available funds for such borrowing for the account of the Borrower. The amount so
received by the Agent shall, subject to the terms and conditions hereof, be made available to the
Borrower in immediately available funds at the Principal Office by the end of that Business Day.
All Loans by the Lenders shall be maintained at the Applicable Lending Office of the Lenders
and shall be evidenced by the Note of the Lenders.

          (e) The face amounts of the Note has been established as an administrative
convenience and do not commit the Lenders to advance funds hereunder in excess of the then
current Borrowing Base.

          2.1B.
Facility C Revolving Line of Credit. (a) Facility C shall be the lesser of the
Facility Amount of each Lender or the Percentage Share of each Lender of the Borrower Base then in
effect for Facility C (not to exceed $5,000,000). Loans shall be made from time to time on any
Business Day designated by the Borrower following receipt by the Agent of a Borrowing Request.

          (b) The terms of Section 2.1A(a), (b), (c), (d) and (e) are applicable to Facility C and are
incorporated herein by this reference.

     2.2
Letter of Credit Facility, (a) Upon the terms and conditions and relying on the
representations and warranties contained in this Agreement, the Agent, as issuing bank for the
Lenders, agrees from the date of this Agreement until the date which is thirty days prior to the
Commitment Termination Date, to issue on behalf of the Lenders in their respective Percentage
Shares, Letters of Credit for the account of the Borrower and to renew and extend such Letters of
Credit. Letters of Credit shall be issued, renewed, or extended from time to time on any

 - 16 - 

 

Business Day designated by the Borrower following the receipt in accordance with the terms hereof
by the Agent of the written (or oral, confirmed promptly in writing) request by a Responsible
Officer of the Borrower and a Letter of Credit Application. Letters of Credit shall be issued in
such amounts as the Borrower may request; provided, however, that (i) no Letter of Credit shall
have an expiration date which is more than 365 days after the issuance thereof or subsequent to
Final Maturity, (ii) each automatically renewable Letter of Credit shall provide that it may be
terminated by the Agent at its then current expiry date by not less than 30 days’ written notice by
the Agent to the beneficiary of such Letter of Credit, and (iii) the Agent shall not be obligated
to issue any Letter of Credit if (A) the face amount thereof would exceed the Available Commitment,
or (B) after giving effect to the issuance thereof, the L/C Exposure, when added to the Loan
Balance then outstanding, would exceed the Commitment Amount, or (C) the L/C Exposure would not
exceed $2,000,000 for Facility A and $2,000,000 for Facility B, never exceeding $2,000,000 in the
aggregate for Facility A and Facility B, and (iv) notwithstanding the above, Letters of Credit may
be issued for Commodity Hedge Agreements or Rate Management Transactions at the sole discretion of
the Agent up to an amount not to exceed $5,000,000 as evidenced by the Note shown on Exhibit
1(A). Any Letters of Credit issued under (iv) above shall be cross-collateralized and
cross-defaulted with the other Obligations hereunder and if drawn shall be due on demand.

          (b) Prior to any payment in respect of any Letter of Credit, each Lender shall be deemed to be
a participant through the Agent with respect to the relevant Letter of Credit in the obligation of
the Agent, as the issuer of such Letter of Credit, in an amount equal to the Percentage Share of
such Lender of the maximum amount which is or at any time may become available to be drawn
thereunder. Upon delivery by such Lender of funds requested pursuant to Section 2.2(c), such Lender
shall be treated as having purchased a participating interest in an amount equal to such funds
delivered by such Lender to the Agent in the obligation of the Borrower to reimburse the Agent, as
the issuer of such Letter of Credit, for any amounts payable, paid, or incurred by the Agent, as
the issuer of such Letter of Credit, with respect to such Letter of Credit.

          (c) Each Lender shall be unconditionally and irrevocably liable, without regard to the
occurrence of any Default or Event of Default, to the extent of the Percentage Share of such Lender
at the time of issuance of each Letter of Credit, to reimburse, on demand, the Agent, as the issuer
of such Letter of Credit, for the amount of each Letter of Credit Payment under such Letter of
Credit. Each payment in respect of any Letter of Credit shall be deemed to be a Floating Rate Loan
by each Lender to the extent of funds delivered by such Lender to the Agent with respect to such
payment and shall to such extent be deemed a Floating Rate Loan under and shall be evidenced by the
Note of such Lender.

          (d) EACH LENDER AGREES TO SEVERALLY INDEMNIFY THE AGENT, AS THE ISSUER OF EACH LETTER OF
CREDIT, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES OF THE
AGENT (TO THE EXTENT NOT REIMBURSED BY THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF
THE BORROWER TO DO SO), RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER AT THE TIME OF
ISSUANCE OF SUCH LETTER OF CREDIT, FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS,
OBLIGATIONS, LOSSES, DAMAGES,

 - 17 - 

 

PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND WHATSOEVER
WHICH MAY AT ANY TIME (INCLUDING, WITHOUT LIMITATION, ANY TIME FOLLOWING THE PAYMENT AND
PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE IMPOSED ON, INCURRED BY
OR ASSERTED AGAINST THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY RELATING TO OR ARISING
OUT OF THIS AGREEMENT OR SUCH LETTER OF CREDIT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT AS THE
ISSUER OF SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR IN CONNECTION WITH ANY OF THE FOREGOING, INCLUDING,
WITHOUT LIMITATION, ANY LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS IMPOSED, INCURRED OR ASSERTED AS A RESULT OF
THE NEGLIGENCE, WHETHER SOLE OR CONCURRENT, OF THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT OR
ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT
NO LENDER (OTHER THAN THE AGENT AS THE ISSUER OF A LETTER OF CREDIT) SHALL BE LIABLE FOR THE
PAYMENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE GROSS NEGLIGENCE WHETHER
SOLE OR CONCURRENT OR WILLFUL MISCONDUCT OF THE AGENT AS THE ISSUER OF A LETTER OF CREDIT. THE
AGREEMENTS IN THIS SECTION 2.2(d) SHALL SURVIVE THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND
THE TERMINATION OF THIS AGREEMENT.

     2.3
Use of Loan Proceeds and Letters of Credit. (a) Proceeds of the Loan
shall be used solely to finance Borrower’s share of capital expenditures for the development of the
Project Fields, to refinance shareholder debt and other projects and/or acquisitions evaluated by
and acceptable to the Agent.

          (b) Letters of Credit shall be used solely for other general limited liability company
purposes and to support Commodity Hedge Agreements and Rate Management Transactions.”

     2.4 Interest. Subject to the terms of this Agreement (including, without limitation,
Section 2.17), interest on the Loans shall accrue and be payable at a rate per annum equal to the
Floating Rate for each Floating Rate Loan and the Adjusted LEBO Rate for each LIBO Rate Loan.
Interest on all Floating Rate Loans shall be computed on the basis of a year of 365 or 366 days, as
applicable, for the actual days elapsed (including the first day but excluding the last day) during
the period for which payable. Interest on all LIBO Rate Loans shall be computed on the basis of a
year of 360 days for the actual days elapsed (including the first day but excluding the last day)
during the period for which payable. Notwithstanding the foregoing, interest on past-due
principal and, to the extent permitted by applicable law, past-due interest, shall accrue at the
Default Rate, computed on the basis of a year of 365 or 366 days, as the case may be, for

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the actual days elapsed (including the first day but excluding the last day) during the period for
which payable, and shall be payable upon demand by the Lender at any time as to all or any portion
of such interest. In the event that the Borrower fails to select the duration of any Interest
Period for any LIBO Rate Loan within the time period and otherwise as provided herein, such Loan
(if outstanding as a LIBO Rate Loan) will be automatically converted into a Floating Rate Loan on
the last day of the then current Interest Period for such Loan or (if outstanding as a Floating
Rate Loan) will remain as, or (if not then outstanding) will be made as, a Floating Rate Loan.
Interest provided for herein shall be calculated on unpaid sums actually advanced and outstanding
pursuant to the terms of this Agreement and only for the period from the date or dates of such
advances until repayment.

     2.5 Repayment of Loans and Interest. Accrued and unpaid interest on each
outstanding Floating Rate Loan shall be due and payable monthly commencing on the first day of
August 2006, and continuing on the first day of each calendar month thereafter while any Floating
Rate Loan remains outstanding, the payment in each instance to be the amount of interest which has
accrued and remains unpaid in respect of the relevant Loan. Accrued and unpaid interest on each
outstanding LIBO Rate Loan shall be due and payable on the last day of the Interest Period for such
LIBO Rate Loan corresponding to the day of the calendar month on which such Interest Period
commenced, the payment in each instance to be the amount of interest which has accrued and remains
unpaid in respect of the relevant Loan. The Loan Balance, together with all accrued and unpaid
interest thereon, shall be due and payable at Final Maturity. At the time of making each payment
hereunder or under the Note, the Borrower shall specify to the Lender the Loans or other amounts
payable by the Borrower hereunder to which such payment is to be applied. In the event the Borrower
fails to so specify, or if an Event of Default has occurred and is continuing, the Lender may apply
such payment as it may elect in its sole discretion.

     2.6 Outstanding Amounts. The outstanding principal balance of the Notes reflected by
the notations by the Lenders on their records shall be deemed rebuttably presumptive evidence of
the principal amount owing on the Notes. The liability for payment of principal and interest
evidenced by the Notes shall be limited to principal amounts actually advanced and outstanding
pursuant to this Agreement and interest on such amounts calculated in accordance with this
Agreement.

     2.7 Time, Place, and Method of Payments. All payments required pursuant to this
Agreement or the Notes shall be made in lawful money of the United States of America and in
immediately available funds, shall be deemed received by the Lender on the Business Day received,
or on the next Business Day following receipt if such receipt is after 2:00 p.m., Central Standard
or Central Daylight Time, as the case may be, on any Business Day, and shall be made at the
Principal Office. Except as provided to the contrary herein, if the due date of any payment
hereunder or under the Notes would otherwise fall on a day which is not a Business Day, such date
shall be extended to the next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.

     2.8
Pro Rata Treatment: Adjustments. (a) Except to the extent otherwise expressly
provided herein, (i) each borrowing pursuant to this Agreement shall be made from the Lenders pro
rata in accordance with their respective Percentage Shares, (ii) each reduction of the sum of

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the Facility Amounts of the Lenders at the request of the Borrower, as well as any subsequent
increase in the sum of the Facility Amounts of the Lenders at the request of the Borrower and with
written agreement of the Agent and the Required Lenders shall serve to adjust the Facility Amounts
of the Lenders pro rata in accordance with the Facility Amounts of the Lenders in effect
immediately prior to any such adjustment, (iii) each payment by the Borrower of fees shall be made
for the account of the Lenders pro rata in accordance with their respective Percentage Shares, (iv)
each payment of principal of Loans shall be made for the account of the Lenders pro rata in
accordance with their Percentage Shares of the Loan Balance, and (v) each payment of interest on
Loans shall be made for the account of the Lenders pro rata in accordance with their Percentage
Shares of the aggregate amount of interest due and payable to the Lenders.

          (b) The Agent shall distribute all payments with respect to the Obligations to the Lenders
promptly upon receipt in like funds as received. In the event that any payments made hereunder by
the Borrower at any particular time are insufficient to satisfy in full the Obligations due and
payable at such time, such payments shall be applied (i) first, to fees and expenses due pursuant
to the terms of this Agreement or any other Loan Document, (ii) second, to accrued interest, (iii)
third, to the Loan Balance, and (iv) last, to any other Obligations.

          (c) If any Lender (for purposes of this Section, a “Benefitted Lender”) shall at any time
receive any payment of all or part of its portion of the Obligations, or receive any Collateral in
respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or
proceedings of the nature referred to in Section 7.1(f)
or Section 7.1(g), or
otherwise) in an amount greater than such Lender was entitled to receive pursuant to the terms
hereof, such Benefitted Lender shall purchase for cash from the other Lenders such portion of the
Obligations of such other Lenders, or shall provide such other Lenders with the benefits of any
such Collateral or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to
share the excess payment or benefits of such Collateral or proceeds with each of the Lenders
according to the terms hereof. If all or any portion of such excess payment or benefits is
thereafter recovered from such Benefitted Lender, such purchase shall be rescinded and the purchase
price and benefits returned by such Lender, to the extent of such recovery, but without interest.
The Borrower agrees that each such Lender so purchasing a portion of the Obligations of another
Lender may exercise all rights of payment (including rights of set-off) with respect to such
portion as fully as if such Lender were the direct holder of such portion. If any Lender ever
receives, by voluntary payment, exercise of rights of set-off or banker’s lien, counterclaim,
cross-action or otherwise, any funds of the Borrower to be applied to the Obligations, or receives
any proceeds by realization on or with respect to any Collateral, all such funds and proceeds shall
be forwarded immediately to the Agent for distribution in accordance with the terms of this
Agreement.

     2.9
Borrowing Base Determinations. (a) The Borrowing Base as of the Closing Date is
acknowledged by the Borrower and the Lender to be $0 for Facility A, $18,500,000 for Facility B and
$5,000,000 for Facility C. The Facility A Borrowing Base will be comprised of Borrower’s proved
developed producing properties. The Facility B Borrowing Base will be comprised of Borrower’s
proved developed shut-in properties. The Facility C Borrowing Base will be comprised of Borrower’s
20% general partner interest in FWOE Partners L.P. Notwithstanding the foregoing, the maximum
aggregate Borrowing Base for Facility A, B and C may never exceed $80,000,000.

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          (b) The Borrowing Base shall be redetermined semi-annually on the basis of information
supplied by the Borrower in compliance with the provisions of this Agreement, including, without
limitation, Reserve Reports, and all other relevant information
available to the Lenders. In addition, the Agent shall, in the normal course of business following a request of the Borrower,
redetermine the Borrowing Base; provided, however, the Lenders shall not be obligated to respond to
no more than ten such requests during 2006 and two such requests in each subsequent calendar year.
The Borrower may make additional requests for which agreement will not be unreasonably withheld
by the Lenders. Notwithstanding the foregoing, the Lenders may at their discretion redetermine the
Borrowing Base as set forth in Section 2.9(a) at any time and from time to time.

          (c) The Borrowing Base for Facility A shall be activated and redetermined following the
completion of facilities and pipeline and Ryder Scott Company classification of the reserves of the
successful wells in each Project Field as proved developed producing. The Borrowing Base for
Facility B will be redetermined following the completion, testing and Ryder Scott Company
classification of the reserves of each of the successful wells in each Project Field as proved
developed shut-in. The Borrowing Base for Facility C will be redetermined each time Facility A or
Facility B is redetermined.

          (d) Upon each determination of the Borrowing Base by the Lenders, the Agent shall notify the
Borrower orally (confirming such notice promptly in writing) of such determination, and the
Borrowing Base so communicated to the Borrower shall become effective upon such written
notification and shall remain in effect until the next subsequent determination of the Borrowing
Base and the monthly amount by which the Borrowing Base shall be reduced.

          (e) The Borrowing Base shall represent the determination by the Lenders, in accordance with
the applicable definitions and provisions herein contained and their customary lending practices
for loans of this nature, of the value, for loan purposes, of the Mortgaged Properties, subject, in
the case of any increase in the Borrowing Base, to the credit approval process of the Lenders.
Furthermore, the Borrower acknowledges that the determination of the Borrowing Base contains an
equity cushion (market value in excess of loan value), which is acknowledged by the Borrower to be
essential for the adequate protection of the Lenders.

     2.10 Mandatory Prepayments. If at any time the sum of the Loan Balance for Facility A,
B and C and the L/C Exposure (for Facility A and Facility B) exceeds the Borrowing Base then in
effect and exceeds the Borrowing Base for Facility A, B and C, the Borrower shall, within 5
Business Days of notice from the Lenders of such occurrence, (a) prepay, or make arrangements
acceptable to the Lenders for the prepayment of, the amount of such excess for application on the
Loan Balance (for the applicable Facility), (b) provide additional collateral, of character and
value satisfactory to the Lenders in their reasonable discretion, to secure the Obligations by the
execution and delivery to the Agent of security instruments in form and substance satisfactory to
the Agent in the exercise of its reasonable discretion, or (c) effect any combination of the
alternatives described in clauses (a) and (b) of this Section and acceptable to the Agent in its
reasonable discretion. In the event that a mandatory prepayment is required under this Section and
the amount owed on the Notes plus accrued interest is less than the amount required to be prepaid,
the Borrower shall repay the amount owed on the applicable Facility, plus accrued interest and, in
accordance with the provisions of the relevant Letter of

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Credit Applications executed by the Borrower or otherwise to the reasonable satisfaction of the
Agent, deposit with the Agent, as additional collateral securing the Obligations, an amount of
cash, in immediately available funds, equal to the L/C Exposure minus the Borrowing Base. The cash
deposited with the Agent in satisfaction of the requirement provided in this Section may be
invested, at the reasonable discretion of the Agent and then only at the express direction of the
Borrower as to investment vehicle and maturity (which shall be no later than the latest expiry date
of any then outstanding Letter of Credit), for the account of the Borrower in cash or cash
equivalent investments offered by or through the Agent.”

     2.11 Voluntary Prepayments and Conversions of Loans. Subject to applicable
provisions of this Agreement, the Borrower shall have the right at any time or from time to time to
prepay Loans and to convert Loans of one type or with one Interest Period into Loans of another
type or with a different Interest Period; provided, however, that (a) the Borrower shall give the
Lender notice of each such prepayment or conversion of all or any portion of a LIBO Rate Loan no
less than two Business Days prior to prepayment or conversion, (b) any LIBO Rate Loan may be
prepaid or converted only on the last day of an Interest Period for such Loan, (c) the Borrower
shall pay all accrued and unpaid interest on the amounts prepaid or converted, and (d) no such
prepayment or conversion shall serve to postpone the repayment when due of any Obligation.

     2.12
Commitment Fee. In addition to interest on the Notes as provided herein and all
other fees payable hereunder and to compensate the Lenders for maintaining funds available, the
Borrower shall pay to the Agent for the account of the Lenders, in immediately available funds, on
the first day of July, 2006, and on the first day of each third calendar month thereafter during
the Commitment Period, a fee in the amount of .375% per annum, calculated on the basis of a year of
365 or 366 days, as the case may be, for the actual days elapsed (including the first day but
excluding the last day), on the average daily amount of the Available Commitment during the
preceding quarterly period.

     2.13 Facility Fee. The Borrower shall pay the Facility Fees as set forth in the Fee
Agreement of even date herewith.

     2.14 Letter of Credit Fee. In addition to interest on the Note as provided herein and
all other fees payable hereunder, the Borrower agrees to pay to the Agent for the account of the
Lenders, on the date of issuance of each Letter of Credit, a fee equal to the greater of $500 or
2.00% calculated on the basis of a year of 365 or 366 days, as the case may be, for the actual days
elapsed (including the first day but excluding the last day), on the face amount of such Letter of
Credit during the period for which such Letter of Credit is issued; provided, however, in the event
such Letter of Credit is canceled prior to its original expiry date or a payment is made by the
Lender with respect to such Letter of Credit, the Lender shall, within 30 days after such
cancellation or the making of such payment, rebate to the Borrower the unearned portion of such
fee. The Borrower also agrees to pay to the Lender on demand its customary letter of credit
transactional fees, including, without limitation, amendment fees, payable with respect to each
Letter of Credit.”

     2.15 Loans to Satisfy Obligations of Borrower. The Lenders may, but shall not be
obligated to, but only if an Event of Default exists, make Loans for the benefit of the Borrower

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and apply proceeds thereof to the satisfaction of any condition, warranty, representation, or
covenant of the Borrower contained in this Agreement or any other Loan Document. Any such Loan
shall be evidenced by the Note and shall be made as a Floating Rate Loan.

     2.16 Security Interest in Accounts; Right of Offset. As security for the payment and
performance of the Obligations, the Borrower hereby transfers, assigns, and pledges to the Agent
for the benefit of the Lenders and grants to the Agent for the benefit of the Lenders a security
interest in all funds of the Borrower now or hereafter or from time to time on deposit with the
Agent and such Lender, with such interest of the Lender to be retransferred, reassigned, and/or
released by the Agent and each Lender, as the case may be, at the expense of the Borrower upon
payment in full and complete performance by the Borrower of all Obligations. All remedies as
secured party or assignee of such funds shall be exercisable by the Lender during the existence of
the occurrence of any Event of Default, regardless of whether the exercise of any such remedy would
result in any penalty or loss of interest or profit with respect to any withdrawal of funds
deposited in a time deposit account prior to the maturity thereof. Furthermore, the Borrower
hereby grants to the Agent and each Lender the right, exercisable during the existence of an Event
of Default, of offset or banker’s lien against all funds of the Borrower now or hereafter or from
time to time on deposit with the Agent and each Lender, regardless of whether the exercise of any
such remedy would result in any penalty or loss of interest or profit with respect to any
withdrawal of funds deposited in a time deposit account prior to the maturity thereof, provided
that such Obligation shall have matured, whether by acceleration of maturity or otherwise.

     2.17
General Provisions Relating to Interest. (a) It is the intention of the parties
hereto to comply strictly with the usury laws of the State of Texas and the United States of
America. In this connection, there shall never be collected, charged, or received on the sums
advanced hereunder interest in excess of that which would accrue at the Highest Lawful Rate. For
purposes of Chapter 303 of the Texas Finance Code (Vernon’s 1999), the Borrower agrees that the
Highest Lawful Rate shall be the “weekly ceiling” as defined in such Section, provided that the
Lenders may also rely, to the extent permitted by applicable laws of the State of Texas or the
United States of America, on alternative maximum rates of interest under other laws of the State of
Texas or the United States of America applicable to the Lender, if greater.

          (b) Notwithstanding anything herein or in the Note to the contrary, during any Limitation
Period, the interest rate to be charged on amounts evidenced by the Note shall be the Highest
Lawful Rate, and the obligation, if any, of the Borrower for the payment of fees or other charges
deemed to be interest under applicable law shall be suspended. During any period or periods of
time following a Limitation Period, to the extent permitted by applicable laws of the State of
Texas or the United States of America, the interest rate to be charged hereunder shall remain at
the Highest Lawful Rate until such time as there has been paid to the Lender (i) the amount of
interest in excess of that accruing at the Highest Lawful Rate that the Lender would have received
during the Limitation Period had the interest rate remained at the otherwise applicable rate, and
(ii) all interest and fees otherwise payable to the Lender but for the effect of such Limitation
Period.

          (c) If, under any circumstances, the aggregate amounts paid on the Note or under this
Agreement or any other Loan Document include amounts which by law are deemed interest and which
would exceed the amount permitted if the Highest Lawful Rate were in effect,

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the Borrower stipulates that such payment and collection will have been and will be deemed to have
been, to the extent permitted by applicable laws of the State of Texas or the United States of
America, the result of mathematical error on the part of the Borrower and the Lender; and the
Lenders shall promptly refund the amount of such excess (to the extent only of such interest
payments in excess of that which would have accrued and been payable on the basis of the Highest
Lawful Rate) upon discovery of such error by the Lender or notice thereof from the Borrower. In
the event that the maturity of any Obligation is accelerated, by reason of an election by the
Lender or otherwise, or in the event of any required or permitted prepayment, then the
consideration constituting interest under applicable laws may never exceed the Highest Lawful
Rate; and excess amounts paid which by law are deemed interest, if any, shall be credited by the
Lender on the principal amount of the Obligations, or if the principal amount of the Obligations
shall have been paid in full, refunded to the Borrower.

          (d) All sums paid, or agreed to be paid, to the Lender for the use, forbearance and detention
of the proceeds of any advance hereunder shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread throughout the full term hereof until paid in full so
that the actual rate of interest is uniform but does not exceed the Highest Lawful Rate throughout
the full term hereof.

     2.18
Yield Protection. (a) Without limiting the effect of the other provisions of
this Section (but without duplication), the Borrower shall pay to the Lenders from time to time
such amounts as the Lenders may determine are necessary to compensate it for any Additional Costs
incurred by the Lenders.

          (b) Without limiting the effect of the other provisions of this Section (but without
duplication), the Borrower shall pay to the Lenders from time to time on request such amounts as
the Lenders may determine are necessary to compensate the Lender for any costs attributable to the
maintenance by the Lenders (or any Applicable Lending Office), pursuant to any Regulatory Change,
of capital in respect of the Commitment, such compensation to include, without limitation, an
amount equal to any reduction of the rate of return on assets or equity of the Lender (or any
Applicable Lending Office) to a level below that which the Lender (or any Applicable Lending
Office) could have achieved but for such Regulatory Change.

          (c) Without limiting the effect of the other provisions of this Section (but without
duplication), in the event that any Requirement of Law or Regulatory Change or the compliance by
the Lenders therewith shall (i) impose, modify, or hold applicable any reserve, special deposit, or
similar requirement against any Letter of Credit or obligation to issue Letters of Credit, or (ii)
impose upon the Lenders any other condition regarding any Letter of Credit or obligation to issue
Letters of Credit, and the result of any such event shall be to increase the cost to the Lenders of
issuing or maintaining any Letter of Credit or obligation to issue Letters of Credit or any
liability with respect to payments by the Lenders under Letters of Credit, or to reduce any amount
receivable in connection therewith, then within 15 days of demand by the Lenders, the Borrower
shall pay to the Lenders, from time to time as specified by the Lender, additional amounts which
shall be sufficient to compensate the Lenders for such increased cost or reduced amount receivable.

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          (d) Without limiting the effect of the other provisions of this Section (but without
duplication), the Borrower shall pay to the Lenders such amounts as shall be sufficient in the
reasonable opinion of the Lender to compensate it for any loss, cost, or expense incurred by and as
a result of:

     (i) any payment, prepayment, or conversion by the Borrower of a
LIBO Rate Loan on a date other than the last day of an Interest
Period for such Loan; or

     (ii) any failure by the Borrower to borrow a LIBO Rate Loan
from the Lenders on the date for such borrowing specified in the
relevant Borrowing Request;

such compensation to include, without limitation, with respect to any LIBO Rate Loan, an amount
equal to the excess, if any, of (A) the amount of interest which would have accrued on the
principal amount so paid, prepaid, converted, or not borrowed for the period from the date of such
payment, prepayment, conversion, or failure to borrow to the last day of the then current Interest
Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan
which would have commenced on the date of such failure to borrow) at the applicable rate of
interest for such Loan provided for herein over (B) the interest component (as reasonably
determined by the Lender) of the amount (as reasonably determined by the Lenders) the Lenders
would have bid in the London interbank market for Dollar deposits of amounts comparable to such
principal amount and maturities comparable to such period; provided, however, that the Lenders
shall be limited to recover their actual losses, and not anticipated profits.

          (e) Determinations by the Lenders for purposes of this Section of the effect of any Regulatory
Change on capital maintained, their costs or rate of return, maintaining Loans, issuing Letters of
Credit, its obligation to make Loans and issue Letters of Credit, or on amounts receivable by it in
respect of Loans, Letters of Credit, or such obligations, and the additional amounts required to
compensate the Lenders under this Section shall be rebuttable presumptions of the additional
amounts due, provided that such determinations are made on a reasonable basis. The Lenders shall
furnish the Borrower with a certificate setting forth in reasonable detail the basis and amount of
increased costs incurred or reduced amounts receivable as a result of any such event, and the
statements set forth therein shall be rebuttable presumptions of the additional amounts due. The
Lenders shall (i) notify the Borrower, as promptly as practicable after the Lender obtains
knowledge of any Additional Costs or other sums payable pursuant to this Section and determines to
request compensation therefore, of any event occurring after the Closing Date which will entitle
the Lenders to compensation pursuant to this Section; provided that the Borrower shall not be
obligated for the payment of any Additional Costs or other sums payable pursuant to this Section
after the earlier of (A) the Final Maturity (provided that the Obligations have been paid in full)
and (B) the expiration of the Commitment (provided that the Obligations have been paid in full) to
the extent such Additional Costs or other sums accrued more than 90 days prior to the date upon
which the Borrower was given such notice; and (ii) designate a different Applicable Lending Office
for the Loans of the Lenders affected by such event if such designation will avoid the need for or
reduce the amount of such compensation and will not, in the sole opinion of the Lenders, be
materially disadvantageous to the Lenders. If the Lenders request compensation from the Borrower
under this Section, the Borrower may, by

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notice to the Lenders, require that the Loans by the Lenders of the type with respect to which
such compensation is requested be converted into Floating Rate Loans in accordance with Section
2.11. Any compensation requested by the Lenders pursuant to this Section shall be due and payable
to the Lenders within fifteen days of delivery of any such notice by the Lenders to the Borrower.

          (f) The Lenders agree that it shall not request, and the Borrower shall not be obligated to
pay, any Additional Costs or other sums payable pursuant to this Section unless similar additional
costs and other sums payable are also generally assessed by the Lenders against other customers of
the Lenders similarly situated where such customers are subject to documents providing for such
assessment.

     2.19 Limitation on Types of Loans. Anything herein to the contrary notwithstanding,
no more than 5 separate Loans shall be outstanding at any one time, with, for purposes of this
Section, all Floating Rate Loans constituting one Loan and all LIBO Rate Loans for the same
Interest Period constituting one Loan. Anything herein to the contrary notwithstanding, if, on or
prior to the determination of any interest rate for any LIBO Rate Loan for any Interest Period
therefor:

     (a) the Lenders determine (which determination shall be conclusive) that
quotations of interest rates for the deposits referred to in the definition of “LIBO
Rate” in Section 1.2 are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining the rate of interest for such Loan as provided
in this Agreement; or

     (b) the Lenders determine (which determination shall be conclusive) that the rates
of interest referred to in the definition of “LIBO Rate” in Section 1.2 upon the basis
of which the rate of interest for such Loan for such Interest Period is to be
determined do not accurately reflect the cost to the Lenders of making or maintaining
such Loan for such Interest Period,

then the Lenders shall give the Borrower prompt notice thereof; and so long as such condition
remains in effect, the Lenders shall be under no obligation to make LIBO Rate Loans or to convert
Loans of any other type into LIBO Rate Loans, and the Borrower shall, on the last day of the then
current Interest Period for each outstanding LIBO Rate Loan, either prepay such LIBO Rate Loan or
convert such Loan into another type of Loan in accordance with Section 2.11. Before giving such
notice pursuant to this Section, the Lenders will designate a different available Applicable
Lending Office for LIBO Rate Loans or take such other action as the Borrower may request if such
designation or action will avoid the need to suspend the obligation of the Lenders to make LIBO
Rate Loans hereunder and will not, in the opinion of the Lenders, be materially disadvantageous to
the Lender.

     2.20 Illegality. Notwithstanding any other provision of this Agreement, in the event
that it becomes unlawful for the Lenders or their Applicable Lending Office to (a) honor its
obligation to make any type of LIBO Rate Loans hereunder, or (b) maintain any type of LIBO Rate
Loans hereunder, then the Lender shall promptly notify the Borrower thereof; and the obligation of
the Lenders hereunder to make such type of LIBO Rate Loans and to convert other

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types of Loans into LIBO Rate Loans of such type shall be suspended until such time as the Lenders
may again make and maintain LIBO Rate Loans of such type, and the outstanding LIBO Rate Loans of
such type shall be converted into Floating Rate Loans in accordance with Section 2.11. Before
giving such notice pursuant to this Section, the Lenders will designate a different available
Applicable Lending Office for LIBO Rate Loans or take such other action as the Borrower may
request if such designation or action will avoid the need to suspend the obligation of the Lenders
to make LIBO Rate Loans and will not, in the opinion of the Lender, be disadvantageous to the
Lenders.

     2.21 Regulatory Change. In the event that by reason of any Regulatory Change, the
Lenders (a) incur Additional Costs based on or measured by the excess above a specified level of
the amount of a category of deposits or other liabilities of the Lenders which includes deposits by
reference to which the interest rate on any LIBO Rate Loan is determined as provided in this
Agreement or a category of extensions of credit or other assets of such Lenders which includes any
LIBO Rate Loan, or (b) becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, at the election of the Lenders with notice to the
Borrower, the obligation of the Lenders to make such LIBO Rate Loans and to convert Floating Rate
Loans into such LIBO Rate Loans shall be suspended until such time as such Regulatory Change ceases
to be in effect, and all such outstanding LIBO Rate Loans shall be converted into Floating Rate
Loans in accordance with Section 2.11.

     2.22 Limitations on Interest Periods. Each Interest Period selected by the Borrower
(a) which commences on the last Business Day of a calendar month (or, with respect to any LIBO Rate
Loan, any day for which there is no numerically corresponding day in the appropriate subsequent
calendar month) shall end on the last Business Day of the appropriate subsequent calendar month,
(b) which would otherwise end on a day which is not a Business Day shall end on the next succeeding
Business Day (or, with respect to any LIBO Rate Loan, if such next succeeding Business Day falls in
the next succeeding calendar month, on the next preceding Business Day), (c) which would otherwise
commence before and end after Final Maturity shall end on Final Maturity, and (d) shall have a
duration of not less than one month, as to any LIBO Rate Loan, and, if any Interest Period would
otherwise be a shorter period, the relevant Loan shall be a Floating Rate Loan during such period.

     2.23 Letters in Lieu of Transfer Orders. The Agent agrees that none of the letters in
lieu of transfer or division orders provided by the Borrower pursuant to Section 3.1(f)(iii) or
Section 5.10 will be sent to the addressees thereof prior to the occurrence of an Event of Default,
at which time the Agent may, at its option and in addition to the exercise of any of its other
rights and remedies, send any or all of such letters.

     2.24 Power of Attorney. The Borrower hereby designates the Agent as its Agent and
attorney-in-fact, to act in its name, place, and stead for the purpose of completing and, upon the
occurrence of an Event of Default, delivering any and all of the letters in lieu of transfer orders
delivered by the Borrower to the Agent pursuant to Section 3.1(f)(iii) or Section 5.10, including,
without limitation, completing any blanks contained in such letters and attaching exhibits thereto
describing the relevant Collateral. The Borrower hereby ratifies and confirms all that the Agent
shall lawfully do or cause to be done by virtue of this power of attorney and the rights granted
with respect to such power of attorney. This power of attorney is coupled with the interests of

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the Agent in the Collateral, shall commence and be in full force and effect as of the Closing Date
and shall remain in full force and effect and shall be irrevocable so long as any Obligation
remains outstanding or unpaid or any Commitment exists. The powers conferred on the Agent by this
appointment are solely to protect the interests of the Agent under the Loan Documents and shall
not impose any duty upon the Agent to exercise any such powers. The Agent shall be accountable
only for amounts that it actually receives as a result of the exercise of such powers and shall
not be responsible to the Borrower or any other Person for any act or failure to act with respect
to such powers, except for gross negligence or willful misconduct.

ARTICLE III

CONDITIONS

     The obligations of the Agent and the Lenders to enter into this Agreement and to make
Loans and issue Letters of Credit are subject to the satisfaction of the following conditions
precedent:

     3.1 Receipt of Loan Documents and Other Items. The Lenders shall have no obligation
under this Agreement unless and until all matters incident to the consummation of the transactions
contemplated herein, including, without limitation, the review by the Agent or its counsel of the
title of the Borrower to its Oil and Gas Properties, shall be satisfactory to the Agent, and the
Agent shall have received, reviewed, and approved the following documents and other items,
appropriately executed when necessary and, where applicable, acknowledged by one or more authorized
officers of the Borrower, all in form and substance satisfactory to the Lender and dated, where
applicable, of even date herewith or a date prior thereto and acceptable to the Lender:

     (a) multiple counterparts of this Agreement, as requested by the Lender;

     (b) the Notes;

     (c) copies of the formation documents of the Borrower and all amendments thereto,
accompanied by a certificate dated the Closing Date issued by the secretary or an
assistant secretary or another authorized representative of the Borrower to the effect
that each such copy is correct and complete;

     (d) a certificate of incumbency dated the Closing Date, including specimen
signatures of all officers or other representatives of the Borrower who are authorized
to execute Loan Documents on behalf of the Borrower, such certificate being executed
by the manager or another authorized representative of the Borrower;

     (e) copies of resolutions of the Borrower, adopted by the board of directors of
the Borrower approving the Loan Documents to which the Borrower is a party and
authorizing the transactions contemplated herein and therein, accompanied by a
certificate dated the Closing Date issued by the manager or

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another authorized representative of the Borrower to the effect that such copies are true and
correct copies of resolutions duly adopted and that such resolutions constitute all the
resolutions adopted with respect to such transactions, have not been amended, modified, or
rescinded in any respect, and are in full force and effect as of the date of such certificate;

     (f) multiple counterparts, as requested by the Agent, of the following Security Instruments
creating, evidencing, perfecting, and otherwise establishing Liens in favor of the Lender in and to
the Collateral:

     (i) Mortgage and Deed of Trust, Indenture, Security Agreement, Assignment
of Production, and Financing Statement from the Borrower covering all Oil and
Gas Properties of the Borrower in the current Borrowing Base and all
improvements, personal property, and fixtures related thereto;

     (ii) Financing Statements from the Borrower, as debtor, constituent to the
instrument described in clause (i) above;

     (iii) undated letters, in form and substance satisfactory to the Lender,
from the Borrower to each purchaser of production and disburser of the proceeds
of production from or attributable to the Mortgaged Properties, together with
additional letters with the addressees left blank, authorizing and directing the
addressees to make future payments attributable to production from the Mortgaged
Properties directly to the Lender;

     (iv) Security Agreement from the Borrower pledging all accounts, contract
rights, etc.;

     (v) Financing Statements from the Borrower, as debtor, constituent to the
instrument described in clause (iv) above;

     (vi) Pledge Agreement from the Borrower pledging its general partner
interest in FWOE Partners L.P.;

     (vii) Financing Statements from the Borrower, as debtor, constituent to the
instrument described in clause (vi) above.

     (g) certificates dated as of a recent date from the Secretary of State or other appropriate
Governmental Authority evidencing the existence or qualification and good standing of
the Borrower in its jurisdictions of formation and in any other jurisdictions where it does
business;

     (h) unaudited Financial Statements of the Borrower as of March 31, 2006;

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     (i) results of searches of the UCC Records of the Secretary of State of the
States of Texas, Delaware, and Louisiana from a source acceptable to the Lender and
reflecting no Liens against any of the Collateral as to which perfection of a Lien
is accomplished by the filing of a financing statement other than in favor of the
Lender;

     (j) confirmation, acceptable to the Lender, of the title of the Borrower to
the Mortgaged Properties, free and clear of Liens other than Permitted Liens;

     (k) all operating, lease, sublease, royalty, sales, exchange, processing,
farm-out, bidding, pooling, unitization, communitization, and other material
agreements relating to the Mortgaged Properties reasonably requested by the Lender;

     (1) engineering reports covering the Mortgaged Properties;

     (m) the opinion of James Gilbert, counsel to the Borrower, in the form
attached hereto as Exhibit IV, with such changes thereto as may be approved by the
Lender;

     (n) certificates evidencing the insurance coverage required pursuant to
Section 5.21;

     (o) payment of the fees covered by the Fee Agreement of even date herewith;

     (p) payment of the fees described in Section 5.17;

     (q) Subordination Agreement;

     (r) Completion and Liquidity Maintenance Agreement;

     (s) copy of Put Right Agreement between Borrower and PrimeEnergy Corporation
acceptable to the Agent; and

     (t) such other agreements, documents, instruments, opinions, certificates,
waivers, consents, and evidence as the Lender may reasonably request.

     3.2 Each Loan and Letter of Credit. In addition to the conditions precedent stated
elsewhere herein, the Lenders shall not be obligated to make any Loan or issue any Letter of Credit
unless:

     (a) the Borrower shall have delivered to the Agent a Borrowing Request at least
the requisite time prior to the requested date for the relevant Loan, or a Letter of
Credit Application at least three Business Days prior to the requested issuance date
for the relevant Letter of Credit; and each statement or certification made in such
Borrowing Request or Letter of Credit Application, as

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the case may be, shall be true and correct in all material respects on the requested date for such
Loan or the issuance of such Letter of Credit;

     (b) no Event of Default or Default shall exist or will occur as a result of the making of the
requested Loan or the issuance of the requested Letter of Credit;

     (c) if requested by the Agent, the Borrower shall have delivered evidence satisfactory to the
Agent substantiating any of the material matters contained in this Agreement which are necessary to
enable the Borrower to qualify for such Loan or the issuance of such Letter of Credit;

     (d) no event shall have occurred which, in the reasonable opinion of the Lender, would have a
Material Adverse Effect;

     (e) each of the representations and warranties contained in this Agreement shall be true and
correct and shall be deemed to be repeated by the Borrower as if made on the requested date for
such Loan or the issuance of such Letter of Credit (except to the extent such representations and
warranties expressly refer to an earlier date, in which case, they shall be true and correct as of
such earlier date) provided, however, for purposes of this Section 3.2, in each representation and
warranty in Article IV that makes reference to an Exhibit, the representation under this Section
3.2 that such representation and warranty in Article IV is true on and as of the date of the making
of such Loan or the issuance of such Letter of Credit shall take into account (i) any subsequent
amendments to any Exhibit referred to therein, (ii) any exception contained in a written notice
received by the Lender which makes specific reference to the applicable Exhibit, or (iii) any
written disclosure made by the Borrower or any of its Subsidiaries prior to the date as of which
such representation or warranty is made, provided that such amendment, exception or disclosure has
been consented to by the Lender if such amendment, exception or disclosure amends or waives
provisions of this Agreement or is otherwise required under the terms of this Agreement.

     (f) all of the Security Instruments shall be in full force and effect and provide to the
Lenders the security intended thereby;

     (g) neither the consummation of the transactions contemplated hereby nor the making of such
Loan or the issuance of such Letter of Credit shall contravene, violate, or conflict with any
Requirement of Law;

     (h) the Borrower shall hold full legal title to the Collateral and be the sole beneficial
owner thereof;

     (i) the Agent and the Lenders shall have received the payment of all fees payable to the
Agent and the Lenders hereunder and reimbursement from the Borrower, or special legal counsel for
the Agent shall have received payment from the Borrower, for (i) all reasonable fees and expenses
of counsel to the

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Agent for which the Borrower is responsible pursuant to applicable provisions of
this Agreement and for which invoices have been presented at least 15 days prior to
the date of the relevant Loan or Letter of Credit Application (otherwise the initial
Borrowing which must be presented at least two days prior to the Closing Date), and
(ii) estimated fees charged by filing officers and other public officials incurred
or to be incurred in connection with the filing and recordation of any Security
Instruments, for which invoices have been presented as of or prior to the date of
the requested Loan or Letter of Credit Application (otherwise the initial Borrowing
which must be presented at least five days prior to the Closing Date); and

     (j) all matters incident to the consummation of the transactions hereby
contemplated shall be satisfactory to the Lender.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     To induce the Agent and the Lenders to enter into this Agreement and to make the Loans
and issue Letters of Credit, the Borrower represents and warrants to the Agent and the Lenders
(which representations and warranties shall survive the delivery of the Notes) that:

     4.1 Due Authorization. The execution and delivery by the Borrower of this
Agreement and the borrowings hereunder, the execution and delivery by the Borrower of the Note, the
repayment of the Notes and interest and fees provided for in the Notes and this Agreement, the
execution and delivery of the Security Instruments by the Borrower and the performance of all
obligations of the Borrower under the Loan Documents are within the power of the Borrower, have
been duly authorized by all necessary limited liability company action by the Borrower, and do not
and will not (a) require the consent of any Governmental Authority, (b) contravene or conflict with
any Requirement of Law, (c) contravene or conflict with any indenture, instrument, or other
agreement to which the Borrower is a party or by which any Property of the Borrower may be
presently bound or encumbered, except where such contravention or conflict would not individually
or in the aggregate result in a Material Adverse Effect, or (d) result in or require the creation
or imposition of any Lien in, upon or of any Property of the Borrower under any such indenture,
instrument, or other agreement, other than the Loan Documents.

     4.2 Limited Liability Company Existence. The Borrower is a limited liability
company duly organized, legally existing, and in good standing under the laws of its state of
formation and is duly qualified as foreign limited liability company and is in good standing in all
jurisdictions wherein the ownership of Property or the operation of its business necessitates same,
other than those jurisdictions wherein the failure to so qualify will not have a Material Adverse
Effect.

     4.3 Valid and Binding Obligations. All Loan Documents, when duly executed and
delivered by the Borrower, will be the legal, valid, and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms except as

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enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors’ rights generally or by equitable principles relative to enforceability.

     4.4 Security Instruments. The provisions of each Security Instrument are effective to
create in favor of the Agent, a legal, valid, and enforceable Lien in all right, title, and
interest of the Borrower in the Collateral described therein, except as enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of
creditors’ rights generally or by equitable principles relative to enforceability, which Liens,
assuming the accomplishment of recording and filing in accordance with applicable laws prior to the
intervention of rights of other Persons, shall constitute fully perfected first-priority Liens on
all right, title, and interest of the Borrower in the Collateral described therein subject to
Permitted Liens.

     4.5 Title to Assets. The Borrower has good and indefeasible title to all of its
interests in its Properties then owned by it, free and clear of all Liens except Permitted Liens.

     4.6 No Material Misstatements. As of the Closing Date, no information, exhibit,
statement, or report furnished to the Lender by or at the direction of the Borrower in connection
with this Agreement contains any material misstatement of fact or omits to state a material fact or
any fact necessary to make the statements contained therein not misleading as of the date made or
deemed made.

     4.7 Liabilities, Litigation, and Restrictions. As of the Closing Date, other than as
reflected and reported in Borrower’s Financial Statements as of March 31, 2006, including the due
to related parties, the Borrower has no liabilities, direct, or contingent, which would result in a
Material Adverse Effect, no litigation or other action of any nature affecting the Borrower is
pending before any Governmental Authority or, to the best knowledge of the Borrower, threatened
against or affecting the Borrower which might reasonably be expected to result in any material
impairment of its ownership of any Collateral or have a Material Adverse Effect. To the best
knowledge of the Borrower, after due inquiry, no unusual or unduly burdensome restriction,
restraint or hazard exists by contract, Requirement of Law, or otherwise relative to the business
or operations of the Borrower or the ownership and operation of the Collateral would result in a
Material Adverse Effect, other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower.

     4.8 Authorizations; Consents. Except as expressly contemplated by this Agreement, no
authorization, consent, approval, exemption, franchise, permit, or license of, or filing with, any
Governmental Authority or any other Person is required to authorize or is otherwise required in
connection with the valid execution and delivery by the Borrower of the Loan Documents or any
instrument contemplated hereby, the repayment by the Borrower of the Note and interest and fees
provided in the Note and this Agreement, or the performance by the Borrower of the Obligations.

     4.9 Compliance with Laws. The Borrower and its Property, including, without
limitation, the Mortgaged Property, are in compliance with all material applicable Requirements of
Law, including, without limitation, Environmental Laws, the Natural Gas Policy Act of 1978,

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as amended, and ERISA, except to the extent non-compliance with any such Requirements of Law could
not reasonably be expected to have a Material Adverse Effect.

     4.10 ERISA. No Reportable Event has occurred with respect to any Single Employer
Plan, and each Single Employer Plan has complied with and been administered in all material
respects in accordance with applicable provisions of ERISA and the Code. To the knowledge of the
Borrower, (a) no Reportable Event has occurred with respect to any Multiemployer Plan, and (b) each
Multiemployer Plan has complied with and been administered in all material respects with applicable
provisions of ERISA and the Code. The present value of all benefits vested under each Single
Employer Plan maintained by the Borrower or any Commonly Controlled Entity (based on the
assumptions used to fund such Plan) did not, as of the last annual valuation date applicable
thereto, exceed the value of the assets of such Plan allocable to such vested benefits. Neither
the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan for which there is any withdrawal liability. As of the most recent valuation
date applicable to any Multiemployer Plan, neither the Borrower nor any Commonly Controlled Entity
would become subject to any liability under ERISA if the Borrower or such Commonly Controlled
Entity were to withdraw completely from such Multiemployer Plan. Neither the Borrower nor any
Commonly Controlled Entity has received notice that any Multiemployer Plan is Insolvent or in
Reorganization. To the knowledge of the Borrower, no such Insolvency or Reorganization is
reasonably likely to occur. Based upon GAAP existing as of the date of this Agreement and current
factual circumstances, the Borrower has no reason to believe that the annual cost during the term
of this Agreement to the Borrower and all Commonly Controlled Entities for post-retirement benefits
to be provided to the current and former employees of the Borrower and all Commonly Controlled
Entities under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) will, in
the aggregate, have a Material Adverse Effect.

     4.11 Environmental Laws. To the knowledge and belief of the Borrower, except as
would not have a Material Adverse Effect:

     (a) no Property of the Borrower is currently on or has ever been on, or is
adjacent to any Property which is on or has ever been on, any federal or state list of
Superfund Sites;

     (b) no Hazardous Substances have been generated, transported, and/or disposed of
by the Borrower at a site which was, at the time of such generation, transportation,
and/or disposal, or has since become, a Superfund Site;

     (c) except in accordance with applicable Requirements of Law or the terms of a
valid permit, license, certificate, or approval of the relevant Governmental
Authority, no Release of Hazardous Substances by the Borrower or from, affecting, or
related to any Property of the Borrower or adjacent to any Property of the Borrower has
occurred; and

     (d) no Environmental Complaint has been received by the Borrower.

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     4.12 Compliance with Federal Reserve Regulations. No transaction contemplated by the
Loan Documents is in violation of any regulations promulgated by the Board of Governors of the
Federal Reserve System, including, without limitation, Regulations G, T, U, or X.

     4.13 Investment Company Act Compliance. The Borrower is not, nor is the Borrower
directly or indirectly controlled by or acting on behalf of any Person which is, an “investment
company” or an “affiliated person” of an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.

     4.14 Public Utility Holding Company Act Compliance. The Borrower is not a “holding
company,” or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding
company,” within the meaning of the Public Utility Holding Company Act of 1935, as amended.

     4.15 Proper Filing of Tax Returns; Payment of Taxes Due. The Borrower has duly and
properly filed its United States income tax return and all other tax returns which are required to
be filed and has paid all taxes due except such as are being contested in good faith and as to
which adequate provisions and disclosures have been made. The respective charges and reserves on
the books of the Borrower with respect to taxes and other governmental charges are adequate.

     4.16 Refunds. No orders of, proceedings pending before, or other requirements of, the
Federal Energy Regulatory Commission, the Texas Railroad Commission, or any Governmental Authority
exist which could result in the Borrower being required to refund any material portion of the
proceeds received or to be received from the sale of hydrocarbons constituting part of the
Mortgaged Property.

     4.17 Gas Contracts. The Borrower (a) is not obligated in any material respect by
virtue of any prepayment made under any contract containing a “take-or-pay” or “prepayment”
provision or under any similar agreement to deliver hydrocarbons produced from or allocated to any
of the Mortgaged Property at some future date without receiving full payment therefor within 90
days of delivery, and (b) has not produced gas, in any material amount, subject to, and neither the
Borrower nor any of the Mortgaged Properties is subject to, balancing rights of third parties or
subject to balancing duties under governmental requirements, except as to such matters for which
the Borrower has reflected in the most recent engineering report or established monetary reserves
adequate in amount to satisfy such obligations and has segregated such reserves from other
accounts.

     4.18 Intellectual Property. The Borrower owns or is licensed to use all Intellectual
Property necessary to conduct all business material to its financial condition, business, or
operations as such business is currently conducted. No claim has been asserted or is pending by any
Person with the respect to the use of any such Intellectual Property or challenging or questioning
the validity or effectiveness of any such Intellectual Property; and the Borrower knows of no valid
basis for any such claim. The use of such Intellectual Property by the Borrower does not infringe
on the rights of any Person, except for such claims and infringements as do not, in the aggregate,
give rise to any material liability on the part of the Borrower.

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     4.19 Casualties or Taking of Property. Except as would not result in a Material
Adverse Effect, neither the business nor any Property of the Borrower has been materially adversely
affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident,
strike or other labor disturbance, embargo, requisition or taking of Property, or cancellation of
contracts, permits, or concessions by any Governmental Authority, riot, activities of armed forces,
or acts of God.

     4.20 Locations of Borrower. The principal place of business and chief executive office
of the Borrower is located at the address of the Borrower set forth in Section 9.3 or at such other
location as the Borrower may have, by proper written notice hereunder, advised the Lender, provided
that such other location is within a state in which appropriate financing statements from the
Borrower in favor of the Lender have been filed.

     4.21 Subsidiaries. As of the Closing Date, the Borrower has no Subsidiaries.

ARTICLE V

AFFIRMATIVE COVENANTS

     So long as any Obligation remains outstanding or unpaid or any Commitment exists, the
Borrower shall:

     5.1 Maintenance and Access to Records. Keep adequate records, of all its
transactions so that at any time, and from time to time, its true and complete financial condition
may be readily determined, and promptly following the reasonable request of the Agent, make such
records available for inspection by the Agent and, at the expense of the Borrower, allow the Agent
to make and take away copies thereof.

     5.2 Quarterly Financial Statements: Compliance Certificates. Deliver to the Agent,
(a) on or before the 45th day after the close of each of the first three quarterly periods of each
fiscal year of the Borrower and FWOE Partners L.P., beginning with the fiscal quarter ending June
30, 2006, a copy of its unaudited Financial Statements at the close of such quarterly period and
from the beginning of such fiscal year to the end of such period, such Financial Statements to be
certified by a Responsible Officer of the Borrower as having been prepared in accordance with GAAP
(with the exception of footnotes) consistently applied and as a fair presentation of the condition
of the Borrower, subject to changes resulting from normal year-end audit adjustments, and (b) on or
before the 45th day after the close of each fiscal quarter, with the exception of the last fiscal
quarter, a Compliance Certificate.

     5.3 Ryder Scott Company Reserve Evaluation. Deliver to the Agent a reserve
evaluation of Ryder Scott Company of each Project Field after each well therein has been completed
and tested and a Ryder Scott Company reserve evaluation after each well has been producing for one
month. Such reports shall be promptly furnished to the Agent upon the occurrence of such events
(i.e. the completion of each well and after such wells have been producing for one month).

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     5.4 Status of Shareholder Loans. Deliver to Agent monthly report, within 10 days of
each month end, stating the amount of the shareholder loans at the end of each month.

     5.5 Log Sections, Maps and Test Dates. Deliver to the Agent log sections, maps and
test data for each well after it has been completed and tested. The Borrower will promptly
deliver such information to the Agent after receiving such data.

     5.6 Annual Financial Statements. Deliver to the Agent, on or before the 120th day
after the close of each fiscal year of the Borrower and FWOE Partners L.P., a copy of the Borrower
and FWOE Partners L.P. annual audited Financial Statements and the Borrowers Compliance Certificate
on the 120th day after the close of each fiscal year.

     5.7 Oil and Gas Reserve Reports, (a) Deliver to the Agent no later than March 1 of
each year during the term of this Agreement, engineering reports in form and substance satisfactory
to the Agent, certified by Ryder Scott Company as fairly and accurately setting forth (i) the
proven and producing, shut-in, behind-pipe, and undeveloped oil and gas reserves (separately
classified as such) attributable to the Mortgaged Properties as of January 1 of the year for which
such reserve reports are furnished, (ii) the aggregate present value of the future net income with
respect to such Mortgaged Properties, discounted at a stated per annum discount rate of proven and
producing reserves, (iii) projections of the annual rate of production, gross income, and net
income with respect to such proven and producing reserves, and (iv) information with respect to the
“take-or-pay,” “prepayment,” and gas-balancing liabilities of the Borrower.

          (b) Deliver to the Agent no later than September 1 of each year during the term of this
Agreement, engineering reports in form and substance satisfactory to the Agent certified by Ryder
Scott Company evaluating the Mortgaged Properties as of July 1 of the year for which such reserve
reports are furnished and updating the information provided in the reports pursuant to Section
5.7(a).

          (c) Each of the reports provided pursuant to this Section shall be submitted to the Agent
together with additional data concerning pricing, quantities of production from the Mortgaged
Properties, volumes of production sold, purchasers of production, gross revenues, expenses, log
section, map, test data and such other information and engineering and geological data with respect
thereto as the Agent may reasonably request.

     5.8 Title Opinions; Title Defects and Mortgages. Promptly upon the request of the
Agent, furnish to the Agent title opinions, in form and substance and by counsel satisfactory to
the Agent, or other confirmation of title acceptable to the Agent, covering all Oil and Gas
Properties currently in the Borrowing Base; and promptly, but in any event within 30 days after
notice by the Agent of any defect, material in the opinion of the Agent in value, in the title of
the Borrower to any of its Oil and Gas Properties, clear such title defects, and, in the event any
such title defects are not cured in a timely manner, pay all related costs and fees incurred by the
Agent to do so. The Borrower shall at all times have granted a Mortgage to the Agent covering all
of the Oil and Gas Properties in the Borrowing Base.

     5.9 Notices of Certain Events. Deliver to the Agent, immediately upon having
knowledge of the occurrence of any of the following events or circumstances, a written statement

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with respect thereto, signed by a Responsible Officer of the Borrower and setting forth the
relevant event or circumstance and the steps being taken by the Borrower with respect to such event
or circumstance:

     (a) any Default or Event of Default;

     (b) any default or event of default under any contractual obligation of the
Borrower, or any litigation, investigation, or proceeding between the Borrower
and any Governmental Authority which, in either case, if not cured or if adversely
determined, as the case may be, could reasonably be expected to have a Material Adverse
Effect;

     (c) any litigation or proceeding involving the Borrower as a defendant or in which
any Property of the Borrower is subject to a claim and in which the amount involved is
$100,000 or more and which is not covered by insurance or in which injunctive or
similar relief is sought;

     (d) the receipt by the Borrower of any Environmental Complaint;

     (e) any actual, proposed, or threatened testing or other investigation by any
Governmental Authority or other Person concerning the environmental condition of, or
relating to, any Property of the Borrower or adjacent to any Property of the Borrower
following any allegation of a violation of any Requirement of Law;

     (f) any Release of Hazardous Substances by the Borrower or from, affecting, or
related to any Property of the Borrower or adjacent to any Property of the Borrower
except in accordance with applicable Requirements of Law or the terms of a valid
permit, license, certificate, or approval of the relevant Governmental Authority,
or the violation of any Environmental Law, or the revocation, suspension, or forfeiture
of or failure to renew, any permit, license, registration, approval, or authorization
which could reasonably be expected to have a Material Adverse Effect;

     (g) the change in identity or address of any Person remitting to the Borrower
proceeds from the sale of hydrocarbon production from or attributable to any Mortgaged
Property;

     (h) any change in the senior management of the Borrower;

     (i) any Reportable Event or imminently expected Reportable Event with respect
to any Plan; any withdrawal from, or the termination, Reorganization or Insolvency
of, any Multiemployer Plan; the institution of proceedings or the taking of any
other action by the PBGC, the Borrower or any Commonly Controlled Entity or
Multiemployer Plan with respect to the withdrawal from, or the termination,
Reorganization or Insolvency of, any Single Employer Plan or Multiemployer Plan; or
any Prohibited Transaction in connection with any Plan or

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any trust created thereunder and the action being taken by the Internal Revenue Service
with respect thereto;

     (j) any other event or condition which could reasonably be expected to have
a Material Adverse Effect.

     5.10 Letters in Lieu of Transfer Orders; Division Orders. Promptly upon request by
the Agent at any time and from time to time, execute such letters in lieu of transfer orders, in
addition to the letters signed by the Borrower and delivered to the Agent in satisfaction of the
condition set forth in Section 3.1(f)(iii) and/or division and/or transfer orders as are necessary
or appropriate to transfer and deliver to the Agent proceeds from or attributable to any Mortgaged
Property.

     5.11 Additional Information. Furnish to the Agent, promptly upon the request of the
Agent, such additional financial or other information concerning the assets, liabilities,
operations, and transactions of the Borrower as the Agent may from time to time request; and notify
the Lender not less than ten Business Days prior to the occurrence of any condition or event that
may change the proper location for the filing of any financing statement or other public notice or
recording for the purpose of perfecting a Lien in any Collateral, including, without limitation,
any change in its name or the location of its principal place of business or chief executive
office; and upon the request of the Agent, execute such additional Security Instruments as may be
necessary or appropriate in connection therewith.

     5.12 Compliance with Laws. Except to the extent the failure to comply or cause
compliance would not have a Material Adverse Effect, comply with all applicable Requirements of
Law, including, without limitation, (a) the Natural Gas Policy Act of 1978, as amended, (b) ERISA,
(c) Environmental Laws, and (d) all permits, licenses, registrations, approvals, and authorizations
(i) related to any natural or environmental resource or media located on, above, within, in the
vicinity of, related to or affected by any Property of the Borrower, (ii) required for the
performance of the operations of the Borrower, or (iii) applicable to the use, generation,
handling, storage, treatment, transport, or disposal of any Hazardous Substances; and cause all
employees, crew members, Lenders, contractors, subcontractors, and future lessees (pursuant to
appropriate lease provisions) of the Borrower, while such Persons are acting within the scope of
their relationship with the Borrower, to comply with all such Requirements of Law as may be
necessary or appropriate to enable the Borrower to so comply.

     5.13 Payment of Assessments and Charges. Pay all taxes, assessments, governmental
charges, rent, and other Indebtedness which, if unpaid, might become a Lien against the Property of
the Borrower, except any of the foregoing being contested in good faith and as to which adequate
reserve in accordance with GAAP has been established or unless failure to pay would not have a
Material Adverse Effect.

     5.14 Maintenance of Limited Liability Company Existence and Good Standing. Maintain
its limited liability company existence or qualification and good standing in its jurisdictions of
incorporation or formation and in all jurisdictions wherein the Property now owned or hereafter
acquired or business now or hereafter conducted necessitates same, unless the failure to do so
would not have a Material Adverse Effect.

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     5.15 Payment of Notes; Performance of Obligations. Pay the Notes according to the
reading, tenor, and effect thereof, as modified hereby, and do and perform every act and discharge
all of its other Obligations.

     5.16 Further Assurances. Promptly cure any defects in the execution and delivery of
any of the Loan Documents and all agreements contemplated thereby, and execute,
acknowledge, and deliver such other assurances and instruments as shall, in the opinion of the
Lender, be necessary to fulfill the terms of the Loan Documents.

     5.17 Initial Fees and Expenses of Counsel to Agent. Upon request by the Agent,
promptly reimburse the Agent for all reasonable fees and expenses of Jackson Walker L.L.P., special
counsel to the Agent, in connection with the preparation of this Agreement and all documentation
contemplated hereby, the satisfaction of the conditions precedent set forth herein, the filing and
recordation of Security Instruments, and the consummation of the transactions contemplated in this
Agreement.

     5.18 Subsequent Fees and Expenses of Agent. Upon request by the Agent, promptly
reimburse the Agent (to the fullest extent permitted by law) for all amounts reasonably expended,
advanced, or incurred by or on behalf of the Agent to satisfy any obligation of the Borrower under
any of the Loan Documents; to collect the Obligations; to ratify, amend, restate, or prepare
additional Loan Documents, as the case may be; for the filing and recordation of Security
Instruments; to enforce the rights of the Agent under any of the Loan Documents; and to protect the
Properties or business of the Borrower, including, without limitation, the Collateral, which
amounts shall be deemed compensatory in nature and liquidated as to amount upon notice to the
Borrower by the Agent and which amounts shall include, but not be limited to (a) all court costs,
(b) reasonable attorneys’ fees, (c) reasonable fees and expenses of auditors and accountants
incurred to protect the interests of the Agent, (d) fees and expenses incurred in connection with
the participation by the Agent as a member of the creditors’ committee in a case commenced under
any Insolvency Proceeding, (e) fees and expenses incurred in connection with lifting the automatic
stay prescribed in §362 Title 11 of the United States Code, and (f) fees and expenses incurred in
connection with any action pursuant to §1129 Title 11 of the United States Code all reasonably
incurred by the Lender in connection with the collection of any sums due under the Loan Documents,
together with interest at the per annum interest rate equal to the Floating Rate, calculated on a
basis of a calendar year of 365 or 366 days, as the case may be, counting the actual number of days
elapsed, on each such amount from the date of notification that the same was expended, advanced, or
incurred by the Agent until the date it is repaid to the Agent, with the obligations under this
Section surviving the non-assumption of this Agreement in a case commenced under any Insolvency
Proceeding and being binding upon the Borrower and/or a trustee, receiver, custodian, or liquidator
of the Borrower appointed in any such case.

     5.19 Operation of Oil and Gas Properties. Develop, maintain, and operate its Oil and
Gas Properties in a prudent and workmanlike manner in accordance with industry standards.

     5.20 Maintenance and Inspection of Properties. Maintain all of its tangible Properties
in good repair and condition, ordinary wear and tear excepted; make all necessary replacements
thereof and operate such Properties in a good and workmanlike manner; and permit any

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authorized representative of the Agent to visit and inspect, at the expense of the Borrower, any
tangible Property of the Borrower.

     5.21 Maintenance of Insurance. The Borrower shall maintain insurance with respect to
its Properties and businesses against such liabilities, casualties, risks, and contingencies as is
customary in the relevant industry and sufficient to prevent a Material Adverse Effect, all such
insurance to be in amounts (and with deductibles) and from insurers reasonably acceptable to the
Agent or as may be required under the laws of any state or jurisdiction in which it may be engaged
in business, maintained by Borrower, naming the Agent as loss payee, only as to coverage on
physical damage and only as it relates to Borrower’s specific interest in such property and, as
additional insured (in the case of liability insurance) upon any renewal of any such insurance and
at other times upon request by the Agent, furnish to the Agent evidence, satisfactory to the Agent,
on the Closing Date of the maintenance of such insurance. The Borrower will give Agent 30 days
prior written notice of intent to cancel or modify any such insurance. If no Borrowing Base
deficiency exists and no Event of Default has occurred and its continuing, (a) the Borrower will
cause all proceeds of insurance in connection with a Casualty Event to be deposited into a deposit
account at the Agent and (b) the Borrower may use such insurance proceeds to, at its option, repair
or rebuild the affected property or pay or prepay any outstanding Loans or other Obligations or for
any other lawful purpose not otherwise restricted by the Loan Documents. If a Borrowing Base
deficiency exists, such insurance proceeds shall be used to cure such Borrowing base deficiency by
prepaying the Loans and/or Letters of Credit to the extent of the deficiency. After the
occurrence and during the continuance of an Event of Default, the Agent may apply all insurance
proceeds upon receipt thereof to the Obligations.

     5.22
INDEMNIFICATION. INDEMNIFY AND HOLD THE AGENT AND EACH LENDER
AND ITS
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, LENDERS, ATTORNEYS-IN-FACT, AND AFFILIATES
AND EACH TRUSTEE FOR THE BENEFIT OF THE LENDER AND EACH LENDER UNDER ANY SECURITY
INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES, FINES,
PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL PROCEEDINGS AND ORDERS, JUDGMENTS,
REMEDIAL ACTIONS, REQUIREMENTS AND ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES
INCURRED IN CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS’ FEES AND
EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE
PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE BORROWER,
WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED ON OR UNDERTAKEN ON OR OFF ANY
PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, AND WHETHER BY THE BORROWER
OR ANY PREDECESSOR IN TITLE, EMPLOYEE, LENDER, CONTRACTOR, OR SUBCONTRACTOR OF THE
BORROWER OR ANY OTHER PERSON AT ANY TIME OCCUPYING OR PRESENT ON SUCH
PROPERTY, IN CONNECTION WITH THE HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION,
CLEANUP, TRANSPORTATION, OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR
PRESENT ON OR UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF THE
BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY OR

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NATURAL RESOURCES ARISING IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE,
TRANSPORTATION OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, LENDER,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING WITHIN THE SCOPE OF
THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL
BE UNDERTAKEN IN ACCORDANCE WITH APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND
ENFORCEMENT OF ANY LOAN DOCUMENT OR ANY OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING, WITHOUT LIMITATION, ANY OF THE
FOREGOING IN THIS SECTION ARISING FROM NEGLIGENCE, WHETHER SOLE OR CONCURRENT, ON THE PART OF THE
AGENT AND EACH LENDER OR ANY OF ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, LENDERS,
ATTORNEYS-IN-FACT, OR AFFILIATES OR ANY TRUSTEE FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY
INSTRUMENT; WITH THE FOREGOING INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE
TERMINATION OF THIS AGREEMENT.

     5.23 Future Subsidiaries. In the event Borrower acquires any Subsidiaries, it agrees
to have such Subsidiary become a Borrower under this Agreement or to guarantee the Obligation
hereunder whichever the Lender requires.

     5.24 Hedging. Within 5 Business Days following the effective date of this Agreement,
the Borrower agrees to enter into a Commodity Hedge Agreement(s) for 2,480,000 MMBtu of gas
production for the calendar year 2007, with a weighted average minimum price of $9.00 per MMBtu.

     5.25 Flow Line Permit. On or before 30 days after obtaining the permit(s) from the
Governmental Authority required to construct, install and operate flow pipeline(s) originating in
the Project Fields, the Borrower agrees to execute and deliver to the Agent the Security
Instruments necessary to provide the Agent with a perfected first priority security interest in the
permit(s).

ARTICLE VI

 NEGATIVE COVENANTS

     So long as any Obligation remains outstanding or unpaid or any Commitment exists, the
Borrower will not:

     6.1 Indebtedness. Create, incur, assume, or suffer to exist any Indebtedness, whether
by way of loan or otherwise; provided, however, the foregoing restriction shall not apply to (a)
the Obligations, (b) unsecured accounts payable in excess of $50,000 in the aggregate incurred in
the ordinary course of business, which are not unpaid in excess of 60 days beyond invoice date or
are being contested in good faith and as to which such reserve as is required by GAAP has been
made or if there is an agreement between the trade creditor and the Borrower allowing a longer
time for payment, (c) crude oil, natural gas, or other hydrocarbon floor, collar, cap, price

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protection, or swap agreements (“Commodity Hedge Agreements”), in form and substance and with a
Person acceptable to the Lender, provided that (i) each commitment issued under such agreement
must also be approved by the Lender, (ii) such agreements shall not be entered into with respect
to Mortgaged Properties constituting more than 80% of monthly production of proven developed
shut-in reserves as forecast in Lender’s most recent engineering evaluation, (iii) that the strike
prices in such agreements are not less than the prices used by the Lender in its most recent
Borrowing Base determination, and (iv) the Lender shall receive a security interest in the
Commodity Hedge Agreements, (d) Rate Management Transactions, in form and substance and with a
Person acceptable to the Lender, (e) Indebtedness secured by Permitted Liens and (f) Subordinated
Debt.

     6.2 Contingent Obligations. Create, incur, assume, or suffer to exist any Contingent
Obligation; provided, however, the foregoing restriction shall not apply to (a) performance
guarantees and performance surety or other bonds provided in the ordinary course of business, or
(b) trade credit incurred or operating leases entered into in the ordinary course of business.

     6.3 Liens. Create, incur, assume, or suffer to exist any Lien on any of its Oil and
Gas Properties or any other Property, whether now owned or hereafter acquired; provided, however,
the foregoing restrictions shall not apply to Permitted Liens.

     6.4 Sales of Assets. Without the prior written consent of the Agent, sell, transfer,
or otherwise dispose of, in one or any series of transactions assets in excess of $100,000 in the
aggregate, whether now owned or hereafter acquired, or enter into any agreement to do so;
provided, however, the foregoing restriction shall not apply to the sale of hydrocarbons or
inventory in the ordinary course of business or the sale or other disposition of Property
destroyed, lost, worn out, damaged or having only salvage value or no longer used or useful in the
business of the Borrower.

     6.5 Leasebacks. Enter into any agreement to sell or transfer any Property and
thereafter rent or lease as lessee such Property or other Property intended for the same use or
purpose as the Property sold or transferred.

     6.6 Loans or Advances. Make or agree to make or allow to remain outstanding any loans
or advances to any Person; provided, however, the foregoing restrictions shall not apply to
(a) advances or extensions of credit in the form of accounts receivable incurred in the ordinary
course of business and upon terms common in the industry for such
accounts receivable, (b) advances to employees of the Borrower for the payment of expenses in the ordinary course of
business or (c) repayment of Subordinated Debt.

     6.7 Investments. Acquire Investments in, or purchase or otherwise acquire all or
substantially all of the assets of, any Person; provided, however, the foregoing restriction shall
not apply to the purchase or acquisition of (a) Oil and Gas Properties, (b) Investments in the form
of (i) debt securities issued or directly and fully guaranteed or insured by the United States
Government or any agency or instrumentality thereof, with maturities of no more than one year, (ii)
commercial paper of a domestic issuer rated at the date of acquisition at least P-2 by Moody’s
Investor Service, Inc. or A-2 by Standard & Poor’s Corporation and with maturities of no more than
one year from the date of acquisition, or (iii) repurchase agreements covering debt

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securities or commercial paper of the type permitted in this Section, certificates of deposit,
demand deposits, eurodollar time deposits, overnight bank deposits and bankers’ acceptances, with
maturities of no more than one year from the date of acquisition, issued by or acquired from or
through the Lender or any bank or trust company organized under the laws of the United States or
any state thereof and having capital surplus and undivided profits aggregating at least
$500,000,000, (c) other short-term Investments similar in nature and degree of risk to those
described in clause (b) of this Section, or (d) money-market funds.

     6.8 Dividends and Distributions. Declare, pay, or make, whether in cash or Property of
the Borrower, any dividend or distribution to any Person.

     6.9
Issuance of Stock; Changes in Limited Liability Structure. Issue or agree to issue
additional shares of capital stock, in one or any series of transactions; enter into any
transaction of consolidation, merger, or amalgamation; liquidate, wind up, or dissolve (or suffer
any liquidation or dissolution).

     6.10 Transactions with Affiliates. Directly or indirectly, enter into any
transaction (including the sale, lease, or exchange of Property or the rendering of service) with
any of its Affiliates, other than upon fair and reasonable terms no less favorable than could be
obtained in an arm’s length transaction with a Person which was not an Affiliate.

     6.11 Lines of Business. Expand, on its own or through any Subsidiary, into any line of
business other than those in which the Borrower is engaged as of the date hereof.

     6.12 ERISA Compliance. Permit any Plan maintained by it or any Commonly Controlled
Entity to (a) engage in any Prohibited Transaction, (b) incur any “accumulated funding deficiency,”
as such term is defined in Section 302 of ERISA, or (c) terminate in a manner which could result in
the imposition of a Lien on any Property of the Borrower pursuant to Section 4068 of ERISA; or
assume an obligation to contribute to any Multiemployer Plan; or acquire any Person or the assets
of any Person which has now or has had at any time an obligation to contribute to any Multiemployer
Plan.

     6.13 FWOE Partners L.P. Change, without the written consent of the Agent, any terms of
the Amended and Restated Agreement of Limited Partnership of FWOE Partners, L.P.

     6.14 Interest Coverage Ratio. Permit as of the close of any fiscal quarter, the ratio
of (a) EBITDAX to (b) Interest Expense, measured on a rolling four-quarter basis, to be less than
3.00 to 1.00 for the fiscal quarters ending June 30, 2006 and September 30, 2006 and 4.00 to 1.00
for the fiscal quarter ending December 31,2006 and each fiscal quarter thereafter. Provided that
(i) for the purpose of calculating the Interest Coverage Ratio as of the fiscal quarter ending June
30, 2006, the ratio shall be calculated by multiplying both EBITDAX and Interest Expense computed
for the fiscal quarter ending June 30, 2006 by 4, and (ii) for the purposes of calculating the
Interest Coverage Ratio as of the fiscal quarter ending September 30, 2006, the ratio shall be
calculated by adding the EBITDAX and Interest Expense computed for the fiscal quarter ending June
30, 2006 with the EBITDAX and Interest Expense computed for the fiscal quarter ending September 30,
2006, respectively, and multiplying each sum by 2, and (iii) for the purposes of calculating the
Interest Coverage Ratio as of the fiscal quarter ending December 31, 2006, the

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ratio shall be calculated be adding the EBITDAX and Interest Expense computed for the fiscal
quarter ending June 30, 2006 with the EBITDAX and Interest Expense computed for the fiscal quarter
ending September 30, 2006 with the EBITDAX and Interest Expense computed for the fiscal quarter
ending December 31, 2006, respectively, and multiplying each sum by 4/3; provided further that any
EBITDAX and Interest Expense computation for subsequent fiscal quarters shall be computed on a
rolling four-quarter basis.

     6.15 Tangible Net Worth. Permit Tangible Net Worth, as of the close of any fiscal
quarter beginning June 30, 2006, to be less than 90% of the Tangible Net Worth at March 31, 2006,
plus 75% of positive quarterly net income thereafter.

     6.16 General and Administrative Expenses. Permit, as of the close of any fiscal
quarter, general and administrative expenses to be more than $350,000 per quarter beginning with
the period ending June 30, 2006.

     6.17 Minimum Liquidity. Permit, subsequent to Project Completion as defined in the
Completion and Liquidity Maintenance Agreement, the sum of the Available Commitment plus
unrestricted cash plus cash equivalent to be less than $1,000,000 at any time.

     6.18 Put Right Agreement. Change, without the written consent of the Agent, which
consent will not be unreasonably withheld, any terms of the Put Right Agreement between the
Borrower and PrimeEnergy Corporation.

ARTICLE VII

EVENTS OF DEFAULT

     7.1 Enumeration of Events of Default. Any of the following events shall
constitute an Event of Default:

     (a) default shall be made in the payment when due on any installment of principal
or interest under this Agreement or the Notes or in the payment when due on any fee or
other sum payable under any Loan Document and such default as to interest or fees only
shall have continued for three Business Days;

     (b) default shall be made by the Borrower in the due observance or performance of
any of their respective obligations under the Loan Documents, and such default shall
continue for 30 days after the earlier of notice thereof to the Borrower by the Agent
or knowledge thereof by the Borrower;

     (c) any representation or warranty made by the Borrower in any of the Loan
Documents proves to have been untrue in any material respect or any representation,
statement (including Financial Statements), certificate, or data furnished or made to
the Agent in connection herewith proves to have been untrue in any material respect as
of the date the facts therein set forth were stated or certified;

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     (d) default shall be made by the Borrower (as principal or guarantor or other surety) in the
payment or performance of any bond, debenture, note, or other Indebtedness or under any
credit agreement, loan agreement, indenture, promissory note, or similar agreement or
instrument executed in connection with any of the foregoing, and such default shall remain
unremedied for in excess of the period of grace, if any, with respect thereto;

     (e) the Borrower shall be unable to satisfy any condition or cure any circumstance specified
in Article III, the satisfaction or curing of which is precedent to the right of the Borrower to
obtain a Loan or the issuance of a Letter of Credit and such inability shall continue for a period
in excess of 30 days;

     (f) either the Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee, or liquidator of it or all or a substantial part of its assets, (ii) file a
voluntary petition commencing an Insolvency Proceeding, (iii) make a general assignment for the
benefit of creditors, (iv) be unable, or admit in writing its inability, to pay its debts generally
as they become due, or (v) file an answer admitting the material allegations of a petition filed
against it in any Insolvency Proceeding;

     (g) an order, judgment, or decree shall be entered against either the Borrower by any court of
competent jurisdiction or by any other duly authorized authority, on the petition of a creditor or
otherwise, granting relief in any Insolvency Proceeding or approving a petition seeking
reorganization or an arrangement of its debts or appointing a receiver, trustee, conservator,
custodian, or liquidator of it or all or any substantial part of its assets, and such order,
judgment, or decree shall not be dismissed or stayed within 60 days;

     (h) the levy against any significant portion of the Property of the Borrower, or any
execution, garnishment, attachment, sequestration, or other writ or similar proceeding which is
not permanently dismissed or discharged within 30 days after the levy;

     (i) a final and non-appealable order, judgment, or decree shall be entered against the
Borrower for money damages and/or Indebtedness due in an amount in excess of $500,000, and such
order, judgment, or decree shall not be paid in full, dismissed, or stayed within 60 days;

     (j) any charges are filed or any other action or proceeding is instituted by any Governmental
Authority against either the Borrower under the Racketeering Influence and Corrupt Organizations
Statute (18 U.S.C. §1961 et seq.), the result of which could be the forfeiture or transfer of any
material Property of the Borrower subject to a Lien in favor of the Lender and/or the Lenders
without (i) satisfaction or provision for satisfaction of such Lien, or (ii) such forfeiture or
transfer of such Property being expressly made subject to such Lien;

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     (k) the Borrower shall have (i) concealed, removed, or diverted, or permitted
to be concealed, removed, or diverted, any part of its Property, with intent to
hinder, delay, or defraud its creditors or any of them, (ii) made or suffered a
transfer of any of its Property which may be fraudulent under any bankruptcy,
fraudulent conveyance, or similar law, (iii) made any transfer of its Property to or
for the benefit of a creditor at a time when other creditors similarly situated have
not been paid, or (iv) shall have suffered or permitted, while insolvent, any
creditor to obtain a Lien upon any of its Property through legal proceedings or
distraint which is not vacated within 30 days from the date thereof;

     (1) any Security Instrument shall for any reason not, or cease to, create valid
and perfected first-priority Liens against the Collateral purportedly covered
thereby;

     (m) the Borrower shall cease to be owned by its presently existing
shareholders;

     (n) the occurrence of a Material Adverse Effect and the same shall remain
unremedied for in excess of 60 days after notice given by the Lender; or

     (o) breach of the obligations under the Completion and Liquidity Maintenance
Agreement of even date herewith, by and between PrimeEnergy Corporation, Borrower
and Lender.

     7.2 Remedies. (a) Upon the occurrence of an Event of Default specified in Sections
7.1(f) or 7.1(g), immediately and without notice, (i) all Obligations shall automatically become
immediately due and payable, without presentment, demand, protest, notice of protest, default, or
dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, or other
notice of any kind, except as may be provided to the contrary elsewhere herein, all of which are
hereby expressly waived by the Borrower; (ii) the Commitment shall immediately cease and terminate
unless and until reinstated by the Lender in writing; and (iii) the Lender are hereby authorized at
any time and from time to time, without notice to the Borrower (any such notice being expressly
waived by the Borrower), to set-off and apply any and all deposits (general or special, time or
demand, provisional or final) held by the Lender and any and all other indebtedness at any time
owing by the Lender to or for the credit or account of the Borrower against any and all of the
Obligations although such Obligations may be unmatured.

          (b) Upon the occurrence of any Event of Default other than those specified in Sections 7.1(f)
or 7.1(g), (i) the Lender may, by notice to the Borrower, declare all Obligations immediately due
and payable, without presentment, demand, protest, notice of protest, default, or dishonor, notice
of intent to accelerate maturity, notice of acceleration of maturity, or other notice of any kind,
except as may be provided to the contrary elsewhere herein, all of which are hereby expressly
waived by the Borrower; (ii) the Commitment shall immediately cease and terminate unless and until
reinstated by the Lender in writing; and (iii) the Lender are hereby authorized at any time and
from time to time, without notice to the Borrower (any such notice being expressly waived by the
Borrower), to set-off and apply any and all deposits (general or special, time or demand,
provisional or final) held by the Lender and any and all other

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indebtedness at any time owing by the Lender to or for the credit or account of the Borrower
against any and all of the Obligations although such Obligations may be unmatured.

          (c) Upon the occurrence of any Event of Default, the Lender may, in addition to the foregoing
in this Section, exercise any or all of its rights and remedies provided by law or pursuant to the
Loan Documents.

ARTICLE VIII

THE AGENT

     8.1 Appointment. Each Lender hereby designates and appoints the Agent as the
agent of such Lender under this Agreement and the other Loan Documents. Each Lender authorizes the
Agent, as the agent for such Lender, to take such action on behalf of such Lender under the
provisions of this Agreement and the other Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to the Agent by the terms of this Agreement and the other
Loan Documents, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Loan
Document, the Agent shall not have any duties or responsibilities except those expressly set forth
herein or in any other Loan Document or any fiduciary relationship with any Lender; and no implied
covenants, functions, responsibilities, duties, obligations, or liabilities on the part of the
Agent shall be read into this Agreement or any other Loan Document or otherwise exist against the
Agent.

     8.2 Waivers, Amendments. The provisions of this Agreement and of each other Loan
Document may from time to time be amended, modified or waived, if such amendment, modification, or
waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however,
that no such amendment, modification or waiver would: (a) modify any requirement hereunder that any
particular action be taken by all of the Lenders or by the Required Lenders unless consented to by
each Lender; (b) modify this Section 8.2, change the definition of “Required Lenders”, or change
the Commitment Amount or Percentage Share of any Lender, reduce the fees described in Article II,
extend the Commitment Termination Date or Final Maturity, release any Security Instrument or Lien,
or initiate any foreclosure, enforcement or collection procedure without the consent of each
Lender; (c) extend the due date for, (or reduce the amount of any scheduled repayment or prepayment
of principal of or interest on any Loan) without the consent of the holder of that Note evidencing
such Loan; (d) affect, adversely the interests, rights, or obligations of the Agent without the
consent of the Agent; or (e) to modify the Borrowing Base or modify the monthly amount by which the
Borrowing Base shall be reduced.

     8.3 Delegation of Duties. The Agent may execute any of its duties under this
Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall
not be responsible to any Lender for the negligence or misconduct of any agents or attorneys-in-
fact selected by it with reasonable care.

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     8.4 Exculpatory Provisions. Neither the Agent nor any of its officers, directors,
employees, agents, attorneys-in-fact or affiliates shall be (a) required to initiate or conduct any
litigation or collection proceedings hereunder, except with the concurrence of the Required Lenders
and contribution by each Lender of its Percentage Share of costs reasonably expected by the Agent
to be incurred in connection therewith, (b) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any other Loan Document
(except for gross negligence or willful misconduct of the Agent or such Person), or (c) responsible
in any manner to any Lender for any recitals, statements, representations or warranties made by the
Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any
certificate, report, statement or other document referred to or provided for in, or received by the
Agent under or in connection with, this Agreement or any other Loan Document, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other
Loan Document or for any failure of the Borrower to perform its obligations hereunder or
thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as
to the observance or performance of any of the agreements contained in, or conditions of, this
Agreement or any other Loan Document, or to inspect the properties, books or records of the
Borrower.

     8.5 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully
protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit,
letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other
document or conversation believed by it to be genuine and correct and to have been signed, sent or
made by the proper Person or Persons and upon advice and statements of legal counsel (including
counsel to the Borrower), independent accountants and other experts selected by the Agent. The
Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless and
until a written notice of assignment, negotiation, or transfer thereof shall have been received by
the Agent. The Agent shall be fully justified in failing or refusing to take any action under this
Agreement or any other Loan Document unless it shall first receive such advice or concurrence of
the Required Lenders as it deems appropriate and contribution by each Lender of its Percentage
Share of costs reasonably expected by the Agent to be incurred in connection therewith. The Agent
shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement
and the other Loan Documents in accordance with a request of the Required Lenders. Such request
and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and all
future holders of the Notes. In no event shall the Agent be required to take any action that
exposes the Agent to personal liability or that is contrary to any Loan Document or applicable
Requirement of Law.

     8.6 Notice of Default. The Agent shall not be deemed to have knowledge or notice of
the occurrence of any Default or Event of Default unless the Agent has received notice from a
Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a “notice of default.” In the event that the Agent receives such a
notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably directed by the
Required Lenders; provided that unless and until the Agent shall have received such
directions, subject to the provisions of Section 7.2, the Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of the Lenders. In the event that the
officer of the

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Agent primarily responsible for the lending relationship with the Borrower or the officer of any
Lender primarily responsible for the lending relationship with the Borrower becomes aware that a
Default or Event of Default has occurred and is continuing, the Agent or such Lender, as the case
may be, shall use its good faith efforts to inform the other Lenders and/or the Agent, as the case
may be, promptly of such occurrence. Notwithstanding the preceding sentence, failure to comply
with the preceding sentence shall not result in any liability to the Agent or any Lender.

     8.7 Non-Reliance on Agent and Other Lenders. Each Lender expressly acknowledges that
neither the Agent nor any other Lender nor any of their respective officers, directors, employees,
agents, attorneys-in-fact or affiliates has made any representation or warranty to such Lender and
that no act by the Agent or any other Lender hereafter taken, including any review of the affairs
of the Borrower, shall be deemed to constitute any representation or warranty by the Agent or any
Lender to any other Lender. Each Lender represents to the Agent that it has, independently and
without reliance upon the Agent or any other Lender, and based on such documents and information as
it has deemed appropriate, made its own appraisal of and investigation into the business,
operations, property, condition (financial and otherwise) and creditworthiness of the Borrower and
the value of the Collateral and other Properties of the Borrower and has made its own decision to
enter into this Agreement. Each Lender also represents that it will, independently and without
reliance upon the Agent or any other Lender and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business, operations, property,
condition (financial and otherwise) and creditworthiness of the Borrower and the value of the
Collateral and other Properties of the Borrower. Except for notices, reports and other documents
expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have
any duty or responsibility to provide any Lender with any credit or other information concerning
the business, operations, property, condition (financial and otherwise), or creditworthiness of the
Borrower or the value of the Collateral or other Properties of the Borrower which may come into the
possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates.

     8.8 Indemnification. Each Lender agrees to indemnify the Agent and its officers,
directors, employees, agents, attorneys-in-fact and affiliates (to the extent not reimbursed by the
Borrower and without limiting the obligation of the Borrower to do so), ratably according to the
Percentage Share of such Lender, from and against any and all liabilities, claims, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind whatsoever which may at any time (including any time following the payment and performance of
all obligations and the termination of this Agreement) be imposed on, incurred by or asserted
against the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates in any way relating to or arising out of this Agreement or any other Loan Document, or
any other document contemplated or referred to herein or the transactions contemplated hereby or
any action taken or omitted by the Agent or any of its officers, directors, employees, agents,
attorneys-in-fact or affiliates under or in connection with any of the foregoing, including any
liabilities, claims, obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses and disbursements imposed, incurred or asserted as a result of the negligence, whether
sole or concurrent, of the Agent or any of its officers, directors, employees, agents,
attorneys-in-

 - 50 - 

 

fact or affiliates; provided that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses
or disbursements resulting solely from the gross negligence or willful misconduct of the Agent or
any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. The agreements
in this Section shall survive the payment and performance of all obligations and the termination
of this Agreement.

     8.9 Restitution. Should the right of the Agent or any Lender to realize funds with
respect to the Obligations be challenged and any application of such funds to the Obligations be
reversed, whether by Governmental Authority or otherwise, or should the Borrower otherwise be
entitled to a refund or return of funds distributed to the Lenders in connection with the
Obligations, the Agent or such Lender, as the case may be, shall promptly notify the Lenders of
such fact. Not later than Noon, Central Standard or Central Daylight Savings Time, as the case may
be, of the Business Day following such notice, each Lender shall pay to the Agent an amount equal
to the ratable share of such Lender of the funds required to be returned to the Borrower. The
ratable share of each Lender shall be determined on the basis of the percentage of the payment all
or a portion of which is required to be refunded originally distributed to such Lender, if such
percentage can be determined, or, if such percentage cannot be determined, on the basis of the
Percentage Share of such Lender. The Agent shall forward such funds to the Borrower or to the
Lender required to return such funds. If any such amount due to the Agent is made available by any
Lender after Noon, Central Standard or Central Daylight Savings Time, as the case may be, of the
Business Day following such notice, such Lender shall pay to the Agent (or the Lender required to
return funds to the Borrower, as the case may be) for its own account interest on such amount at a
rate equal to the Federal Funds Rate for the period from and including the date on which
restitution to the Borrower is made by the Agent (or the Lender required to return funds to the
Borrower, as the case may be) to but not including the date on which such Lender failing to timely
forward its share of funds required to be returned to the Borrower shall have made its ratable
share of such funds available.

     8.10 Agent in Its Individual Capacity. The Agent and its affiliates may make loans to,
accept deposits from and generally engage in any kind of business with the Borrower as though the
Agent were not the agent hereunder. With respect to any Note issued to the Lender serving as the
Agent, the Agent shall have the same rights and powers under this Agreement as a Lender and may
exercise such rights and powers as though it were not the Agent. The terms “Lender” and “Lenders”
shall include the Agent in its individual capacity.

     8.11 Successor Agent. The Agent may resign as Agent upon ten days’ notice to the
Lenders and the Borrower. If the Agent shall resign as Agent under this Agreement and the other
Loan Documents, Lenders for which the Percentage Shares aggregate at least fifty-one percent (51%)
shall appoint from among the Lenders a successor agent for the Lenders, subject to the reasonable
consent of the Borrower, whereupon such successor agent shall succeed to the rights, powers and
duties of the Agent. The term “Agent” shall mean such successor agent effective upon its
appointment. The rights, powers, and duties of the former Agent as Agent shall be terminated,
without any other or further act or deed on the part of such former Agent or any of the parties to
this Agreement or any holders of the Notes. After the removal or resignation of any Agent
hereunder as Agent, the provisions of this Article VIII and those of any Section hereof
relating to the Agent, including Section 5.17, Section 5.18 and Section 5.22 shall

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inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under
this Agreement and the other Loan Documents.

     8.12 Applicable Parties. The provisions of this Article are solely for the benefit of
the Agent and the Lenders, and the Borrower shall not have any rights as a third party beneficiary
or otherwise under any of the provisions of this Article. In performing functions and duties
hereunder and under the other Loan Documents, the Agent shall act solely as the agent of the
Lenders and does not assume, nor shall it be deemed to have assumed, any obligation or relationship
of trust or agency with or for the Borrower or any legal representative, successor, and assign of
the Borrower.

ARTICLE IX

MISCELLANEOUS

     9.1 Transfers; Participations. Each Lender may assign or sell participations
in its Loans and Commitments to one or more other Persons in accordance with this Section 9.1.

     (a) Assignments. Any Lender,

     (i) with the written consent of the Borrower and the Agent
(which consent shall not be unreasonably delayed or withheld), may
at any time, assign and delegate to one or more commercial banks or
other financial institutions, and

     (ii) with notice to the Borrower and the Agent, but without the
consent of the Borrower or the Agent, may assign and delegate to any
of its Affiliates or to any other Lender

(each Person described in (i) or (ii) above as being the Person to whom such assignment and
delegation is to be made, being hereinafter referred to as an “Assignee Lender”), all or any
fraction of such Lender’s total Loans and Commitments (which assignment and delegation shall be of
a constant, and not a varying percentage, of all the assigning Lender’s Loans and Commitments), in
a minimum aggregate amount of $1,000,000 of such Lender’s Percentage Share of the Maximum
Commitment Amount, if less; provided, however, that such Assignee Lender will comply with all the
provisions of this Agreement, and further, provided, however, that the Borrower and Agent shall be
entitled to continue to deal solely and directly with such assigning Lender in connection with the
interests so assigned and delegated to an Assignee Lender until:

     (iii) written notice of such assignment and delegation together
with payment instructions, addresses and related information with
respect to such Assignee Lender, shall have been given to the
Borrower and the Agent by such Lender and such Assignee Lender,

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     (iv) such Assignee Lender shall have executed and delivered to
the Borrower and the Agent a Lender Assignment Agreement, accepted
by the Borrower and the Agent and attached hereto as Exhibit VII,
and

     (v) the processing fees described below shall have been paid.

From and after the date that the Borrower and the Agent accept such Lender Assignment Agreement,
(a) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and
to the extent that rights and obligations hereunder have been assigned and delegated to such
Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and
obligations of a Lender hereunder and under the other Loan Documents, and (b) the Assignor Lender,
to the extent that rights and obligations hereunder have been assigned and delegated by it in
connection with such Lender Assignment Agreement, shall be released from its obligations hereunder
and under the other Loan Documents. Within five Business Days after its receipt of notice that the
Agent has received an executed Lender Assignment Agreement, the Borrower shall execute and deliver
to the Agent (for delivery to the relevant Assignee Lender) new Notes evidencing such Assignee
Lender’s assigned Loans and Commitments and, if the assignor Lender has retained Loans and
Commitments hereunder, replacement Notes in the principal amount of the Loans and Commitments
retained by the assignor Lender hereunder (such Notes to be in exchange for, but not in payment
of, those Notes then held by such assignor Lender). Each such Note shall be dated the date of the
predecessor Notes. The assignor Lender shall mark the predecessor Notes “exchanged” and deliver
them to the Borrower. Accrued interest on that part of the predecessor Notes evidenced by the new
Notes, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued
interest on that part of the predecessor Notes evidenced by the replacement Notes shall be paid to
the assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times
provided in the predecessor Notes and in this Agreement. Such assignor Lender or such assignee
Lender must also pay a processing fee to the Agent upon delivery of any Lender Assignment
Agreement in the amount of $3,000. Any attempted assignment and delegation not made in accordance
with this Section 9.1 shall be null and void.

          (b) Participations. Any Lender, with the prior written consent of the Borrower in its
sole discretion, may at any time sell to one or more commercial banks (each of such commercial
banks being herein called a “Participant”) participating interests in any of the Loans,
Commitments, or other interests of such Lender hereunder; provided, however, that (a) no
participation contemplated in this Section 9.1 shall relieve such Lender from its Commitments or
its other obligations hereunder or under any other Loan Document, (b) such Lender shall remain
solely responsible for the performance of its Commitments and such other obligations, (c) the
Borrower and the Agent shall continue to deal solely and directly with such Lender in connection
with such Lender’s rights and obligations under this Agreement and each of the other Loan
Documents, (d) no Participant shall be entitled to require such Lender to take or refrain from
taking any action hereunder or under any other Loan Document.

     9.2 Survival of Representations, Warranties, and Covenants. All representations
and warranties of the Borrower and all covenants and agreements herein made shall survive the

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execution and delivery of the Notes and the Security Instruments and shall remain in force and
effect so long as any Obligation is outstanding or any Commitment exists.

     9.3 Notices and Other Communications. Except as to oral notices expressly
authorized herein, which oral notices shall be confirmed in writing, all notices, requests, and
communications hereunder shall be in writing (including by telecopy). Unless otherwise expressly
provided herein, any such notice, request, demand, or other communication shall be deemed to have
been duly given or made when delivered by hand, or, in the case of delivery by mail, when deposited
in the mail, certified mail, return receipt requested, postage prepaid, or, in the case of telecopy
notice, when receipt thereof is acknowledged orally or by written confirmation report, addressed as
follows:

	 	(a)	 	if to the Agent and Lender, to:

Guaranty Bank, FSB

333 Clay Street, Suite 4400

Houston, Texas 77002

Attention: David M. Butler

Telecopy: (713) 890-8868

	 	(b)	 	if to the Borrower, to:

Prime Offshore L.L.C.

9821 Katy Freeway,

Suite 1050

Houston, Texas 77024

Attention: Jim R. Brock

Telecopy: (713) 461-9231

     Any party may, by proper written notice hereunder to the others, change the individuals or
addresses to which such notices to it shall thereafter be sent.

     9.4 Parties in Interest. Subject to applicable restrictions contained herein, all
covenants and agreements herein contained by or on behalf of the Borrower, the Agent or the Lenders
shall be binding upon and inure to the benefit of the Borrower, the Agent or the Lenders, as the
case may be, and their respective legal representatives, successors, and assigns.

     9.5 Rights of Third Parties. All provisions herein are imposed solely and exclusively
for the benefit of the Agent, Lenders and the Borrower. No other Person shall have any right,
benefit, priority, or interest hereunder or as a result hereof or have standing to require
satisfaction of provisions hereof in accordance with their terms.

     9.6
Renewals; Extensions. All provisions of this Agreement relating to the Notes
shall apply with equal force and effect to each promissory note hereafter executed which in whole
or in part represents a renewal or extension of any part of the Indebtedness of the Borrower under
this Agreement, the Notes, or any other Loan Document.

 - 54 - 

 

     9.7
No Waiver; Rights Cumulative. No course of dealing on the part of the Agent or a
Lender, its officers or employees, nor any failure or delay by the Agent or a Lender with respect
to exercising any of its rights under any Loan Document shall operate as a waiver thereof. The
rights of the Agent or a Lender under the Loan Documents shall be cumulative and the exercise or
partial exercise of any such right shall not preclude the exercise of any other right. Neither the
making of any Loan nor the issuance of a Letter of Credit shall constitute a waiver of any of the
covenants, warranties, or conditions of the Borrower contained herein. In the event the Borrower
is unable to satisfy any such covenant, warranty, or condition, neither the making of any Loan nor
the issuance of a Letter of Credit shall have the effect of precluding the Lender from thereafter
declaring such inability to be an Event of Default as hereinabove provided.

     9.8 Survival Upon Unenforceability. In the event any one or more of the provisions
contained in any of the Loan Documents or in any other instrument referred to herein or executed in
connection with the Obligations shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any
other provision of any Loan Document or of any other instrument referred to herein or executed in
connection with such Obligations.

     9.9 Amendments; Waivers. Neither this Agreement nor any provision hereof may be
amended, waived, discharged, or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the amendment, waiver, discharge, or termination is sought.

     9.10 Controlling Agreement. In the event of a conflict between the provisions of this
Agreement and those of any other Loan Document, the provisions of this Agreement shall control.

     9.11 Disposition of Collateral. Notwithstanding any term or provision, express or
implied, in any of the Security Instruments, the realization, liquidation, foreclosure, or any
other disposition on or of any or all of the Collateral shall be in the order and manner and
determined in the sole discretion of the Agent; provided, however, that in no event shall the Agent
violate applicable law or exercise rights and remedies other than those provided in such Security
Instruments or otherwise existing at law or in equity.

     9.12 USA Patriot Act Notice. Lender hereby notices Borrower that pursuant to the
requirements of the USA Patriot Act (Title 111 of Pub. L. 107-56 (signed into law October 26,
2001)) (the “Act”) it is required to obtain, verify and record information that identifies
Borrower, which information includes the names and address of Borrower and other information that
will allow Lender to identify Borrower in accordance with the Act.

     9.13 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO BE CONTRACTS MADE
UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT
CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT

 - 55 - 

 

LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.

     9.14 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY
OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN COURTS
HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. THE BORROWER HEREBY SUBMITS TO THE JURISDICTION OF
ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES
ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION
BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.

     9.15 WAIVER OF RIGHTS TO JURY TRIAL. THE BORROWER, AGENT AND THE LENDERS HEREBY KNOWINGLY,
VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE ACTS OR
OMISSIONS OF THE LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR PROVISIONS OF
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH RESPECT THERETO. THE PROVISIONS OF
THIS SECTION ARE A MATERIAL INDUCEMENT FOR THE LENDER ENTERING INTO THIS AGREEMENT.

     9.16 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE
PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN
THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF.
FURTHERMORE, IN THIS REGARD, THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT,
COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

     9.17 Counterparts. For the convenience of the parties, this Agreement may be
executed in multiple counterparts, each of which for all purposes shall be deemed to be an
original, and all such counterparts shall together constitute but one and the same Agreement.

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     IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the date first above
written.

	 	 	 	 	 
	 	BORROWER: 

PRIME OFFSHORE L.L.C.

 	 
	 	By:  	/s/ Jim R. Brock
 	 
	 	 	Jim R. Brock 	 
	 	 	President and Chief Financial Officer 	 
	 

 - 57 - 

 

	 	 	 	 	 
	 	AGENT AND LENDER:

GUARANTY BANK, FSB

 	 
	 	By:  	/s/ Kelly L. Elmore, III
 	 
	 	 	Kelly L. Elmore, III 	 
	 	 	Senior Vice President 	 
	 

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EXHIBIT I 

[FORM OF NOTE]

PROMISSORY NOTE

	$200,000,000 	Houston, Texas  	June 29, 2006 

     FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned (“Maker”) promises to pay to the order
of GUARANTY BANK, FSB (“Payee”), at its banking quarters in Houston, Harris County, Texas, the sum
of TWO HUNDRED MILLION DOLLARS ($200,000,000), or so much thereof as may be advanced against this
Note pursuant to the Credit Agreement dated of even date herewith by and between Maker and Payee
(as amended, restated, or supplemented from time to time, the “Credit Agreement”), together with
interest at the rates and calculated as provided in the Credit Agreement.

     Reference is hereby made to the Credit Agreement for matters governed thereby, including,
without limitation, availability of the Maker to receive advances under this Note and certain
events which will entitle the holder hereof to accelerate the maturity of all amounts due
hereunder. Capitalized terms used but not defined in this Note shall have the meanings assigned to
such terms in the Credit Agreement.

     This Note is issued pursuant to and is payable as provided in the Credit Agreement. Subject
to compliance with applicable provisions of the Credit Agreement, Maker may at any time pay the
full amount or any part of this Note without the payment of any premium or fee, but such payment
shall not, until this Note is fully paid and satisfied, excuse the payment as it becomes due of
any payment on this Note provided for in the Credit Agreement.

     Without being limited thereto or thereby, this Note is secured by the Security
Instruments.

     THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF TEXAS WITHOUT
GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER
345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY TO THIS NOTE.

	 	 	 	 	 
	 	PRIME OFFSHORE L.L.C.

 	 
	 	By:  	 	 
	 	 	     Jim R. Brock        	 
	 	 	     President and Chief Financial Officer 	 
	 

I-i

 

EXHIBIT I(A)

[FORM OF NOTE]

PROMISSORY NOTE

	$5,000,000 	Houston, Texas  	June 29, 2006 

     FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned (“Maker”) promises to pay to the order
of GUARANTY BANK, FSB (“Payee”), at its banking quarters in Houston, Harris County, Texas, ON
DEMAND the sum of FIVE MILLION DOLLARS ($5,000,000), or so much thereof as may be advanced against
this Note pursuant to the Credit Agreement dated of even date herewith by and between Maker and
Payee (as amended, restated, or supplemented from time to time, the “Credit Agreement”), together
with interest at the rates and calculated as provided in the Credit Agreement.

     Reference is hereby made to the Credit Agreement for matters governed thereby, including,
without limitation, availability of the Maker to receive advances under this Note and certain
events which will entitle the holder hereof to accelerate the maturity of all amounts due
hereunder. Capitalized terms used but not defined in this Note shall have the meanings assigned to
such terms in the Credit Agreement.

     This Note is issued pursuant to and is payable as provided in the Credit Agreement. Subject
to compliance with applicable provisions of the Credit Agreement, Maker may at any time pay the
full amount or any part of this Note without the payment of any premium or fee, but such payment
shall not, until this Note is fully paid and satisfied, excuse the payment as it becomes due of
any payment on this Note provided for in the Credit Agreement.

     Without being limited thereto or thereby, this Note is secured by the Security Instruments.

     THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF TEXAS WITHOUT
GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER
345 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY TO THIS NOTE.

	 	 	 	 	 
	 	PRIME OFFSHORE L.L.C.

 	 
	 	By:  	 	 
	 	 	    Jim R. Brock 	 
	 	 	    President and Chief Financial Officer 	 
	 

 I(A)-i 

 

EXHIBIT II 

[FORM OF BORROWING REQUEST]

GUARANTY BANK, FSB 
333 CLAY
STREET, SUITE 4400 
HOUSTON, TEXAS
77002 
Attention: David M. Butler

	 	 	 
	Re:

	 	Credit Agreement dated as of June 29, 2006, by and between PRIME
OFFSHORE L.L.C. and GUARANTY BANK, FSB, as Agent, and the Lenders signatory
thereto from time to time (as amended, restated, or supplemented from time to
time, the “Credit Agreement”)

Ladies and Gentlemen:

     Pursuant to the Credit Agreement, the Borrower hereby makes the requests indicated below:

	 	1.	 	Loans
	 
	 	(a)	 	Amount of new Loan: $                                         
	 
	 	(b)	 	Requested funding date:                                         , 20                    .
	 
	 	(c)	 	$                                          of such Loan is to be a Floating Rate Loan;
	 
	 	 	 	$                                          of such Loan is to be a LIBO Rate Loan.

     Requested Interest Period for LIBO Rate Loan:                                         months.

	 	2.	 	Continuation or conversion of LIBO Rate Loan maturing on                                         :
	 
	 	(a)	 	Amount to be continued as a LIBO Rate Loan is $                                         , with an Interest
	 
	 	 	 	Period of                      months;
	 
	 	(b)	 	Amount to be converted to a Floating Rate Loan is $                                          ; and
	 
	 	3.	 	Conversion of Floating Rate Loan:
	 
	 	(a)	 	Requested conversion date:                                         , 20                      .
	 
	 	(b)	 	Amount to be converted to a LIBO Rate Loan is $                                         , with an Interest
Period of                      months.

     The undersigned certifies that he is the                of the Borrower, has obtained all consents
necessary, and as such she/he is authorized to execute this request on behalf of the Borrower. The
undersigned further certifies, represents, and warrants on behalf of the Borrower that the
Borrower is entitled to receive the requested borrowing, continuation, or conversion under the

 II-i 

 

terms and conditions of the Credit Agreement and are in full compliance with all the terms and
conditions of the Credit Agreement. Each capitalized term used but not defined herein shall have
the meaning assigned to such term in the Credit Agreement.

	 	 	 	 	 
	 	PRIME OFFSHORE L.L.C.

 	 
	 	By:  	 	 
	 	 	    Jim R. Brock 	 
	 	 	    President and Chief Financial Officer 	 
	 

II-ii 

 

EXHIBIT III 

[FORM OF COMPLIANCE CERTIFICATE]

                     , 2004

GUARANTY BANK, FSB 
333 CLAY
STREET, SUITE 4400 
HOUSTON, TEXAS
77002 
Attention: David M. Butler

	 	 	 
	Re:

	 	Credit Agreement dated as of June 29, 2006, by and between PRIME
OFFSHORE L.L.C. and Guaranty Bank, FSB, as Agent, and the Lenders signatory
thereto from time to time (as amended, restated, or supplemented from time to
time, the “Credit Agreement”)

Ladies and Gentlemen:

     Pursuant to applicable requirements of the Credit Agreement, the undersigned, as a
Responsible Officer of the Borrower, hereby certifies to you the following information as true and
correct as of the date hereof or for the period indicated, as the case may be:

1. To the best of the knowledge of the undersigned, no Default or Event of Default exists
as of the date hereof or has occurred since the date of our previous certification to you,
if any.

1. To the best of the knowledge of the undersigned, the following Defaults or Events of
Default exist as of the date hereof or have occurred since the date of our previous
certification to you, if any, and the actions set forth below are being taken to remedy such
circumstances:

2. The compliance of the Borrower with the financial covenants of the Credit Agreement, as
of the close of business on_____ , is evidenced by the following:

	 	(a)	 	Section 6.14: Interest Coverage Ratio. Permit as of
the close of any fiscal quarter, the ratio of (a) EBITDAX to (b)
Interest Expense, measured on a rolling four-quarter basis, to be less
than 3.00 to 1.00 for the fiscal quarters ending June 30, 2006 and
September 30, 2006 and 4.00 to 1.00 for the fiscal quarter ending
December 31, 2006 and each fiscal quarter thereafter.

Actual 

                     to 1.0

	 	(b)	 	Section 6.15: Tangible Net Worth. Permit Tangible Net
Worth, as adjusted for exploration costs as of the close of any fiscal
quarter beginning June 30, 2006, to be less than 90% of the Tangible Net

 III-i 

 

	 	 	 	Worth at March 31, 2006, plus 75% of positive quarterly net income
thereafter.

Required                Actual

	 	(c)	 	Section 6.16: General and Administrative Expenses. Permit, as of the
close of any fiscal quarter, general and administrative expenses to be more
than $350,000 per quarter beginning with the period ending June 30, 2006.

Actual

	 	(e)	 	Section 6.17: Minimum Liquidity. Permit, subsequent to Project
Completion as defined in the Completion and Liquidity Maintenance Agreement,
the sum of the Available Commitment plus unrestricted cash plus cash
equivalent to be less than $1,000,000 at any time.

Required                Actual

     3. No Material Adverse Effect has occurred since the date of the Financial Statements
dated as of              .

 III-ii 

 

     Each capitalized term used but not defined herein shall have the meaning assigned to such term
in the Credit Agreement.

	 	 	 	 	 
	 	Very truly yours,

PRIME OFFSHORE L.L.C. 

 	 
	 	By:  	 	 
	 	 	   Jim R. Brock 	 
	 	 	   President and Chief Financial Officer 	 
	 

 III-iii 

 

EXHIBIT IV 

[FORM OF OPINION OF COUNSEL]

[Closing Date]

GUARANTY BANK, FSB 
333 CLAY STREET,
SUITE 4400

HOUSTON, TEXAS 77002

Attention: David M. Butler

			
	      Re:	 	Credit Agreement dated as of June 29, 2006, by and between PRIME
OFFSHORE L.L.C. and Guaranty Bank, FSB, as Agent, and the Lenders signatory
thereto from time to time (as amended, restated, or supplemented from time to
time, the “Credit Agreement”)

Ladies and Gentlemen:

     We have
acted as counsel to PRIME OFFSHORE L.L.C. (the “Borrower”) in connection with the
transactions contemplated in the Credit Agreement. This Opinion is delivered pursuant to Section
3.1(m) of the Credit Agreement, and the Lender is hereby authorized to rely upon this Opinion in
connection with the transactions contemplated in the Credit Agreement. Each capitalized term used
but not defined herein shall have the meaning assigned to such term in the Credit Agreement.

     In our representation of the Borrower, we have examined an executed counterpart of each of the
following (the “Loan Documents”):

          (a) the Credit Agreement;

          (b) the Notes;

          (c) Mortgage, Deed of Trust, Indenture, Security Agreement,
Assignment of Production, and Financing Statement dated of even date herewith
from the Borrower in favor of the Lender (the “Mortgage”); and

          (d) Financing Statements from the Borrower, as debtors, constituent to
the Mortgage (the “Financing Statement”).

          (e) a certificate of incumbency dated the Closing Date, including
specimen signatures of all officers or other representatives of the Borrower who
are authorized to execute Loan Documents on behalf of the Borrower, such
certificate being executed by the manager or another authorized representative of
the Borrower;

          (f) copies of resolutions, to the extent required under the Operating
Agreement of the Borrower, adopted by the board of directors of the Borrower
approving the Loan Documents to which the Borrower is a party and authorizing

IV-i

 

 

the transactions contemplated herein and therein, accompanied by a certificate dated
the Closing Date issued by the manager or another authorized representative of the
Borrower to the effect that such copies are true and correct copies of resolutions
duly adopted and that such resolutions constitute all the resolutions adopted with
respect to such transactions, have not been amended, modified, or rescinded in any
respect, and are in full force and effect as of the date of such certificate;

     (g) multiple counterparts, as requested by the Lender, of the following
Security Instruments creating, evidencing, perfecting, and otherwise establishing
Liens in favor of the Lender in and to the Collateral:

     (i) Ratification of Mortgage and Deed of Trust, Indenture,
Security Agreement, Assignment of Production, and Financing Statement
from the Borrower covering all Oil and Gas Properties of the Borrower
and all improvements, personal property, and fixtures related
thereto;

     (ii) Financing Statements from the Borrower, as debtor,
constituent to the instrument described in clause (i) above;

     (iii) undated letters, in form and substance satisfactory to
the Lender, from the Borrower to each purchaser of production and
disburser of the proceeds of production from or attributable to the
Mortgaged Properties, together with additional letters with the
addressees left blank, authorizing and directing the addressees to
make future payments attributable to production from the Mortgaged
Properties directly to the Lender;

     (iv) Security Agreement from the Borrower pledging contract
rights, etc.;

     (v) Financing Statements from the Borrower, as debtor,
constituent to the instrument described in clause (iv) above;

     (vi) Pledge Agreement from the Borrower pledging certain
partnership interest;

     (vii) Financing Statement from the Borrower, as debtor,
constituent to the instrument described in Clause (vi) above;

     (h) certificates dated as of a recent date from the Secretary of State or other
appropriate Governmental Authority evidencing the existence or qualification and
good standing of the Borrower in its jurisdictions of formation and in any other
jurisdictions where it does business;

     We have also examined the originals, or copies certified to our satisfaction, of such other
records of the Borrower, certificates of public officials and officers of the Borrower, agreements,

IV-ii

 

 

instruments, and documents as we have deemed necessary as a basis for the opinions hereinafter
expressed.

     In making such examinations, we have, with your permission, assumed:

     (a) the genuineness of all signatures to the Loan Documents other than those
of the Borrower;

     (b) the authenticity of all documents submitted to us as originals and the
conformity with the originals of all documents submitted to us as copies;

     (c) the Agent and Lender is authorized and has the power to enter into and
perform its obligations under the Credit Agreement;

     (d) the due authorization, execution, and delivery of all Loan Documents by
each party thereto other than the Borrower; and

     (e) the Borrower has title to all Property covered or affected by the Mortgage.

     Based upon the foregoing and subject to the qualifications set forth herein, we are of the
opinion that:

     1. The Borrower is a limited liability company duly organized, legally
existing, and in good standing under the laws of their respective states of formation
and is
duly qualified as a limited liability company and is in good standing in all
jurisdictions
wherein the ownership of their respective Property or the operation of its respective
businesses necessitates same.

     2. The execution and delivery by the Borrower of the Credit Agreement and
the borrowings thereunder, the execution and delivery by the Borrower of the other Loan
Documents to which the Borrower is a party, and the payment and performance of all
Obligations of the Borrower thereunder are within the power of the Borrower, have been
duly authorized by all necessary corporate action, and do not (a) require the consent
of any Governmental Authority, (b) contravene or conflict with any Requirement of Law,
(c)to our knowledge after due inquiry, contravene or conflict with any indenture,
instrument, or other agreement to which the Borrower is a party or by which any
Property of the Borrower may be presently bound or encumbered, or (d) result in or require the
creation or imposition of any Lien upon any Property of the Borrower other than as
contemplated by the Loan Documents.

     3. The Loan Documents to which the Borrower is a party constitute legal,
valid, and binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms.

     4. The forms of the Mortgage and the Financing Statement and the
description of the Mortgaged Property (as such term is defined in the Mortgage and so
used herein) situated in the State of Texas (the “State”) satisfy all
applicable
Requirements of Law of the State and are legally sufficient under the laws of the State
to

IV-iii

 

 

enable the Lender to realize the practical benefits purported to be afforded by the Mortgage.

     5. The Mortgage creates a valid lien upon and security interest in all
Mortgaged Property situated in the State to secure the Indebtedness (as such term is
defined in the Mortgage and so used herein).

     6. The Mortgage and the Financing Statement are in satisfactory form for
filing and recording in the offices described below.

     7. The filing and/or recording, as the case may be, of (a) the Mortgage in the
office of the county clerk of each county in the State in which any portion of the
Mortgaged Property is located, and as a financing statement and utility security
instrument in the office of the Secretary of State of the State, and (b) the Financing
Statement in the Uniform Commercial Code records in each county in the State in which
any portion of the Mortgaged Property is located are the only recordings or filings in the
State necessary to perfect the liens and security interests in the Mortgaged Property
created by the Mortgage or to permit the Lender to enforce in the State its rights under
the Mortgage. No subsequent filing, re-filing, recording, or re-recording will be required
in the State in order to continue the perfection of the liens and security interests created
by the Mortgage except that (a) a continuation statement must be filed with respect to the
Mortgage filed as a financing statement in the office of the Secretary of State of the State
and with respect to the Financing Statement in the Uniform Commercial Code records in
each county in the State in which any portion of the Mortgaged Property is located, each
within six months prior to the expiration of five years from the date of the relevant initial
financing statement filing, (b) a subsequent continuation statement must be filed within
six months prior to the expiration of each subsequent five-year period from the date of
each initial financing statement filing, and (c) amendments or supplements to the
Mortgage filed as a financing statement and the Financing Statement and/or additional
financing statements may be required to be filed in the event of a change in the name,
identity, or structure of the Borrower or in the event the financing statement filing
otherwise becomes inaccurate or incomplete.

     8. To our knowledge after due inquiry, except as disclosed in Exhibit VI to
the Credit Agreement, no litigation or other action of any nature affecting the Borrower is
pending before any Governmental Authority or threatened against the Borrower. To our
knowledge after due inquiry, no unusual or unduly burdensome restriction, restraint, or
hazard exists by contract, Requirement of Law, or otherwise relative to the business or
operations of the Borrower or the ownership and operation of any Properties of the
Borrower other than such as relate generally to Persons engaged in business activities
similar to those conducted by the Borrower, as the case may be.

     9. No authorization, consent, approval, exemption, franchise, permit or
license of, or filing (other than filing of Security Instruments in appropriate filing
offices)
with, any Governmental Authority or any other Person is required to authorize or is
otherwise required in connection with the valid execution and delivery by the Borrower

IV-iv

 

 

of the Loan Documents or any instrument contemplated thereby, or the payment performance by
the Borrower of the Obligations.

     10. No transaction contemplated by the Loan Documents is in violation of any
regulations promulgated by the Board of Governors of the Federal Reserve System,
including, without limitation, Regulations G, T, U, or X.

     11. The Borrower is not, nor is the Borrower directly or indirectly controlled
by or acting on behalf of any Person which is, an “investment company” or an
“affiliated
person” of an “investment company” within the meaning of the Investment Company Act
of 1940, as amended.

     12. The Borrower is not a “holding company,” or an “affiliate” of a “holding
company” or of a “subsidiary company” of a “holding company,” within the meaning of
the Public Utility Holding Company Act of 1935, as amended.

The opinions expressed herein are subject to the following qualifications and limitations:

     A. We are licensed to practice law only in the State and other jurisdictions
whose laws are not applicable to the opinions expressed herein; accordingly, the
foregoing opinions are limited solely to the laws of the State, applicable United
States
federal law.

     B. The validity, binding effect, and enforceability of the Loan Documents
may be limited or affected by bankruptcy, insolvency, moratorium,
reorganization, or other
similar laws affecting rights of creditors generally, including, without
limitation,
statutes or rules of law which limit the effect of waivers of rights by a debtor or
grantor;
provided, however, that the limitations and other effects of such statutes or rules of
law
upon the validity and binding effect of the Loan Documents should not differ materially
from the limitations and other effects of such statutes or rules of law upon the
validity
and binding effect of credit agreements, promissory notes, guaranties, and security
instruments generally.

     C. The enforceability of the respective obligations of the Borrower under the
Loan Documents is subject to general principles of equity (whether such enforceability
is
considered in a suit in equity or at law).

     This Opinion is furnished by us solely for the benefit of the Lender in connection with the
transactions contemplated by the Loan Documents and is not to be quoted in whole or in part or
otherwise referred to or disclosed in any other transaction.

Very truly yours,

IV-v

 

 

EXHIBIT V

FACILITY AMOUNTS

	 	 	 	 	 	 	 	 	 
	Revolving Line of Credit	 	 	 	 	 	 
	Name of Lender	 	Facility Amount	 	 	Percentage Share	 
	Guaranty Bank, FSB
	 	$	200,000,000	 	 	100	%	 
	 
	 	 	 	 	 	 	 	 
	Total
	 	$	200,000,000	 	 	100	%	 

 V-i

 

 

EXHIBIT VI 

[FORM OF ASSIGNMENT AGREEMENT]

ASSIGNMENT AGREEMENT

     This ASSIGNMENT AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, this “Agreement”) is dated as of                     ,          , by and
between
                     (the “Assignor”) and                      (the “Assignee”).

RECITALS

     WHEREAS, the Assignor is a party to the Credit Agreement dated as of June 29, 2006,
(as amended, supplemented or restated from time to time, the “Credit Agreement”) by and
among PRIME OFFSHORE L.L.C. (the “Borrower”), each of the lenders that is or becomes a party
thereto as provided in Section 9.1(b) of the Credit Agreement (individually, together with its
successors and assigns, a “Lender”, and collectively, together with their successors and assigns,
the “Lenders”), and Guaranty Bank, FSB, a federal savings bank, as a Lender (in such capacity,
“Guaranty”) and as agent for the Lenders (in such capacity, together with its successors in such
capacity, the “Agent”); and

     WHEREAS, the Assignor proposes to sell, assign and transfer to the Assignee, and the Assignee
proposes to purchase and assume from the Assignor, [all] [a portion] of the Assignor’s Facility
Amount and its outstanding Loans, all on the terms and conditions of this Agreement;

     NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein,
and for other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

     1.1 Definitions from Credit Agreement. All capitalized terms used but not
defined
herein have the respective meanings given to such terms in the Credit Agreement.

     1.2  Additional Defined Terms. As used herein, the following terms have the
following respective meanings:

     “Assigned Interest” shall mean all of Assignor’s (in its capacity as a
“Lender”) rights and obligations (i) under the Credit Agreement and the other Loan
Documents in respect of [all of] [the portion of the] Facility Amount of the Assignor in
the principal
amount equal to 
$
                     and (ii) to make Loans under its Commitment up to such
amount referenced above and any right to receive payments for the Loans currently
outstanding under its Commitment in the principal amount of $                     (the “Loan
Balance”), plus the interest and fees which will accrue with respect thereto from and after
the Assignment Date.

VI-i

 

 

      “Assignment
Date” shall
mean        ,        .

     1.3
References. References in this Agreement to Schedule, Exhibit, Article, or
Section numbers shall be to Schedules, Exhibits, Articles, or Sections of this Agreement,
unless
expressly stated to the contrary. References in this Agreement to “hereby,” “herein,”
“hereinafter,” “hereinabove,” “hereinbelow,” “hereof,” “hereunder” and words of similar import
shall be to this Agreement in its entirety and not only to the particular Schedule, Exhibit,
Article,
or Section in which such reference appears. Except as otherwise indicated, references in
this
Agreement to statutes, sections, or regulations are to be construed as including all statutory
or
regulatory provisions consolidating, amending, replacing, succeeding, or supplementing the
statute, section, or regulation referred to. References in this Agreement to “writing”
include
printing, typing, lithography, facsimile reproduction, and other means of reproducing words in
a tangible visible form. References in this Agreement to agreements and other contractual
instruments shall be deemed to include all exhibits and appendices attached thereto and all
subsequent amendments and other modifications to such instruments, but only to the extent such
amendments and other modifications are not prohibited by the terms of this Agreement.
References in this Agreement to Persons include their respective successors and permitted
assigns.

     1.4 Articles and Sections. This Agreement, for convenience only, has been divided
into Articles and Sections; and it is understood that the rights and other legal relations of
the
parties hereto shall be determined from this instrument as an entirety and without regard to
the
aforesaid division into Articles and Sections and without regard to headings prefixed to such
Articles or Sections.

     1.5 Number and Gender. Whenever the context requires, reference herein made to
the single number shall be understood to include the plural; and likewise, the plural shall be
understood to include the singular. Definitions of terms defined in the singular or plural
shall be
equally applicable to the plural or singular, as the case may be, unless otherwise indicated.
Words denoting sex shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the general but shall
be
construed as cumulative.

     1.6 Negotiated Transaction. Each party to this Agreement affirms to the other that it
has had the opportunity to consult, and discuss the provisions of this Agreement with,
independent counsel and fully understands the legal effect of each provision.

ARTICLE II

SALE AND ASSIGNMENT

     2.1 Sale and Assignment. On the terms and conditions set forth herein,
effective on and as of the Assignment Date, the Assignor hereby sells, assigns and transfers to the
Assignee, and the Assignee hereby purchases and assumes from the Assignor, all of the right, title
and interest of the Assignor in and to, and all of the obligations of the Assignor in respect of,
the Assigned Interest. Such sale, assignment and transfer is without recourse and, except as
expressly provided in this Agreement, without representation or warranty.

VI-ii

 

 

     2.2 Assumption of Obligations. The Assignee agrees with the Assignor (for the
express benefit of the Assignor and the Borrower) that the Assignee will, from and after the
Assignment Date, assume and perform all of the obligations of the Assignor in respect of the
Assigned Interest. From and after the Assignment Date: (a) the Assignor shall be released from
the Assignor’s obligations in respect of the Assigned Interest, and (b) the Assignee shall be
entitled to all of the Assignor’s rights, powers and privileges under the Credit Agreement and
the
other Loan Documents in respect of the Assigned Interest.

     2.3 Consent by Agent. By executing this Agreement as provided
below,
in accordance with Section 9.1(b) of the Credit Agreement, the Agent hereby acknowledges
notice of the transactions contemplated by this Agreement and consents to such transactions.

ARTICLE III

PAYMENTS

     3.1 Payments. As consideration for the sale, assignment and transfer contemplated
by Section 2.1, the Assignee shall, on the Assignment Date, assume Assignor’s obligations
in respect of the Assigned Interest and pay to the Assignor an amount equal to the Loan Balance,
if any, all accrued and unpaid interest and fees with respect to the Assigned Interest as of the
Assignment Date. Except as otherwise provided in this Agreement, all payments hereunder shall
be made in Dollars and in immediately available funds, without setoff, deduction or
counterclaim.

     3.2 Allocation of Payments. The Assignor and the Assignee agree that
(i) the Assignor shall be entitled to any payments of principal with respect to the Assigned
Interest made prior to the Assignment Date, together with any interest and fees with respect
to
the Assigned Interest accrued prior to the Assignment Date, (ii) the Assignee shall be
entitled to
any payments of principal with respect to the Assigned Interest made from and after the
Assignment Date, together with any and all interest and fees with respect to the Assigned
Interest
accruing from and after the Assignment Date, and (iii) the Agent is authorized and instructed
to
allocate payments received by it for the account of the Assignor and the Assignee as provided
in the foregoing clauses. Each party hereto agrees that it will hold any interest, fees or other
amounts that it may receive to which the other party hereto shall be entitled pursuant to the
preceding sentence for account of such other party and pay, in like money and funds, any such
amounts that it may receive to such other party promptly upon receipt.

     3.3 Delivery of Notes. Promptly following the receipt by the Assignor of
the consideration required to be paid under Section 3.1 hereof, the Assignor shall, in
the manner contemplated by Section 9.1(b) of the Credit Agreement, (i) deliver to the Agent (or
its counsel) the Note held by the Assignor and (ii) notify the Agent to request that the Borrower
execute and deliver new Notes to the Assignor, if Assignor continues to be a Lender, and the
Assignee, dated the Assignment Date in respective principal amounts equal to the respective
Facility Amounts of the Assignor (if appropriate) and the Assignee after giving effect to the
sale, assignment and transfer contemplated hereby.

VI-iii

 

 

     3.4 Further Assurances. The Assignor and the Assignee hereby agree to execute
and deliver such other instruments, and take such other actions, as either party may reasonably
request in connection with the transactions contemplated by this Agreement.

ARTICLE IV

CONDITIONS PRECEDENT

     The effectiveness of the sale, assignment and transfer contemplated hereby is subject
to the satisfaction of each of the following conditions precedent:

     (a) the execution and delivery of this Agreement by the Assignor and
the Assignee;

     (b) the receipt by the Assignor of the payments required to be made
under Section 3.1; and

     (c) the acknowledgment and consent by the Agent contemplated by
Section 2.3.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

     5.1 Representations and Warranties of Assignor. The Assignor represents and
warrants to the Assignee as follows:

     (a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its obligations
under, and consummate the transactions contemplated by, this Agreement;

     (b) the execution, delivery and compliance with the terms hereof by
the Assignor and the delivery of all instruments required to be delivered by it
hereunder do not and will not violate any Requirement of Law applicable to it;

     (c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor, enforceable
against it in accordance with its terms;

     (d) all approvals and authorizations of, all filings with and all actions
by any Governmental Authority necessary for the validity or enforceability of its
obligations under this Agreement have been obtained;

     (e) the Assignor has good title to, and is the sole legal and beneficial
owner of, the Assigned Interest, free and clear of all Liens, claims,
participations
or other charges of any nature whatsoever; and

VI-iv

 

 

     (f) the transactions contemplated by this Agreement are commercial banking
transactions entered into in the ordinary course of the banking business of the
Assignor.

     5.2 Disclaimer. Except as expressly provided in Section 5.1 hereof, the
Assignor
does not make any representation or warranty, nor shall it have any responsibility to the
Assignee, with respect to the accuracy of any recitals, statements, representations or
warranties
contained in the Credit Agreement or in any other Loan Document or for the value, validity,
effectiveness, genuineness, execution, legality, enforceability or sufficiency of the Credit
Agreement, the Notes or any other Loan Document or for any failure by the Borrower or any
other Person (other than Assignor) to perform any of its obligations thereunder or for the
existence, value, perfection or priority of any collateral security or the financial or other
condition of the Borrower or any other Person, or any other matter relating to the Credit
Agreement or any other Loan Document or any extension of credit thereunder.

     5.3  Representations and Warranties of Assignee. The Assignee represents and
warrants to the Assignor as follows:

     (a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its obligations
under, and consummate the transactions contemplated by, this Agreement;

     (b) the execution, delivery and compliance with the terms hereof by
the Assignee and the delivery of all instruments required to be delivered by it
hereunder do not and will not violate any Requirement of Law applicable to it;

     (c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignee, enforceable
against it in accordance with its terms;

     (d) all approvals and authorizations of, all filings with and all actions
by any Governmental Authority necessary for the validity or enforceability of its
obligations under this Agreement have been obtained;

     (e) the Assignee has received copies of the Credit Agreement and the
other Loan Documents, as well as copies of all Financial Statements previously
provided by the Borrower in satisfaction of obligations under the Credit
Agreement.

     (f) the Assignee has fully reviewed the terms of the Credit Agreement
and the other Loan Documents and has independently and without reliance upon
the Assignor, and based on such information as the Assignee has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement;

     (g) if the Assignee is not incorporated under the laws of the United
Sates of America or a state thereof, the Assignee has contemporaneously herewith

VI-v

 

 

delivered to the Agent and the Borrower such documents as are required by Section
2.25(b) of the Credit Agreement; and

     (h) the transactions contemplated by this Agreement are commercial banking
transactions entered into in the ordinary course of the banking business of the
Assignee.

ARTICLE VI

MISCELLANEOUS

     6.1 Notices. All notices and other communications provided for herein
(including
any modifications of, or waivers, requests or consents under, this Agreement) shall be given
or
made in writing (including by telecopy) to the intended recipient at its “Address for Notices”
specified below its name on the signature pages hereof or, as to either party, at such other
address as shall be designated by such party in a notice to the other party.

     6.2 Amendment, Modification or Waiver. No provision of this Agreement may be
amended, modified or waived except by an instrument in writing signed by the Assignor and the
Assignee, and consented to by the Agent.

     6.3 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted assigns. The
representations and warranties made herein by the Assignee are also made for the benefit of
the
Agent, and the Assignee agrees that the Agent is entitled to rely upon such representations
and
warranties.

     6.4 Assignments. Neither party hereto may assign any of its rights or obligations
hereunder except in accordance with the terms of the Credit Agreement.

     6.5 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be identical and all of which, taken together, shall constitute one and
the same instrument, and each of the parties hereto may execute this Agreement by signing any such
counterpart.

     6.6 Governing Law. This Agreement (including the validity and enforceability
hereof) shall be governed by, and construed in accordance with, the laws of the State of
Texas,
other than the conflict of laws rules thereof.

     6.7 Expenses. To the extent not paid by the Borrower pursuant to the terms of the
Credit Agreement, each party hereto shall bear its own expenses in connection with the
execution, delivery and performance of this Agreement.

     6.8 Waiver of Jury Trial. Each of the parties hereto hereby irrevocably waives, to the
fullest extent permitted by law, any and all right to trial by jury in any legal proceeding
arising out
of or relating to this Agreement or the transactions contemplated hereby.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

VI-Vi

 

 

     IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed
and delivered as of the date first above written.

	 	 	 	 	 	 	 	 	 	 	 
	 	 	ASSIGNOR	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	By:	 	 	 	 
	 	 	 	 	 	 	   	 	 
	 	 	 	 	Name:	 	 	 	 
	 	 	 	 	 	 	   	 	 
	 	 	 	 	Title:	 	 	 	 
	 	 	 	 	 	 	   	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	Address for Notices:	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Telecopier No.:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Telephone No.:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Attention:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	ASSIGNEE	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	By:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Name:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Title:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	Address for Notices:	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Telecopier No.:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Telephone No.:	 	 	 	 
	 	 	 	 	 	 	 	 	 
	 	 	 	 	Attention:	 	 	 	 
	 	 	 	 	 	 	 	 	 

	 	 	 	 	 
	ACKNOWLEDGED AND CONSENTED TO:
	 
	 	 	 	 
	GUARANTY BANK, FSB 
as Agent
	 
	 	 	 	 
	By:
	 	 	 	 
	Name:

	 	 

	 	 
	Title:

	 	 

	 	 
	 

	 	 

	 	 

VI-viiexv10w26w1

 

EXHIBIT 10.26.1

SUBORDINATION AGREEMENT

     THIS
SUBORDINATION AGREEMENT (this “Agreement”) is made and entered into effective this
29th day
of June, 2006, by and among PRIME OFFSHORE L.L.C. (the
“Borrower”). PRIMEENERGY
CORPORATION (the “Subordinated Party”) and
GUARANTY BANK, FSB, a federal savings bank (the
“Agent”
and a “Lender”).

W I T N E S S E T H:

     WHEREAS, pursuant to that certain Credit Agreement dated June 29, 2006, by and between the
Borrower and the Agent and Lender (as such agreement may be amended, modified, supplemented or
restated from time to time, the “Credit Agreement”), the Lender has agreed to make Loans to or for
the benefit of the Borrower;

     WHEREAS, Subordinated Party (“SP”) has advanced certain funds to the Borrower pursuant to a
Credit Agreement effective August 22, 2005 between Borrower and SP, with a Convertible Note in the
amount of $40,000,000 and has advanced approximately $32,000,000 as of the date of this Agreement
and may advance other funds to the Borrower subsequent to the date of this Agreement (all of which
are referred to as the “Debt”):

     WHEREAS, pursuant to the Credit Agreement and as an inducement to the Lender to extend credit
to the Borrower under the Credit Agreement, SP and the Borrower have agreed to execute this
Agreement in favor of the Lender;

     NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the
parties hereto agree as follows:

ARTICLE I

DEFINITIONS

     1.01
Terms Defined Above. As used in this Agreement, each of the terms
“Agreement,” “Borrower,”
“Credit Agreement,” “Debt,”
“Lender,” and “SP,” shall have the
meaning assigned to such term hereinabove.

     1.02
Terms Defined in Credit Agreement. Each term defined in the Credit Agreement
and used herein without definition shall have the meaning assigned to such term in the Credit
Agreement.

     1.03 Other Definitional Provisions.

     (a) The words “hereby,” “herein,” “hereinafter,” “hereinabove,” “hereinbelow,”
“hereof,” “hereunder,” and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular Article, Section or provision of
this Agreement.

 

 

     (b) Section references are to such Sections of this Agreement unless
otherwise
specified.

     (c) As used herein and in any certificate or other document made or delivered
pursuant hereto, accounting and financial terms not otherwise defined shall be defined
according to GAAP.

ARTICLE II

SUBORDINATION

     2.01 Subordination of Payment. The payment of the Debt is hereby expressly
subordinated in right of payment to the prior payment in full of all Obligations and all other
indebtedness of the Borrower owed to the Lender; provided, however, so long as
no Default or
Event of Default has occurred and is continuing for which the Lender has given written notice
of
such Default or Event of Default to the Borrower (a “Default
Notice”), and the payment of
interest and/or principal will not result in a Default or an Event of Default, the Borrower
may pay
interest and/or principal on the Debt. At any time following the occurrence and during the
continuance of any Default or Event of Default and provided that the Lender has given a
Default
Notice, SP will not request, accept or receive, and the Borrower will not make, any payments,
whether in cash or other Property, on or with respect to the Debt unless and until (a) such
Default
or Event of Default shall have been cured or waived or shall have ceased to exist, or (b) such
time as all Obligations shall have been fully paid and performed and the obligation of the
Lender
to make Loans under the Credit Agreement shall have terminated. Notwithstanding the above, if
within one hundred eighty (180) days after the giving of such Default Notice by the Lender
such
Default or Event of Default has not become the subject of (a) judicial proceedings or (b) an
acceleration notice by the Lender, then the Borrower may, at its option (unless in such
interval
the provision of this Section 2.01 have again come into effect on account of any other Default
or
Event of Default), resume making any and all required payments in respect of the Debt in any
manner authorized under the terms governing such Debt until such time (if any) that such
judicial proceedings are instituted, such an acceleration notice is given or a Default Notice
is
given and a period of one hundred eighty (180) days shall not have elapsed since the giving of
such Default Notice as contemplated above. If any direct or indirect payment or
distribution,
whether in cash or other Property, shall be received by SP in contravention of the provisions
hereof, such payment or distribution shall be held in trust for, and shall be immediately paid
over or delivered to, the Lender for application to the Obligations until all Obligations shall
have been
paid in full.

     2.02 SP Debt Subordinated to Prior Payment of Obligations on Dissolution,
Liquidation or Reorganization of the Borrower. Upon any distribution of assets of the
Borrower
upon any voluntary or involuntary dissolution, winding up, liquidation or reorganization of
the
Borrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment
for the benefit of creditors or otherwise):

     (a) the Lender shall first be entitled to receive payment in full (or to have such
payment duly provided for to its satisfaction) of the principal thereof and interest due on
the Obligations and other amounts due in connection therewith before SP is entitled to

- 2 -

 

receive any payment on account of the principal of or interest on the Debt and SP
agrees not to contest any proceeding which allows such payment to the Lender in full even
if SP does not receive the full payment of the Debt;

     (b) any payment or distribution of assets of the Borrower of any kind or
character, whether in cash, property or securities, to which SP would be entitled
except
for the provisions of this Agreement, shall be paid by the liquidating trustee or agent
or
other person making such payment or distribution directly to the Lender or its
representative, to the extent necessary to make payment in full of all Obligations
remaining unpaid, after giving effect to any concurrent payment or distribution or
provision therefor to the Lender; and

     (c) if, notwithstanding the foregoing, any payment or distribution of assets of
the Borrower of any kind or character, whether in cash, property or securities, shall
be
received by SP on account of principal of or interest on the Debt before all
Obligations
are paid in full or provision made for their payment, such payment or distribution
(subject
to the further provisions of this Article) shall be immediately paid over to the Lender
or
its representative for application to the payment of all Obligations remaining unpaid
or
unprovided for until all such Obligations shall have been paid in full, after giving
effect
to any concurrent payment or distribution or provision therefor to the Lender.

     2.03
Subordination of Remedies. So long as any Obligation remains outstanding or any
obligation of the Lender exists to make Loans under the Credit Agreement, SP shall not, without the
prior written consent of the Lender, declare any Debt due or in default or foreclose upon or
exercise any power of sale with respect to any security for all or any portion of the Debt or
exercise any other right, power or remedy of SP provided for in any document or instrument executed
in connection with the Debt or by law, individually or with any other creditor of the Borrower
initiate or take any action in any bankruptcy, insolvency or receivership proceedings of the
Borrower or seek an assignment for the benefit of creditors or the marshalling of the assets and
liabilities of the Borrower. Upon any distribution of assets of the Borrower or the dissolution,
winding up, liquidation or reorganization (whether in bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or the marshalling of the assets and
liabilities of the Borrower or otherwise), any payment to which SP would otherwise be entitled with
respect to the Debt shall be held in trust for, and shall be immediately paid over or delivered to,
the Lender for application to the Obligations until all Obligations shall have been paid in full.

     2.04 Continuing Agreement. This Agreement shall continue in full force and effect and
the liabilities and obligations of the Borrower and SP hereunder shall not be affected or impaired
by any amendment, modification or alteration of any Loan Document, except as may be expressly
provided in any such amendment, modification or alteration. This Agreement shall continue to be
effective or shall be reinstated, as the case may be, if at any time any payment of any of the
Obligations is rescinded or must otherwise be returned by the Lender upon the insolvency,
bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been
made.

- 3 -

 

     2.05 Liability Not Impaired. The liabilities and obligations of the
Borrower and SP hereunder shall not be affected or impaired by (a) the failure of the Lender or any
other Person to exercise diligence or reasonable care in the preservation, protection or other
handling or treatment of all or any part of any Collateral for all or any portion of the
Obligations, (b) the failure of any Lien intended to be granted or created to secure all or any
part of the Obligations to be properly perfected or created or the unenforceability of any such
Lien for any other reason, or (c) the subordination of any such Lien to any other Lien. The Lender
may at any time and from time to time, without the consent of or notice to SP, and without
incurring any responsibility to SP, and without impairing or releasing or otherwise affecting any
of the obligations or agreements of SP hereunder, (a) change the manner, place or terms of payment,
or change or extend the time of payment of, renew, or alter all or any portion of the Obligations,
(b) exchange, release, surrender, realize upon or otherwise deal with, in any manner and any order,
any Property at any time subject to any Lien in favor of the Lender, (c) exercise or refrain from
exercising any rights against the Borrower or others, and (d) sell, transfer, assign or grant
participations in the Obligations or any portion thereof.

     2.06 Waivers. SP waives any right to require the Lender to (a) proceed against the
Borrower or make any effort at the collection of the Obligations from the Borrower or any other
Person liable for all or any portion of the Obligations, (b) proceed against or exhaust any
Collateral securing all or any portion of the Obligations, or (c) pursue any other remedy in the
power of the Lender. The liability and obligations of SP hereunder shall not be affected or
impaired by any action or inaction by the Lender in regard to any matter waived herein.

ARTICLE III

MISCELLANEOUS

     3.01 Survival of Covenants and Agreements. All covenants and agreements of the
Borrower and SP herein made shall survive the execution and delivery hereof and shall remain in
force and effect so long as any Obligation remains outstanding or any obligation of the Lender
exists to make Loans under the Credit Agreement.

     3.02
Parties in Interest. All covenants and agreements herein contained by or on behalf
of the Borrower, SP or the Lender shall be binding upon and inure to the benefit of the Borrower,
SP, or the Lender, as the case may be, and their respective legal representatives, successors and
assigns.

     3.03 Rights of Third Parties. All provisions herein are imposed solely and exclusively
for the benefit of the Borrower, SP, and the Lender. No other Person shall have any right,
benefit, priority or interest hereunder or as a result hereof or have standing to require
satisfaction of provisions hereof in accordance with their terms; and any or all of such provisions
may be freely waived in whole or in part by the Lender at any time if in its sole discretion it
deems it advisable to do so.

     3.04
Articles and Sections. This Agreement, for convenience only, has been divided
into Articles and Sections; and it is understood and agreed that the rights and other legal
relations of the parties hereto shall be determined from this Agreement as an entirety and without
regard

- 4 -

 

to the aforesaid division into Articles and Sections and without regard to headings
prefixed to such Articles or Sections.

     3.05 Number and Gender. Whenever the context requires, reference herein made to the
single number shall be understood to include the plural; and likewise, the plural shall be
understood to include the singular. Definitions of terms defined in the singular or plural shall be
equally applicable to the plural or singular, as the case may be, unless otherwise indicated. Words
denoting sex shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the general but shall be
construed as cumulative.

     3.06
No Waiver; Rights Cumulative. No course of dealing on the part of the Lender, its
officers or employees, nor any failure or delay by the Lender with respect to exercising any of its
rights hereunder or under any Loan Document shall operate as a waiver of any of the rights of the
Lender hereunder or under such Loan Document. The rights of the Lender hereunder and under the
Loan Documents shall be cumulative, and the exercise or partial exercise of any such right shall
not preclude the exercise of any other right.

     3.07 Survival Upon Unenforceability. If any one or more of the provisions contained
herein or executed in connection herewith shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any
other provision hereof or of any such other instrument.

     3.08 Amendments or Modifications. Neither this Agreement nor any provision hereof may
be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge or termination is sought.

     3.09 GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

     3.10 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING
DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM THIS
AGREEMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE LENDER, IN COURTS HAVING
SITUS IN DALLAS, DALLAS COUNTY, TEXAS. EACH OF THE BORROWER AND SP HEREBY SUBMIT TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN DALLAS, DALLAS COUNTY, TEXAS, AND
HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY
LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.

     3.11 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT AMONG
THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT AMONG
THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE

- 5 -

 

SUBJECT HEREOF. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT,
COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS AMONG SUCH PARTIES.

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

	 	 	 	 	 
	 	BORROWER:

PRIME OFFSHORE L.L.C.

 	 
	 	By:  	/s/ Jim R. Brock
 	 
	 	 	Jim R. Brock 	 
	 	 	President and Chief Financial Officer 	 

- 6 -

 

	 	 	 	 	 

	 	 	 	 	 
	 	LENDER: 

GUARANTY BANK, FSB , AS AGENT

 	 
	 	By:  	/s/ Kelly L. Elmore, III
 	 
	 	 	Kelly L. Elmore, III 	 
	 	 	Senior Vice President 	 

- 7 -

 

	 	 	 	 	 

	 	 	 	 	 
	 	SUBORDINATED PARTY:

PRIMEENERGY CORPORATION 

 	 
	 	By:  	/s/        Beverly A. Cummings
 	 
	 	 	Beverly A. Cummings 	 
	 	 	Executive Vice President,

Treasurer and Chief Financial Officer 	 
	 

- 8 -

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