Exhibit 10.7

Execution Version

 

 

 

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

ESQUISTO INVESTMENT HOLDINGS, LLC

December 19, 2016

 

 

 

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TABLE OF CONTENTS

 

       Page No.   

Article I

  FORMATION OF COMPANY      1   

Section 1.1

  Formation      1   

Section 1.2

  Name      1   

Section 1.3

  Business      2   

Section 1.4

  Places of Business; Registered Agent; Names and Addresses of Members      2   

Section 1.5

  Term      2   

Section 1.6

  Filings      2   

Section 1.7

  Title to Company Property      2   

Section 1.8

  No Payments of Individual Obligations      3   

Article II

  DEFINITIONS AND REFERENCES      3   

Section 2.1

  Defined Terms      3   

Section 2.2

  References and Titles      9   

Article III

  CAPITALIZATION AND UNITS      10   

Section 3.1

  Capital Contributions of Members      10   

Section 3.2

  Issuances of Additional Securities      10   

Section 3.3

  Return of Contributions      10   

Article IV

  ALLOCATIONS AND DISTRIBUTIONS      10   

Section 4.1

  Allocations of Net Profits and Net Losses      10   

Section 4.2

  Special Allocations      11   

Section 4.3

  Income Tax Allocations      12   

Section 4.4

  Distributions      14   

Article V

  MANAGEMENT AND RELATED MATTERS      14   

Section 5.1

  Power and Authority of Board      14   

Section 5.2

  Officers      15   

Section 5.3

  Acknowledged and Permitted Activities      16   

Section 5.4

  Duties and Services of the Board      16   

Section 5.5

  Liability and Indemnification      16   

Section 5.6

  Reimbursement of Members      18   

Section 5.7

  Insurance      18   

Section 5.8

  Tax Elections and Status      18   

Section 5.9

  Tax Returns      18   

Section 5.10

  Tax Matters Member      18   

Section 5.11

  Partnership Representative      19   

Section 5.12

  Annual Financial Statements      20   

Section 5.13

  Subsidiaries of the Company      20   

Section 5.14

  Outside Manager Expenses      20   

Section 5.15

  Tax Reimbursement      20   

 

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Article VI

  RIGHTS OF MEMBERS      21   

Section 6.1

  Rights of Members      21   

Section 6.2

  Limitations on Members      21   

Section 6.3

  Liability of Members      21   

Section 6.4

  Withdrawal and Return of Capital Contributions      21   

Section 6.5

  Voting Rights      21   

Article VII

  BOOKS, REPORTS, MEETINGS AND CONFIDENTIALITY      22   

Section 7.1

  Capital Accounts, Books and Records      22   

Section 7.2

  Bank Accounts      23   

Section 7.3

  Reports      23   

Section 7.4

  Meetings of Members      24   

Section 7.5

  Confidentiality      24   

Article VIII

  DISSOLUTION, LIQUIDATION AND TERMINATION      24   

Section 8.1

  Dissolution      24   

Section 8.2

  Winding Down      25   

Section 8.3

  Liquidation and Termination      25   

Article IX

  ASSIGNMENTS OF COMPANY INTERESTS      26   

Article X

  REPRESENTATIONS AND WARRANTIES      27   

Article XI

  MISCELLANEOUS      30   

Section 11.1

  Notices      30   

Section 11.2

  Amendment      30   

Section 11.3

  Partition      31   

Section 11.4

  Amendment and Restatement of Original Agreement; Entire Agreement      31   

Section 11.5

  Severability      31   

Section 11.6

  No Waiver      31   

Section 11.7

  Applicable Law      32   

Section 11.8

  Successors and Assigns      32   

Section 11.9

  Arbitration      32   

Section 11.10

  Counterparts      34   

 

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EXHIBITS

 

Exhibit A    —      List of Members and Sharing Ratios; Deemed Capital
Contributions

 

 

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AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

OF

ESQUISTO INVESTMENT HOLDINGS, LLC

THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this
“Agreement”), dated effective as of December 19, 2016, is made by and among
Esquisto Resources II, LLC, a Delaware limited liability company (the
“Company”), and the Persons who have executed a signature page to this Agreement
as the Members and Managers.

WHEREAS, the Company was formed pursuant to the filing of a Certificate of
Formation with the Secretary of State of the State of Delaware effective on
November 21, 2016, in accordance with the provisions of the Act (as defined
below) and by the execution of that certain Limited Liability Company Agreement,
dated effective as of November 21, 2016 (the “Original Agreement”); and

WHEREAS, effective as of the date hereof, the parties to this Agreement hereby
amend and restate the Original Agreement in its entirety as set forth herein in
order to reflect the admission of the Members, and the parties’ agreement
regarding the manner in which the Company shall be governed and operated and the
other matters set forth herein.

ARTICLE I

FORMATION OF COMPANY

Section 1.1 Formation. Subject to the provisions of this Agreement, the parties
do hereby desire to establish this Agreement to continue and govern the Company
as a limited liability company under the provisions of the Delaware Limited
Liability Company Act, DEL. CODE ANN. TIT. 6 §§ 18-101 (2010) et seq., as
amended from time to time, and any successor statute or statutes (the “Act”).
The Company was formed upon the execution and filing by the organizer with the
Secretary of State of the State of Delaware of a Certificate of Formation of the
Company effective on November 21, 2016. This Agreement shall amend and restate
in its entirety the Original Agreement in all respects and such Original
Agreement shall be of no force or effect after the date hereof. The parties
hereby continue the Company pursuant to the terms and provisions of this
Agreement.

Section 1.2 Name. The name of the Company shall be Esquisto Resources II, LLC.
Subject to all applicable laws, the business of the Company shall be conducted
in the name of the Company unless under the law of some jurisdiction in which
the Company does business such business must be conducted under another name or
unless the Board determines that it is advisable to conduct Company business
under another name. In such a case, the business of the Company in such
jurisdiction or in connection with such determination may be conducted under
such other name or names as the Board shall determine to be necessary. The Board
shall cause to be filed on behalf of the Company such assumed or fictitious name
certificate or certificates or similar instruments as may from time to time be
required by law.

 

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Section 1.3 Business. The business of the Company shall be, whether directly or
indirectly through subsidiaries, to hold shares of common stock of WRDC and to
make distributions to Members as provided herein.

Section 1.4 Places of Business; Registered Agent; Names and Addresses of
Members.

(a) The address of the principal United States office and place of business of
the Company and its street address shall be 421 West Third Street, Suite 750,
Fort Worth, Texas 76102. The Board, at any time and from time to time, may
change the location of the Company’s principal place of business upon giving
prior written notice of such change to the Members and may establish such
additional place or places of business of the Company as the Board shall
determine to be necessary or desirable.

(b) The registered office of the Company in the State of Delaware shall be and
it hereby is, established and maintained at 1209 Orange Street, Wilmington,
Delaware 19801, and the registered agent for service of process on the Company
shall be The Corporation Trust Company, whose business address is the same as
the Company’s registered office in Delaware. The Board, at any time and from
time to time, may change the Company’s registered office or registered agent or
both by complying with the applicable provisions of the Act, and may establish,
appoint and change additional registered offices and registered agents of the
Company in such other states as the Board shall determine to be necessary or
advisable.

(c) The mailing address and street address of each of the Members shall be the
same as for the Company, unless another address for such Member is set forth on
Exhibit A to this Agreement.

Section 1.5 Term. The Company shall continue until terminated in accordance with
Section 8.1.

Section 1.6 Filings. Upon the request of the Board, the Members shall promptly
execute and deliver all such certificates and other instruments conforming
hereto as shall be necessary for the Board to accomplish all filing, recording,
publishing and other acts appropriate to comply with all requirements for the
formation and operation of a limited liability company under the laws of the
State of Delaware and for the qualification and operation of a limited liability
company in all other jurisdictions where the Company shall propose to conduct
business. Prior to conducting business in any jurisdiction, the Board shall use
its reasonable good faith efforts to cause the Company to comply with all
requirements for the qualification of the Company to conduct business as a
limited liability company in such jurisdiction.

Section 1.7 Title to Company Property. All property owned by the Company,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the Company as an entity, and no Member, individually, shall have any ownership
of such property. The Company may hold its property in its own name or in the
name of a nominee which may be the Board or any of its Affiliates or any trustee
or agent designated by it.

 

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Section 1.8 No Payments of Individual Obligations. The Members shall use the
Company’s credit and assets solely for the benefit of the Company. No asset of
the Company shall be Transferred for or in payment of any individual obligation
of any Member.

ARTICLE II

DEFINITIONS AND REFERENCES

Section 2.1 Defined Terms. When used in this Agreement, the following terms
shall have the respective meanings set forth below:

“Act” shall have the meaning assigned to such term in Section 1.1.

“Adjusted Capital Account” shall mean the Capital Account maintained for each
Member as provided in Section 7.1(b) as of the end of each Fiscal Period,
(a) increased by (i) the amount of any unpaid Capital Contributions agreed to be
contributed by such Member under Section 3.1, if any, and (ii) an amount equal
to such Member’s allocable share of Minimum Gain as computed on the last day of
such Fiscal Period in accordance with the applicable Treasury Regulations, and
(b) reduced by the adjustments provided for in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d)(4)-(6).

“Adjusted Property” shall mean any property that has a Carrying Value different
than its adjusted tax basis.

“Affiliate” (whether or not capitalized) shall mean, with respect to any Person:
(a) any other Person directly or indirectly owning, controlling or holding power
to vote 10% or more of the outstanding voting securities of such Person, (b) any
other Person 10% or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote by such Person, (c) any
other Person directly or indirectly controlling, controlled by or under common
control with such Person, and (d) any officer, director, member, partner or
immediate family member of such Person or any other Person described in
subsection (a), (b) or (c) of this paragraph.

“Agreement” shall have the meaning assigned to such term in the introductory
paragraph.

“Auditor” shall mean any of KPMG, Ernst & Young, Deloitte, Pricewaterhouse
Coopers, Grant Thornton or such other auditor as may be agreed upon by the
Company and NGP.

“Bipartisan Budget Act” shall mean Title XI of the Bipartisan Budget Act of 2015
and any related provisions of law, court decisions, regulations, rules, and
administrative guidance.

“Board” and “Board of Managers” shall have the meaning assigned to such term in
Section 5.1.

“Capital Account” shall have the meaning assigned to such term in
Section 7.1(b).

 

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“Capital Contributions” shall mean for any Member at the particular time in
question the aggregate of the dollar amounts of any cash, or the fair market
value (as determined in the discretion of the Board) of any property,
contributed to the capital of the Company, or, if the context in which such term
is used so indicates, the dollar amounts of cash or the fair market value (as
determined in the discretion of the Board) of any property agreed to be
contributed, or requested to be contributed, by such Member to the capital of
the Company.

“Carrying Value” shall mean with respect to any asset, the value of such asset
as reflected in the Capital Accounts of the Members. The Carrying Value of any
asset shall be such asset’s adjusted basis for federal income tax purposes,
except as follows:

(a) The initial Carrying Value of any asset contributed by a Member to the
Company will be the fair market value of the asset on the date of the
contribution, as determined by the Board;

(b) The Carrying Value of all Company assets shall be adjusted to equal their
respective fair market values, as determined by the Board, upon (i) the
acquisition of an additional Company Interest by any new or existing Member in
exchange for a Capital Contribution that is not de minimis; (ii) the
distribution by the Company to a Member of Company property that is not de
minimis as consideration for a Company Interest; (iii) the grant of a Company
Interest that is not de minimis consideration for the performance of services to
or for the benefit of the Company by any new or existing Member; (iv) the
liquidation of the Company as provided in Section 8.3; (v) the acquisition of a
Company Interest by any new or existing Member upon the exercise of a
noncompensatory option in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv)(s); or (vi) any other event to the extent determined
by the Board to be necessary to properly reflect Carrying Values in accordance
with the standards set forth in Treasury Regulations
Section 1.704-1(b)(2)(iv)(q). If any noncompensatory options are outstanding
upon the occurrence of an event described in clauses (i) through (vi) above, the
Company shall adjust the Carrying Values of its properties in accordance with
Treasury Regulations Sections 1.704-1(b)(2)(iv)(f)(1) and
1.704-1(b)(2)(iv)(h)(2);

(c) The Carrying Value of any Company asset distributed to any Member shall be
adjusted to equal the fair market value of such asset on the date of
distribution, as determined by the Board;

(d) The Carrying Value of an asset shall be adjusted by Depreciation and
Simulated Depletion taken into account with respect to such asset for purposes
of computing Net Profits, Net Losses and other items allocated pursuant to
Section 7.1(b)(iv); and

(e) The Carrying Value of Company assets shall be adjusted at such other times
as required in the applicable Treasury Regulations.

“Company” shall have the meaning assigned to it in the introductory paragraph of
this Agreement.

“Company Interest” shall mean any Member’s interest in, or rights in, the
Company, including and representing, as the context shall require, any
membership interest in the Company and/or any other class or series of interests
created pursuant to Section 3.2.

 

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“Company Nonrecourse Liabilities” shall mean nonrecourse liabilities (or
portions thereof) of the Company for which no Member bears the economic risk of
loss in accordance with applicable Treasury Regulations.

“Confidential Information” shall mean, without limitation, all proprietary and
confidential information of the Company, including business opportunities of the
Company, intellectual property, and any other information heretofore or
hereafter acquired, developed or used by the Company relating to its business,
including any confidential information contained in any lease files, well files
and records, land files, abstracts, title opinions, title or curative matters,
contract files, seismic records, electric logs, core data, pressure data,
production records, geological and geophysical reports and related data,
memoranda, notes, records, drawings, correspondence, financial and accounting
information, customer lists, statistical data and compilations, patents,
copyrights, trademarks, trade names, inventions, formulae, methods, processes,
agreements, contracts, manuals or any other documents relating to the business
of the Company, developed by, or originated by any third party and brought to
the attention of, the Company.

“Deemed Capital Contributions” shall mean for any Member the amounts deemed
contributed to the capital of the Company as of the date hereof as set forth on
Exhibit A attached hereto and as further adjusted by the Board for subsequent
Capital Contributions or other transactions.

“Depreciation” shall mean for each Fiscal Period or other period, an amount
equal to the depreciation, amortization, or other cost recovery deduction (other
than Simulated Depletion) allowable with respect to an asset for such year or
other period, except that if the Carrying Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such year or
other period, Depreciation shall be an amount which bears the same ratio to such
beginning Carrying Value as the federal income tax depreciation, amortization or
other cost recovery deduction for such year or other period bears to such
beginning adjusted tax basis (unless the adjusted tax basis is equal to zero, in
which event Depreciation shall be determined under any reasonable method
selected by the Board).

“Dispute” shall have the meaning assigned to such term in Section 11.9.

“Distributable Funds” shall mean the available cash of the Company in excess of
the working capital and other requirements of the Company as determined by the
Board of Managers.

“Employee” shall mean an individual who is employed by, serves as an independent
contractor for, or whose services are otherwise leased from or provided by, CH4
Management, Inc., PetroMax Operating Co., Inc. or any other third party by the
Company or any of its subsidiaries or other Affiliates. In the event any
provision of this Agreement refers to the resignation or termination of an
Employee, such resignation or termination shall apply (a) to the entity that is
the employer of such Employee and (b) to instances where an individual is an
independent contractor of the Company or any of its subsidiaries, or where
services are otherwise leased by, or otherwise provided to, the Company (or any
Member for the benefit of the Company), and (i) a majority of such individual’s
time ceases to be spent providing services to the Company (or any Member for the
benefit of the Company), or (ii) the Company provides written notice to such
individual that it no longer wishes to engage the services of such individual.

 

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“Excluded Affiliate Transfer” shall mean (a) any Transfer of a Company Interest
by a Member who is an individual to a member of such Member’s family or to a
revocable trust for estate planning purposes, but only if and for so long as
such Transferring Member retains the exclusive right to vote such Company
Interest following such Transfer; (b) any Transfer occurring by operation of law
upon the death or mental incapacity of a Member who is an individual; (c) any
Transfer to a corporation, partnership or limited liability company which is
wholly owned and controlled (through voting rights) by such Member, but only if
and for so long as such Transferring Member retains the exclusive right to vote
such Company Interest following such Transfer, it being acknowledged and agreed
that any failure by such Transferring Member to retain the exclusive right to
vote or to retain 100% ownership and control of such Company Interest shall then
immediately and automatically be deemed to be a Transfer that is not an Excluded
Affiliate Transfer; and (d) any Transfer of a Company Interest by a Member which
is a trust to the principal beneficiary of that trust; provided that, in the
case of any Transfer described in clauses (a)-(d) above, such Transferee agrees
to be bound by the terms of this Agreement and evidences same by executing a
copy of this Agreement and such other documents as the Company may reasonably
request promptly upon receiving the assignment of such Company Interest.

“Excluded Business Opportunity” shall mean a business opportunity other than a
business opportunity: (a) that (i) has come to the attention of a Person solely
in, and as a direct result of, its or his capacity as a director of, advisor to,
principal of or officer of the Company or a subsidiary of the Company, or
(ii) was developed with the use or benefit of the personnel or assets of the
Company, or a subsidiary of the Company, and (b) that has not been previously
independently brought to the attention of the subject Person from a source that
is not affiliated (other than through such subject Person) with the Company or a
subsidiary of the Company.

“Fiscal Period” shall mean each period (a) beginning, for the first Fiscal
Period, on the date of formation of the Company, or for each succeeding Fiscal
Period on the day after the last day of the immediately preceding Fiscal Period
and (b) ending on the earliest to occur of the last day of the calendar year and
the day on which the Carrying Value of all Company assets are adjusted pursuant
to clause (b) of the definition of Carrying Value.

“Indemnitee” shall have the meaning assigned to such term in Section 5.5(a).

“Indirect Transfer” shall mean (with respect to any Member that is a
corporation, partnership, limited liability company or other entity) a deemed
Transfer of a Company Interest, which shall occur upon any Transfer of the
ownership of, or voting rights associated with, the equity or other ownership
interests in such Member.

“Internal Revenue Code” shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute or statutes.

“JAMS” shall have the meaning assigned to such term in Section 11.9(a).

 

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“Majority Interest” of the Members, as to any agreement, election, vote or other
action of the Members, shall mean those Members whose combined Sharing Ratios
exceed fifty percent (50%).

“Manager” and “Managers” shall have the meanings assigned to such terms in
Section 5.1(a).

“Members” shall mean the Persons who from time to time shall execute a signature
page to this Agreement (including by counterpart) as the Members, including any
Person who becomes a substituted Member of the Company pursuant to the terms
hereof.

“Member Nonrecourse Debt” shall mean any nonrecourse debt of the Company for
which any Member bears the economic risk of loss in accordance with applicable
Treasury Regulations.

“Member Nonrecourse Deductions” shall mean the amount of deductions, losses and
expenses equal to the net increase during the year in Minimum Gain attributable
to a Member Nonrecourse Debt, reduced (but not below zero) by proceeds of such
Member Nonrecourse Debt distributed during the year to the Members who bear the
economic risk of loss for such debt, as determined in accordance with applicable
Treasury Regulations.

“Minimum Gain” shall mean (a) with respect to Company Nonrecourse Liabilities,
the amount of gain that would be realized by the Company if the Company
Transferred (in a taxable transaction) all Company properties that are subject
to Company Nonrecourse Liabilities in full satisfaction of Company Nonrecourse
Liabilities, computed in accordance with applicable Treasury Regulations, or
(b) with respect to each Member Nonrecourse Debt, the amount of gain that would
be realized by the Company if the Company Transferred (in a taxable transaction)
the Company property that is subject to such Member Nonrecourse Debt in full
satisfaction of such Member Nonrecourse Debt, computed in accordance with
applicable Treasury Regulations.

“Net Profit” or “Net Loss” shall mean, with respect to any Fiscal Period, the
net income or net loss of the Company for such period, determined in accordance
with federal income tax accounting principles and Section 703(a) of the Internal
Revenue Code (including any items that are separately stated for purposes of
Section 702(a) of the Internal Revenue Code), with the following adjustments:

(a) any income of the Company that is exempt from federal income tax shall be
included as income;

(b) any expenditures of the Company that are described in Section 705(a)(2)(B)
of the Internal Revenue Code or treated as so described pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(i) shall be treated as current expenses;

(c) in the event the Carrying Value of any Company asset is adjusted as provided
in this Agreement, the amount of such adjustment shall be taken into account as
gain or loss from the Transfer of such asset for purposes of computing Net
Profit or Net Loss;

 

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(d) gain or loss resulting from any Transfer of Company property with respect to
which gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Carrying Value of the property Transferred,
notwithstanding that the adjusted tax basis for such property differs from its
Carrying Value;

(e) in lieu of the depreciation, amortization and other cost recovery deductions
taken into account in computing such taxable income or loss, there shall be
taken into account Depreciation for such Fiscal Period; and

(f) items specially allocated under Section 4.2 and Section 7.1(b)(iv) shall be
excluded (but the amount of such items shall be determined under principles
similar to those set forth above).

“NGP” shall mean NGP IX US Holdings, L.P., a Delaware limited partnership,
NGP IX CH4 Holdings, LLC, a Delaware limited liability company, NGP XI US
Holdings, L.P., a Delaware limited partnership, and their respective successors
and assigns.

“Original Agreement” shall have the meaning assigned to such term in the
recitals of this Agreement.

“Partnership Representative” shall have the meaning assigned to such term in
Section 5.11.

“Person” (whether or not capitalized) shall mean any natural person,
corporation, company, limited or general partnership, joint stock company, joint
venture, association, limited liability company, trust, bank, trust company,
business trust or other entity or organization, whether or not a governmental
authority.

“Regulatory Allocations” shall have the meaning assigned to such term in
Section 4.2(d).

“Rules” shall have the meaning assigned to such term in Section 11.9(a).

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Sharing Ratio” shall mean for any Member the percentages set forth in the books
and records of the Company, as adjusted hereunder.

“Simulated Basis” shall mean the Carrying Value of any oil and gas property (as
defined in Section 614 of the Internal Revenue Code).

“Simulated Depletion” shall mean, with respect to each oil and gas property, a
depletion allowance computed in accordance with federal income tax principles
(as if the Simulated Basis of the property were its adjusted tax basis) and in
the manner specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(k)(2). For
purposes of computing Simulated Depletion with respect to any property, the
Simulated Basis of such property shall be deemed to be the Carrying Value of
such property, and in no event shall such allowance, in the aggregate, exceed
such Simulated Basis.

 

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“Simulated Gain” shall mean the excess of the amount realized from the sale of
an oil or gas property over the Carrying Value of such property.

“Simulated Loss” shall mean the excess of the Carrying Value of an oil or gas
property over the amount realized from the sale of such property.

“Supermajority Approval” shall mean written consent of at least five (5) of
seven (7) Managers of the Company.

“Tax Matters Member” shall have the meaning assigned to such term in
Section 5.10.

“Transaction Documents” shall mean, collectively, this Agreement and the Voting
and Transfer Restriction Agreement.

“Transfer,” or any derivation thereof, shall mean any sale, assignment,
conveyance, mortgage, pledge, granting of security interest in, or other
disposition of a Company Interest or any asset of the Company, as the context
may require.

“Treasury Regulations” shall mean regulations promulgated by the United States
Treasury Department under the Internal Revenue Code.

“Unit” shall mean a unit of a membership interest in the Company representing,
as the context shall require, any Company Interest, as well as any other class
or series of Units created pursuant to Section 3.2 No Units will be issued to
the Members for Capital Contributions or Deemed Capital Contributions as of the
date hereof; provided that the Board of Managers may subsequently amend this
Agreement to provide for an issuance of Units for Capital Contributions or
Deemed Capital Contributions in its sole discretion.

“WRDC” means WildHorse Resources Development Corporation, a Delaware
corporation.

“Voting and Transfer Restriction Agreement” shall mean that certain Voting and
Transfer Restriction Agreement dated even date herewith among the Company and
the Members.

Any capitalized term used in this Agreement but not defined in this Section 2.1
shall have the meaning assigned to such term elsewhere in this Agreement.

Section 2.2 References and Titles. All references in this Agreement to articles,
sections, subsections and other subdivisions refer to corresponding articles,
sections, subsections and other subdivisions of this Agreement unless expressly
provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words “this Agreement,” “herein,” “hereof,” “hereby,”
“hereunder” and words of similar import refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited. Pronouns in
masculine, feminine and neuter genders shall be construed to include any other
gender, and words in the singular form shall be construed to include the plural
and vice versa, unless the context otherwise requires. The word “including” (in
its various forms) means including without limitation.

 

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ARTICLE III

CAPITALIZATION AND UNITS

Section 3.1 Capital Contributions of Members.

(a) As of the date hereof, each Member has contributed, or is deemed to have
contributed, Capital Contributions to the Company in the amounts and on the
dates set forth on Exhibit A attached hereto and each Member shall have the
initial Sharing Ratio indicated opposite such Member’s name under the “Sharing
Ratio” column on Exhibit A attached hereto. No Member shall be obligated to make
any additional Capital Contributions to the Company.

Section 3.2 Issuances of Additional Securities.

(a) The Company may not issue additional Company Interests, or classes or series
thereof, or options, rights, warrants or appreciation rights relating thereto,
or any other type of equity security without the prior written consent of the
Board of Managers.

Section 3.3 Return of Contributions. No interest shall accrue on any
contributions to the capital of the Company. No Member shall have the right to
withdraw or to be repaid any capital contributed by such Member except as
otherwise specifically provided in this Agreement.

ARTICLE IV

ALLOCATIONS AND DISTRIBUTIONS

Section 4.1 Allocations of Net Profits and Net Losses.

(a) Net Profits and Net Losses and all related items of income, gain, loss,
deduction and credit for each Fiscal Period shall be allocated among the Members
in such manner as shall cause the Capital Accounts of each Member to equal, as
nearly as possible, (i) the amount such Member would receive if all assets on
hand at the end of such year were sold for cash at the Carrying Values of such
assets, all liabilities were satisfied in cash in accordance with their terms
(limited in the case of Member Nonrecourse Debt and Company Nonrecourse
Liabilities to the Carrying Value of the assets securing such liabilities), and
any remaining or resulting cash was distributed to the Members under
Section 4.4(a), minus (ii) an amount equal to such Member’s allocable share of
Minimum Gain as computed on the last day of such fiscal year in accordance with
the applicable Treasury Regulations.

(b) The Board shall make the foregoing allocations as of the last day of each
Fiscal Period; provided, however, that if during any Fiscal Period of the
Company there is a change in any Member’s Company Interest, the Board shall make
the foregoing allocations as of the date of each such change in a manner which
takes into account the varying interests of the Members and in a manner the
Board reasonably deems appropriate.

 

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Section 4.2 Special Allocations.

(a) Notwithstanding any of the provisions of Section 4.1 to the contrary:

(i) If during any Fiscal Period of the Company there is a net increase in
Minimum Gain attributable to a Member Nonrecourse Debt that gives rise to Member
Nonrecourse Deductions, each Member bearing the economic risk of loss for such
Member Nonrecourse Debt shall be allocated items of Company deductions and
losses for such period (consisting first of cost recovery or depreciation
deductions with respect to property that is subject to such Member Nonrecourse
Debt and then, if necessary, a pro rata portion of the Company’s other items of
deductions and losses, with any remainder being treated as an increase in
Minimum Gain attributable to Member Nonrecourse Debt in the subsequent period)
equal to such Member’s share of Member Nonrecourse Deductions, as determined in
accordance with applicable Treasury Regulations.

(ii) If for any Fiscal Period of the Company there is a net decrease in Minimum
Gain attributable to Company Nonrecourse Liabilities, each Member shall be
allocated items of Company income and gain for such period (consisting first of
gain recognized from the Transfer of Company property subject to one or more
Company Nonrecourse Liabilities and then, if necessary, a pro rata portion of
the Company’s other items of income and gain, and if necessary, for subsequent
periods) equal to such Member’s share of such net decrease (except to the extent
such Member’s share of such net decrease is caused by a change in debt structure
with such Member commencing to bear the economic risk of loss as to all or part
of any Company Nonrecourse Liability or by such Member contributing capital to
the Company that the Company uses to repay a Company Nonrecourse Liability), as
determined in accordance with applicable Treasury Regulations.

(iii) If for any Fiscal Period of the Company there is a net decrease in Minimum
Gain attributable to a Member Nonrecourse Debt, each Member bearing the economic
risk of loss for such Member Nonrecourse Debt shall be allocated items of
Company income and gain for such period (consisting first of gain recognized
from the Transfer of Company property subject to Member Nonrecourse Debt, and
then, if necessary, a pro rata portion of the Company’s other items of income
and gain, and if necessary, for subsequent periods) equal to such Member’s share
of such net decrease (except to the extent such Member’s share of such net
decrease is caused by a change in debt structure such that the Member
Nonrecourse Debt becomes partially or wholly a Company Nonrecourse Liability or
by the Company’s use of capital contributed by such Member to repay the Member
Nonrecourse Debt) as determined in accordance with applicable Treasury
Regulations.

(b) The Net Losses allocated pursuant to this Article IV shall not exceed the
maximum amount of Net Losses that can be allocated to a Member without causing
or increasing a deficit balance in the Member’s Adjusted Capital Account. All
Net Losses in excess of the limitation set forth in this Section 4.2(b) shall be
allocated to Members with positive Adjusted Capital Account balances remaining
at such time in proportion to such positive balances.

 

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(c) In the event that a Member unexpectedly receives any adjustment, allocation
or distribution described in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) that causes or increases a deficit
balance in such Member’s Adjusted Capital Account, items of Company income and
gain shall be allocated to that Member in an amount and manner sufficient to
eliminate the deficit balance as quickly as possible.

(d) The allocations set forth in subsections (a) through (c) of this Section 4.2
(collectively, the “Regulatory Allocations”) are intended to comply with certain
requirements of the Treasury Regulations. It is the intent of the Members that,
to the extent possible, all Regulatory Allocations that are made be offset
either with other Regulatory Allocations or with special allocations pursuant to
this Section 4.2(d). Therefore, notwithstanding any other provisions of this
Article IV (other than the Regulatory Allocations), the Board shall make such
offsetting special allocations in whatever manner it determines appropriate so
that, after such offsetting allocations are made, each Member’s Adjusted Capital
Account balance is, to the extent possible, equal to the Adjusted Capital
Account balance such Member would have had if the Regulatory Allocations were
not part of the Agreement and all Company items were allocated pursuant to
Section 4.1 and the remaining subsections of this Section 4.2.

(e) In the event Units are issued to a Person and the issuance of such Units
results in items of income or deduction to the Company, such items of income or
deduction shall be allocated to the Members in proportion to the positive
balances in their Capital Accounts immediately before the issuance of such
Units.

Section 4.3 Income Tax Allocations.

(a) Except as provided in this Section 4.3, each item of income, gain, loss and
deduction of the Company for federal income tax purposes shall be allocated
among the Members in the same manner as such items are allocated for Capital
Account purposes under Section 4.1 and Section 4.2.

(b) The deduction for depletion with respect to each separate oil and gas
property (as defined in Section 614 of the Internal Revenue Code) shall, in
accordance with Section 613A(c)(7)(D) of the Internal Revenue Code, be computed
for federal income tax purposes separately by the Members rather than the
Company. Except as provided in Section 4.3(d), for purposes of such computation,
the adjusted tax basis of each oil and gas property shall be allocated among the
Members in proportion to their Sharing Ratios at the time of the acquisition of
such property. Each Member, with the assistance of the Tax Matters Member, shall
separately keep records of its share of the adjusted tax basis in each separate
oil and gas property, adjust such share of the adjusted tax basis for any cost
or percentage depletion allowable with respect to such property and use such
adjusted tax basis in the computation of its cost depletion or in the
computation of its gain or loss on the Transfer of such property by the Company.
Upon the request of the Tax Matters Member, each Member shall advise the Tax
Matters Member of its adjusted tax basis in each separate oil and gas property
and any depletion computed with respect thereto, both as computed in accordance
with the provisions of this subsection. The Tax Matters Member may rely on such
information and, if it is not provided by the Member, may make such reasonable
assumptions as it shall determine with respect thereto.

 

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(c) Except as provided in Section 4.3(d), for the purposes of the separate
computation of gain or loss by each Member on the Transfer of each separate oil
and gas property (as defined in Section 614 of the Internal Revenue Code), the
Company’s allocable share of the “amount realized” (as such term is defined in
Section 1001(b) of the Internal Revenue Code) from such Transfer shall be
allocated for federal income tax purposes among the Members as follows:

(i) first, to the extent such amount realized constitutes a recovery of the
Simulated Basis of the property, to the Members in the same proportion as the
depletable basis of such property was allocated to the Members pursuant to
Section 4.3(b) (without regard to any special allocation of basis under
Section 4.3(d)); and

(ii) second, the remainder of such amount realized, if any, to the Members so
that, to the maximum extent possible, the amount realized that is allocated to
each Member under this Section 4.3(c)(ii) will equal such Member’s share of the
Simulated Gain recognized by the Company from such Transfer.

(d) The Members recognize that with respect to Adjusted Property, there will be
a difference between the Carrying Value of such property at the time of
revaluation or contribution and the adjusted tax basis of such property at the
time. All items of tax depreciation, cost recovery, amortization, adjusted tax
basis of depletable properties, amount realized and gain or loss with respect to
such Adjusted Property shall be allocated among the Members to take into account
the disparities between the Carrying Values and the adjusted tax basis with
respect to such properties in accordance with the provisions of Sections 704(b)
and 704(c) of the Internal Revenue Code and the Treasury Regulations under those
sections; provided, however, that any tax items not required to be allocated
under Sections 704(b) or 704(c) of the Internal Revenue Code shall be allocated
in the same manner as such gain or loss would be allocated for Capital Account
purposes under Section 4.1 and Section 4.2. In making such allocations, the
Board shall use such method or methods of allocation as it shall determine, in
its absolute discretion, to be reasonable and in accord with the applicable
Treasury Regulations.

(e) All recapture of income tax deductions resulting from the Transfer of
Company property shall, to the maximum extent possible, be allocated to the
Member to whom the deduction that gave rise to such recapture was allocated
hereunder to the extent that such Member is allocated any gain from the Transfer
of such property. For this purpose, deductions that were allocated as a
component of Net Profit or Net Loss shall be treated as if allocated in the same
manner as the allocation of the related Net Profit or Net Loss.

(f) If, as a result of an exercise of a noncompensatory option, a Capital
Account reallocation is required under Treasury Regulation
Section 1.704-1(b)(2)(iv)(s)(3), the Company shall make corrective allocations
pursuant to Treasury Regulation Section 1.704-1(b)(4)(x).

 

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Section 4.4 Distributions.

(a) The Board may cause the Company to distribute Distributable Funds at such
times and in such amounts as the Board, in its sole discretion, determines to be
appropriate. All such distributions made pursuant to this Section 4.4(a) shall
be made to the Members pro rata in accordance with their respective Sharing
Ratios.

(b) In addition to distributions made to the Members pursuant to Section 4.4(a),
and subject to applicable law, to the extent that the Board determines that the
Company has Distributable Funds, the Board shall cause the Company to pay to the
Members within ninety (90) days after the end of each year an amount equal to
the lesser of (i) the Distributable Funds, or (ii) an amount equal to the
highest marginal federal and applicable state income tax rate for individuals
(taking into account the character of the taxable income (e.g., long-term
capital gain, qualified dividend income, ordinary income, etc.)), multiplied by
the taxable income of the Company, if any, for such year, such payment to be
made among the Members in the same percentages as the taxable income for such
year was allocated. Any such payments to a Member under this Section 4.4(b)
shall be deemed to be a draw against such Member’s share of future distributions
under Section 4.4(a) and Section 8.3(b), so that such Member’s share of such
future distributions shall be reduced by the amounts previously drawn under this
Section 4.4(b) until the aggregate reductions in such distributions equal the
aggregate draws made under this Section 4.4(b).

ARTICLE V

MANAGEMENT AND RELATED MATTERS

Section 5.1 Power and Authority of Board.

(a) The Company shall be managed by a Board of Managers (“Board” or “Board of
Managers”). The Company shall initially have seven (7) managers (each, a
“Manager” and, collectively, the “Managers”) and the Managers serving on the
Board shall be appointed and removed by a Majority Interest of the Members,
subject to the terms of the Voting and Transfer Restriction Agreement. The
managers making up the initial Board shall be Mike Hoover, Richard D. Brannon,
Bruce Selkirk, David W. Hayes, Craig S. Glick, Brian Minnehan and David R.
Albin, and such persons shall continue to serve as Managers subject to their
earlier death, resignation or removal as contemplated under this Agreement and
the Voting and Transfer Restriction Agreement. Except as otherwise expressly
provided in Section 5.4 and elsewhere in this Agreement, all management powers
over the business and affairs of the Company shall be exclusively vested in the
Board, and the Members shall have no right of control over the business and
affairs of the Company. In addition to the powers now or hereafter granted to
managers under the Act or which are granted to the Board under any other
provision of this Agreement, the Board shall have full power and authority to do
all things deemed necessary or desirable by it to conduct the business of the
Company in the name of the Company.

 

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(b) The Board may hold such meetings at such place and at such time as it may
determine. Notice of a meeting shall be served not less than 24 hours before the
date and time fixed for such meeting by confirmed facsimile or other written
communication or not less than three (3) days prior to such meeting if notice is
provided by overnight delivery service. Notice of a meeting need not be given to
any Manager who signs a waiver of notice or provides a waiver by electronic
transmission or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, either prior thereto or at its commencement, the lack of notice to
such Manager. A special meeting of the Board may be called by any member of the
Board. Any member of the Board may participate in a meeting by conference
telephone or similar communications equipment. Any action required or permitted
to be taken by the Board may be taken without a meeting if such action is
evidenced in writing and signed by the requisite members of the Board that are
sufficient to approve the matter in question. At any meeting of the Board, the
presence in person or by telephone or similar electronic communication of
Managers representing at least a majority of the Board shall constitute a
quorum.

(c) Each Manager serving on the Board of Managers shall have one vote on any
Company matter. Except as otherwise provided in this Agreement, the business of
the Company presented at any meeting of the Board of Managers shall be decided
by a vote of Managers representing a majority of the entire Board of Managers.

(d) In accomplishing all of the foregoing and in fulfilling its obligations
pursuant to this Agreement, the Board may, in its sole discretion, retain or use
any Company Affiliates’ personnel, properties and equipment or the Board may
hire or rent those of third parties and may employ on a temporary or continuing
basis outside accountants, attorneys, consultants and others on such terms as
the Board deems advisable. No Person, firm or corporation dealing with the
Company shall be required to inquire into the authority of the Board to take any
action or make any decision.

Section 5.2 Officers.

(a) Designation. The Board may, from time to time, designate individuals (who
need not be a Manager) to serve as officers of the Company. The officers may,
but need not, include a president and chief executive officer and one or more
vice presidents and a secretary. Any two or more offices may be held by the same
Person.

(b) Duties of Officers. Each officer of the Company designated hereunder shall
devote such time to the Company’s business as he deems necessary to manage and
supervise Company business and affairs in an efficient manner.

(c) Term of Office; Removal; Filling of Vacancies.

(i) Each officer of the Company shall hold office until his successor is chosen
and qualified in his stead or until his earlier death, resignation, retirement,
disqualification or removal from office.

(ii) Any officer may be removed at any time by the Board whenever in their
judgment the best interests of the Company will be served thereby. Designation
of an officer shall not of itself create any contract rights in favor of such
officer.

 

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(iii) If the office of any officer becomes vacant for any reason, the vacancy
may be filled by the Board.

Section 5.3 Acknowledged and Permitted Activities. The Company and the Members
recognize that (a) the Members own and will own substantial equity interests in
other companies (existing and future) that participate in the energy industry
and (b) that at any given time, a Member may be in direct or indirect
competition with the Company and/or its subsidiaries. The Company and the
Members acknowledge and agree that (i) the Members: (A) shall not be prohibited
or otherwise restricted by their relationship with the Company and its
subsidiaries from engaging in the business of investing in oil and gas
investments, regardless of whether such activities are in direct or indirect
competition with the business or activities of the Company or its subsidiaries,
and (B) shall not have any obligation to offer the Company or its subsidiaries
any Excluded Business Opportunity, and (ii) the Company and the Members hereby
renounce any interest or expectancy in any Excluded Business Opportunity pursued
by any Member and waive any claim that any such business opportunity constitutes
a corporate, partnership or other business opportunity of the Company or any of
its subsidiaries.

Section 5.4 Duties and Services of the Board. The Board shall comply in all
respects with the terms of this Agreement. The Board shall be obligated to
perform the duties, responsibilities and obligations of the Board hereunder only
to the extent that funds of the Company are available therefor. During the
existence of the Company, each Manager serving on the Board shall devote such
time and effort to the Company’s business as he deems necessary to manage and
supervise Company business and affairs in an efficient manner. No Member, in its
capacity as a Member, shall have any fiduciary or other duty to the Company, any
other Member or any other Person that is a party to or is otherwise bound by
this Agreement other than (i) to the extent required by law, the implied
contractual covenant of good faith and fair dealing and (ii) such other
contractual obligations as are expressly set forth in this Agreement. Each
Manager serving on the Board, in its capacity as Manager, shall not have any
fiduciary or other duty to the Company, any other Member or any other Person
that is a party to or is otherwise bound by this Agreement other than (i) to the
extent required by law, the implied contractual covenant of good faith and fair
dealing and (ii) such other contractual obligations as are expressly set forth
in this Agreement. The provisions of this Agreement, to the extent that they
modify or eliminate the duties and liabilities of any Member or Manager
otherwise existing at law or in equity, are agreed by the Members and Managers
to modify or eliminate to that extent such other duties and liabilities of such
Member or Manager to the fullest extent permitted by applicable law.

Section 5.5 Liability and Indemnification.

(a) The Company’s officers, the Board, the Members and their Affiliates, and
their partners, officers, directors, employees and agents, shall not be liable,
responsible or accountable in damages or otherwise to the Company or the other
Members for any acts or omissions that do not constitute gross negligence,
willful misconduct, or a breach of the express terms of this Agreement, and the
Company shall indemnify to the maximum extent permitted under the Act and save
harmless the Company’s officers, the Board and the Members and their Affiliates,
and their partners, officers, directors, employees and agents (individually, an
“Indemnitee”) from all liabilities for which indemnification is permitted under
the Act. Any act or omission performed or omitted by an Indemnitee on advice of
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consultant who has been employed or retained by the Company shall be presumed to
have been performed or omitted in good faith without gross negligence or willful
misconduct. THE PARTIES RECOGNIZE THAT THIS PROVISION SHALL RELIEVE ANY SUCH
INDEMNITEE FROM ANY AND ALL LIABILITIES, OBLIGATIONS, DUTIES, CLAIMS, ACCOUNTS
AND CAUSES OF ACTION WHATSOEVER ARISING OR TO ARISE OUT OF ANY ORDINARY
NEGLIGENCE BY ANY SUCH INDEMNITEE, AND SUCH INDEMNITEE SHALL BE ENTITLED TO
INDEMNIFICATION FROM ACTS OR OMISSIONS THAT MAY CONSTITUTE ORDINARY NEGLIGENCE.

(b) The Company shall, to the maximum extent permitted under the Act, pay or
reimburse expenses incurred by an Indemnitee in connection with the Indemnitee’s
appearance as a witness or other participation in a proceeding involving or
affecting the Company at a time when the Indemnitee is not a named defendant or
respondent in the proceeding.

(c) The Board shall have the right to require that any contract entered into by
the Company provide that the Board shall have no personal liability for the
obligations of the Company thereunder.

(d) The indemnification provided by this Section 5.5 shall be in addition to any
other rights to which each Indemnitee may be entitled under any agreement or
vote of the Members, as a matter of law or otherwise, both as to action in the
Indemnitee’s capacity as a Member or an officer, director, employee or agent of
a Member or as a Person serving at the request of the Company as set forth above
and to action in another capacity, and shall continue as to an Indemnitee who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns, administrators and personal representatives of the
Indemnitees; provided that the indemnification provided by this Section 5.5
shall be the primary source of indemnification with respect to the matters
addressed herein, without regard to other potential sources of indemnification,
reimbursement or contribution (subject to applicable express provisions of any
insurance policy to which the Company is a party) and the Company irrevocably
waives, relinquishes and releases all right to contribution, subrogation or any
other recovery of any kind from NGP or its Affiliates and insurance provided by
NGP or its Affiliates to any Indemnitee; and provided, further, that no
advancement or payment by NGP, its Affiliates or insurance provided by any of
them to an Indemnitee with respect to any claim for which an Indemnitee has
sought indemnification from the Company shall affect the foregoing and NGP and
its Affiliates shall have a right of contribution and/or be subrogated to the
extent of such advancement or payment to all of the rights of recovery of such
Indemnitee against the Company. The Company and each Member agree that NGP, its
Affiliates and the insurers they engage to provide insurance to Indemnitees are
express third party beneficiaries of this Section 5.5(d).

(e) In no event may an Indemnitee subject the Members to personal liability by
reason of this indemnification provision.

(f) An Indemnitee shall not be denied indemnification in whole or in part under
this Section 5.5 because the Indemnitee had an interest in the transaction with
respect to which the indemnification applies if the transaction was otherwise
permitted by the terms of this Agreement.

 

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Section 5.6 Reimbursement of Members. The Company or its subsidiaries shall pay
or reimburse to the Members all reasonable direct and indirect costs and
expenses incurred by such Members in organizing the Company, including legal
fees and accounting fees.

Section 5.7 Insurance. The Company shall acquire and maintain insurance covering
such risks and in such amounts as the officers of the Company shall, or the
Board may, from time to time determine to be necessary or appropriate.

Section 5.8 Tax Elections and Status.

(a) The Board shall make such tax elections on behalf of the Company as it shall
deem appropriate in its sole discretion.

(b) Except as otherwise determined appropriate by the Board, the Members agree
to classify the Company as a partnership for U.S. federal and any applicable
state income tax purposes, and neither the Company, any Member, nor any Manager
shall file an election to classify the Company as an association taxable as a
corporation for such income tax purposes.

Section 5.9 Tax Returns. The Company shall deliver necessary tax information to
each Member after the end of each fiscal year of the Company. Not less than
sixty (60) days prior to the date (as extended) on which the Company intends to
file its federal income tax return or any state income tax return but in any
event no earlier than March 1 of each year, the return proposed by the Board to
be filed by the Company shall be furnished to the Members for review; provided,
however, that an IRS Form K-1 or a good faith estimate of the amounts to be
included on such IRS Form K-1 for each Member shall be sent to each Member on or
before March 1 of each year and the IRS Form K-1 for each Member shall be sent
to each Member no later than April 15 of each year. In addition, not more than
ten (10) days after the date on which the Company files its federal income tax
return or any state income tax return, a copy of the return so filed shall be
furnished to the Members.

Section 5.10 Tax Matters Member.

(a) With respect to tax years beginning on or before December 31, 2017, CH4
Energy IV, LLC, a Delaware limited liability company, shall be designated the
tax matters member under Section 6231 of the Internal Revenue Code (in such
capacity, the “Tax Matters Member”). The Tax Matters Member may be removed and
replaced by action of a Majority Interest of the Members. The Tax Matters Member
is authorized to take such actions and to execute and file all statements and
forms on behalf of the Company which may be permitted or required by the
applicable provisions of the Internal Revenue Code or Treasury Regulations
issued thereunder. The Tax Matters Member shall have full and exclusive power
and authority on behalf of the Company to represent the Company (at the
Company’s expense) in connection with all examinations of the Company’s affairs
by tax authorities, including resulting administrative and judicial proceedings,
and to expend Company funds for professional services and costs associated
therewith. The Tax Matters Member shall keep the Members informed as to the
status of any audit of the Company’s tax affairs, and shall take such action as
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necessary to cause any Member so requesting to become a “notice partner” within
the meaning of Section 6223 of the Internal Revenue Code. Without first
obtaining the approval of a Majority Interest of the Members, the Tax Matters
Member shall not, with respect to Company tax matters: (b) enter into a
settlement agreement with respect to any tax matter which purports to bind
Members, (c) intervene in any action pursuant to Internal Revenue Code
Section 6226(b)(5), (d) enter into an agreement extending the statute of
limitations, or (e) file a petition pursuant to Internal Revenue Code
Section 6226(a) or 6228. If an audit of any of the Company’s tax returns shall
occur, the Tax Matters Member shall not settle or otherwise compromise
assertions of the auditing agent which may be adverse to any Member as compared
to the position taken on the Company’s tax returns without the prior written
consent of each such affected Member. The Tax Matters Member, with the approval
of a Majority Interest of the Members, may elect (at such time and in such form
and manner as the Internal Revenue Service may prescribe) for the amendments to
Internal Revenue Code Sections 6221-6241 made by Section 1101 of the Bipartisan
Budget Act of 2015 (H.R. 1315) to apply to any return of the Company filed for
taxable years beginning after November 2, 2015 and before January 1, 2018.

Section 5.11 Partnership Representative. With respect to tax years beginning
after December 31, 2017, the partnership representative of the Company pursuant
to Section 6223(a) of the Internal Revenue Code shall be any person (including
any Member) designated by the Board of Managers, subject to replacement by
action of a Majority Interest of the Members to the extent permitted by the
provisions of the Internal Revenue Code or Treasury Regulations issued
thereunder. (Any person who is designated as the partnership representative is
referred to herein as the “Partnership Representative”). The Partnership
Representative is authorized to take such actions and to execute and file all
statements and forms on behalf of the Company which may be permitted or required
by the applicable provisions of the Internal Revenue Code or Treasury
Regulations issued thereunder, provided that the Partnership Representative may
file any suit only with the approval of a Majority Interest of the Members. The
Partnership Representative shall have the sole authority to act on behalf of the
Company under Subchapter C of Section 63 of the Internal Revenue Code (relating
to IRS partnership audit proceedings) and in any tax proceedings brought by
other taxing authorities, and the Company and all Members shall be bound by the
actions taken by the Partnership Representative in such capacity. The
Partnership Representative shall be reimbursed by the Company for all expenses
incurred in connection with all examinations of the Company’s affairs by tax
authorities, including resulting proceedings, and is authorized to expend
Company funds for professional services and costs associated therewith. The
Partnership Representative shall keep the Members informed as to the status of
any audit of the Company’s tax affairs. Without first obtaining the approval of
a Majority Interest of the Members, the Partnership Representative shall not,
with respect to Company tax matters: (a) enter into a settlement agreement with
respect to any tax matter, or (b) enter into an agreement extending the statute
of limitations. If an audit of any of the Company’s tax returns shall occur, the
Partnership Representative shall not settle or otherwise compromise assertions
of the auditing agent which may be adverse to any Member as compared to the
position taken on the Company’s tax returns without the prior written consent of
each such affected Member. If an audit results in an imputed underpayment by the
Company as determined under Section 6225 of the Internal Revenue Code, the
Partnership Representative, with the approval of a Majority Interest of the
Members, may make the election under Section 6226(a) of the Internal Revenue
Code within forty-five (45) days after the date of the notice of final
partnership adjustment in the manner provided by the Internal Revenue Service.
If such an

 

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election is made, the Company shall furnish to each Member of the Company for
the year under audit a statement reflecting the Member’s share of the adjusted
items as determined in the notice of final partnership adjustment, and each such
Member shall take such adjustment into account as required under Section 6226(b)
of the Internal Revenue Code and shall be liable for any related interest,
penalty, addition to tax, or additional amount.

Section 5.12 Annual Financial Statements. As soon as available, and in any event
within one hundred twenty (120) days after the end of each fiscal year, the
Company shall deliver to the Managers audited consolidated balance sheets of the
Company and any Company subsidiaries as at the end of each such fiscal year and
audited consolidated statements of income, cash flows and Members’ equity for
such fiscal year prepared by the Auditor, in each case setting forth in
comparative form the figures for the previous fiscal year, accompanied by the
certification of independent certified public accountants of recognized national
standing selected by the Board, certifying to the effect that, except as set
forth therein, such financial statements have been prepared in accordance with
GAAP, applied on a basis consistent with prior years, and fairly present in all
material respects the financial condition of the Company and the Company
subsidiaries as of the dates thereof and the results of their operations and
changes in their cash flows and Members’ equity for the periods covered thereby.

Section 5.13 Subsidiaries of the Company. The Board may determine to conduct any
Company operations indirectly through one or more subsidiaries.

Section 5.14 Outside Manager Expenses. Each member of the Board who is not
employed as an officer of, or as a consultant to, the Company shall be entitled
to be reimbursed by the Company for all reasonable out-of-pocket expenses
incurred by such Person in connection with such services.

Section 5.15 Tax Reimbursement. If Texas law requires the Company and a Member
to participate in the filing of a Texas franchise tax combined group report, and
if the Company or such Member or its Affiliates pay the franchise tax liability
due in connection with such combined report, the parties agree that the Company
shall promptly reimburse such Member of its Affiliates for the franchise tax
paid on behalf of the Company as a combined group member. The franchise tax paid
on behalf of the Company shall be equal to the franchise tax that the Company
would have paid if it had computed its franchise tax liability for the report
period on a separate entity basis rather than as a member of the combined group.
In such event, the parties agree that such Member and its Affiliates shall be
considered as paying such amount on behalf of the Company and the Company shall
deduct for federal income tax purposes one hundred percent (100%) of the Texas
franchise tax attributable to the Company; provided that in the event that such
deduction may not be properly taken by the Company, the Company shall reimburse
such member and its Affiliates for the after-tax cost of such payment of Texas
franchise tax paid on the Company’s behalf.

 

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ARTICLE VI

RIGHTS OF MEMBERS

Section 6.1 Rights of Members. Each of the Members shall have the right to:
(a) have the Company books and records (including those required under the Act)
kept at the principal United States office of the Company and at all reasonable
times to inspect and copy any of them at the sole expense of such Member;
(b) have on demand true and full information of all things affecting the Company
and a formal account of Company affairs whenever circumstances render it just
and reasonable; (c) have dissolution and winding up of the Company by decree of
court as provided for in the Act; and (d) exercise all rights of a Member under
the Act (except to the extent otherwise specifically provided herein).
Notwithstanding the foregoing, the Members shall not have the right to receive
data pertaining to the properties of the Company if the Company is subject to a
valid agreement prohibiting the distribution of such data or if the Board shall
otherwise determine that such data is Confidential Information.

Section 6.2 Limitations on Members. The Members (in his or its capacity as a
Member) shall not: (a) be permitted to take part in the business or control of
the business or affairs of the Company; (b) have any voice in the management or
operation of any Company property; or (c) have the authority or power to act as
agent for or on behalf of the Company or any other Member, to do any act which
would be binding on the Company or any other Member, or to incur any
expenditures on behalf of or with respect to the Company. No Member (in his or
its capacity as a Member) shall hold out or represent to any third party that
the Members have any such power or right or that the Members are anything other
than “members” of the Company. The foregoing provision shall not be applicable
to a Member acting in his or its capacity as a member of the Board or an officer
of the Company.

Section 6.3 Liability of Members. No Member shall be liable for the debts,
liabilities, contracts or other obligations of the Company except (a) as
otherwise provided in the Act and (b) as otherwise expressly provided in this
Agreement.

Section 6.4 Withdrawal and Return of Capital Contributions. No Member shall be
entitled to (a) withdraw from the Company except upon the assignment by such
Member of all of its Company Interest in accordance with Article IX, or (b) the
return of its Capital Contributions except to the extent, if any, that
distributions made pursuant to the express terms of this Agreement may be
considered as such by law or upon dissolution and liquidation of the Company,
and then only to the extent expressly provided for in this Agreement and as
permitted by law.

Section 6.5 Voting Rights. Except as otherwise expressly provided herein, to the
extent that the vote of the Members may be required hereunder, the act of a
Majority Interest of the Members shall be an act of the Members. Notwithstanding
anything in this Agreement to the contrary, with respect to any Company
Interests held by any Member who is an Employee, such Company Interests shall be
non-voting if and when such Person’s status as an Employee is terminated for any
reason or without reason, including by termination, resignation, death or
disability.

 

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ARTICLE VII

BOOKS, REPORTS, MEETINGS AND CONFIDENTIALITY

Section 7.1 Capital Accounts, Books and Records.

(a) The Company shall keep books of account for the Company in accordance with
the terms of this Agreement. Such books shall be maintained at the principal
office of the Company.

(b) An individual capital account (the “Capital Account”) shall be maintained by
the Company for each Member as provided below:

(i) The Capital Account of each Member shall, initially except as otherwise
provided herein, be equal to the amount of such Member’s Deemed Capital
Contribution as of the date hereof and shall thereafter be increased by the
amount of cash and the fair market value of any property contributed to the
Company by such Member (net of liabilities secured by such contributed property
that the Company is considered to assume or take subject to under Section 752 of
the Internal Revenue Code) and by such Member’s share of the Net Profits of the
Company and special allocations of income or gain under Section 4.2, and shall
be decreased by such Member’s share of the Net Losses of the Company and special
allocations of deduction or loss under Section 4.2 and by the amount of cash or
the fair market value of any property distributed to such Member (net of
liabilities secured by such distributed property that such Member is considered
to assume or take subject to under Section 752 of the Internal Revenue Code).
The Capital Accounts shall also be increased or decreased upon the exercise of
any noncompensatory option pursuant to the requirements of Treasury Regulation
Sections 1.704-1(b)(2)(iv)(d)(4) and 1.704-1(b)(2)(iv)(s).

(ii) Any adjustments of basis of Company property provided for under
Sections 734 and 743 of the Internal Revenue Code (resulting from an election
under Section 754 of the Internal Revenue Code) shall not affect the Capital
Accounts of the Members (unless otherwise required by applicable Treasury
Regulations), and the Members’ Capital Accounts shall be debited or credited
pursuant to the terms of this Section 7.1 as if no such election had been made.

(iii) Capital Accounts shall be adjusted, in a manner consistent with this
Section 7.1, to reflect any adjustments in items of Company income, gain, loss
or deduction (including Simulated Depletion, Simulated Gain and Simulated Loss)
that result from amended returns filed by the Company or pursuant to an
agreement by the Company with the Internal Revenue Service or a final court
decision.

(iv) The allocation of basis prescribed by Section 613A(c)(7)(D) of the Internal
Revenue Code and provided for in Section 4.3(b) and each Member’s separately
computed depletion deductions shall not reduce such Member’s Capital Account,
but such Member’s Capital Account shall be decreased by its allocable share of
Simulated Depletion. The Simulated Basis in each oil and gas property as of the
date of this

 

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Agreement or hereafter acquired shall be allocated among the Members in
proportion to their Sharing Ratios. Simulated Depletion with respect to each
separate oil and gas property shall be allocated to the Members in proportion to
their respective shares of the Simulated Basis in the related property. No
Member’s Capital Account shall be decreased, however, by Simulated Depletion
deductions attributable to any oil and gas property to the extent such
deductions exceed such Member’s allocable share of the Company’s remaining
Simulated Basis in such property. Any Simulated Gain shall be allocated to the
Members and shall increase their respective Capital Accounts in the same manner
as an equal amount of gain would have been allocated pursuant to Section 4.1.
Any Simulated Loss shall be allocated to the Members and shall reduce their
respective Capital Accounts in the same percentages as the basis of the property
sold was allocated up to an amount equal to each Member’s share of the Company’s
Simulated Basis in such property at the time of such sale.

(v) It is the intention of the Members that the Capital Accounts of each Member
be kept in the manner required under Treasury Regulation
Section 1.704-1(b)(2)(iv). To the extent any additional adjustment to the
Capital Accounts is required by such regulation, the Board is hereby authorized
to make such adjustment after notice to the Members.

(vi) Any Person who acquires a Company Interest directly from a Member, or whose
Company Interest shall be increased by means of a Transfer to it of all or part
of the Company Interest of another Member, shall have a Capital Account
(including a credit for all Deemed Capital Contributions and subsequent Capital
Contributions made by such Member Transferring such Company Interest) which
includes the Capital Account balance of the Company Interest or portion thereof
so acquired or Transferred.

Section 7.2 Bank Accounts. The Board shall cause one or more Company accounts to
be maintained in a bank (or banks) which is a member of the Federal Deposit
Insurance Corporation or some other financial institution, which accounts shall
be used for the payment of the expenditures incurred by the Company in
connection with the business of the Company, and in which shall be deposited any
and all receipts of the Company. The Board shall determine the number of and the
Persons who will be authorized as signatories on each such bank account. The
Company may invest the Company funds in such money market accounts or other
investments as the Board shall determine to be of high quality.

Section 7.3 Reports. The Company shall provide each Member with copies of such
financial reports as shall be reasonably requested from time to time by the
Members and any such other reports and financial information as the Board shall
determine from time to time, including periodic consolidated financial
statements for the Company and its subsidiaries (including income statements,
balance sheets and cash flow statements) and copies of all engineering reserve
reports and other financial reports that the Company or its subsidiaries
provides to any financial institution that provides debt or equity financing to
the Company or its subsidiaries.

 

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Section 7.4 Meetings of Members. The Board may hold meetings of the Members from
time to time to inform and consult with the Members concerning the Company’s
assets and such other matters as the Board deems appropriate, provided that
nothing in this Section 7.4 shall require the Board to hold any such meetings.
Such meetings shall be held at such times and places, as often and in such
manner as shall be determined by the Board. The Board at its election may
separately inform and consult with the Members for the above purposes without
the necessity of calling and/or holding a meeting of the Members.
Notwithstanding the foregoing provisions of this Section 7.4, the Members shall
not be permitted to take part in the business or control of the business of the
Company; it being the intention of the parties that the involvement of the
Members as contemplated in this Section 7.4 is for the purpose of informing the
Members with respect to various Company matters, explaining any information
furnished to the Members in connection therewith, answering any questions the
Members may have with respect thereto and receiving any ideas or suggestions the
Members may have with respect thereto; it being the further intention of the
parties that the Board shall have full and exclusive power and authority on
behalf of the Company to acquire, manage, control and administer the assets,
business and affairs of the Company in accordance with Section 5.1 and the other
applicable provisions of this Agreement.

Section 7.5 Confidentiality. No Member shall use, publish, disseminate or
otherwise disclose, directly or indirectly, any Confidential Information that
should come into the possession of such Member for other than a proper Company
purpose. No Member shall disclose any such Confidential Information except as
expressly authorized by this Agreement or by the Board, or as required by law or
governmental or regulatory authority. Each Member shall instruct all Affiliates
(including their representatives, agents and counsel) to comply with this
Section 7.5. If a Member is required by law or court order to disclose
information that would otherwise be Confidential Information under this
Agreement, such Member shall immediately notify the Company of such notice and
provide the Company the opportunity to resist such disclosure by appropriate
proceedings. The terms of this Section 7.5 shall survive with respect to each
Member until the earlier to occur of (a) the date following one year from the
date of the liquidation of the Company and (b) the date following two years from
the date of termination of such Member’s Company Interest.

ARTICLE VIII

DISSOLUTION, LIQUIDATION AND TERMINATION

Section 8.1 Dissolution. The Company shall be dissolved upon the occurrence of
any of the following:

(a) The seventh anniversary of the date of this Agreement;

(b) The sale, disposition or termination of all or substantially all of the
property then owned by the Company; or

(c) The consent in writing of the Board of Managers.

 

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Section 8.2 Winding Down. From and after the sixth (6th) anniversary of the
Company’s formation, unless a Majority Interest of the Members otherwise
mutually agree or unless the Company has previously been dissolved, the Members
shall cooperate in the marketing and sale of all or substantially all of the
assets or outstanding Company Interests, or any other similar transaction to
potentially interested third parties, such that the Company can be formally
liquidated prior to the end of its stated term.

Section 8.3 Liquidation and Termination. Upon dissolution of the Company, the
Board or, if the Board so desires, a Person selected by the Board, shall act as
liquidator or shall appoint one or more liquidators who shall have full
authority to wind up the affairs of the Company and make final distribution as
provided herein. The liquidator shall continue to operate the Company properties
with all of the power and authority of the Board. The steps to be accomplished
by the liquidator are as follows:

(a) As promptly as possible after dissolution and again after final liquidation,
the liquidator, if requested by any Member, shall cause a proper accounting to
be made by the Company’s independent accountants of the Company’s assets,
liabilities and operations through the last day of the month in which the
dissolution occurs or the final liquidation is completed, as appropriate.

(b) The liquidator shall pay all of the debts and liabilities of the Company
(including all expenses incurred in liquidation) or otherwise make adequate
provision therefor (including the establishment of a cash escrow fund for
contingent liabilities in such amount and for such term as the liquidator may
reasonably determine). After making payment or provision for all debts and
liabilities of the Company, the liquidator shall sell all properties and assets
of the Company for cash as promptly as is consistent with obtaining the best
price therefor; provided, however, that upon the consent of a Majority Interest
of the Members, the liquidator may distribute such properties in kind. All Net
Profit, Net Loss, Simulated Gain and Simulated Loss (or other items of income,
gain, loss or deduction allocable under Section 4.2) realized on such sales
shall be allocated to the Members as provided in this Agreement, and the Capital
Accounts of the Members shall be adjusted accordingly. In the event of a
distribution of properties in kind, the liquidator shall first adjust the
Capital Accounts of the Members by the amount of any Net Profit, Net Loss,
Simulated Gain and Simulated Loss (or other items of income, gain, loss or
deduction allocable under Section 4.2) that would have been recognized by the
Members if such properties had been sold at then fair market values. The
liquidator shall then distribute the proceeds of such sales or such properties
to the Members in the manner provided in Section 4.4(a) (subject to the last
sentence of Section 4.4(b)). If the foregoing distributions to the Members do
not equal the Member’s respective positive Capital Account balances as
determined after giving effect to the foregoing adjustments and to all
adjustments attributable to allocations of Net Profit, Net Loss, Simulated Gain
and Simulated Loss realized by the Company during the taxable year in question
and all adjustments attributable to contributions and distributions of money and
property effected prior to such distribution, then, the allocations of Net
Profit, Net Loss, Simulated Gain and Simulated Loss provided for in this
Agreement shall be adjusted, to the least extent necessary, to produce a Capital
Account balance for each Member which corresponds to the amount of the
distribution to such Member. Each Member shall have the right to designate
another Person to receive any property which otherwise would be distributed in
kind to that Member pursuant to this Section 8.3.

 

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(c) Except as expressly provided herein, the liquidator shall comply with any
applicable requirements of the Act and all other applicable laws pertaining to
the winding up of the affairs of the Company and the final distribution of its
assets.

(d) Notwithstanding any provision in this Agreement to the contrary, no Member
shall be obligated to restore a deficit balance in its Capital Account at any
time.

The distribution of cash and/or property to the Members in accordance with the
provisions of this Section 8.3 shall constitute a complete return to the Members
of their Capital Contributions and a complete distribution to the Members of
their Company Interest and all Company property.

ARTICLE IX

ASSIGNMENTS OF COMPANY INTERESTS

(a) No Member’s Company Interest or rights therein shall be Transferred, or made
subject to an Indirect Transfer, in whole or in part, without the prior written
consent of the Board; provided, however, that any Member may assign its Company
Interest without obtaining such consent pursuant to (i) an Excluded Affiliate
Transfer or (ii) a Transfer that is otherwise permitted pursuant to the Voting
and Transfer Restriction Agreement. Any attempt by a Member to assign its
Company Interest in violation of the immediately preceding sentence shall be
void ab initio. If an interest in a Unit or other Company Interest is required
by law to be Transferred to a spouse of a holder thereof pursuant to an order of
a court of competent jurisdiction in a divorce proceeding (notwithstanding the
foregoing provisions of this Article IX(a)), then such holder shall nevertheless
retain all rights with respect to such interest and any interest of such spouse
shall be subject to such rights of such holder. In addition, if it is determined
that the holder will be required to pay any taxes attributable to such interest
of the spouse in the Company, then any tax liability of such holder that is
attributable to such spouse’s interest shall be taken into account, and shall
reduce such spouse’s interest in the Company; in no event shall the Company be
required to provide any financial, valuation or other information regarding the
Company or any of its subsidiaries or Affiliates or any of their respective
assets to the spouse or former spouse of such holder.

(b) Unless an assignee of a Company Interest becomes a substituted Member in
accordance with the provisions set forth below, such assignee shall not be
entitled to any of the rights granted to a Member hereunder, other than the
right to receive allocations of income, gains, losses, deductions, credits and
similar items and distributions to which the assignor would otherwise be
entitled, to the extent such items are assigned.

(c) An assignee of a Company Interest shall become a substituted Member entitled
to all of the rights of a Member if, and only if, (i) the assignor gives the
assignee such right, (ii) the Board consents in writing to such substitution,
the granting or denying of which shall be in the Board’s sole discretion,
(iii) the assignee executes and delivers such instruments, in form and substance
satisfactory to the Board, as the Board may deem necessary or desirable to
effect such substitution and to confirm the agreement of the assignee to be
bound by all of the terms and provisions of this Agreement, and (iv) if the
Board so requires, the assignee

 

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reimburses the Company for any costs incurred by the Company in connection with
such assignment and substitution. Upon the satisfaction of such requirements,
such assignee shall be admitted as of such date as shall be provided for in any
document evidencing such assignment as a substituted Member of the Company.

(d) The Company and the Board shall be entitled to treat the record Member of
any Company Interest as the absolute Member thereof in all respects and shall
incur no liability for distributions of cash or other property made in good
faith to such Member until such time as a written assignment of such Company
Interest that complies with the terms of this Agreement has been received by the
Board.

ARTICLE X

REPRESENTATIONS AND WARRANTIES

Each Member acknowledges and agrees that its Company Interest is being purchased
for such Member’s own account as part of a private offering, exempt from
registration under the Securities Act and all applicable state securities or
blue sky laws, for investment only and not with a view to the distribution nor
other sale thereof and that an exemption from registration under the Securities
Act or any applicable state securities laws may not be available if the Company
Interest is acquired by such Member with a view to resale or distribution
thereof under any conditions or circumstances as would constitute a distribution
of such Company Interest within the meaning and purview of the Securities Act or
the applicable state securities laws. Accordingly, each Member represents,
warrants and covenants to the Company and all other interested parties that:

(a) Such Member understands that (i) such Member’s Company Interest is being
offered and issued under exemptions from registration provided for in the
Securities Act and applicable state securities or “blue sky” laws, (ii) such
Member is acquiring an interest in the Company without being furnished any
offering literature or prospectus, and (iii) the acquisition of such Member’s
Company Interest by such Member has not been reviewed by the United States
Securities and Exchange Commission or by any administrative agency charged with
the administration of the securities or “blue sky” laws of any state.

(b) Such Member acknowledges that the Company Interest being acquired by such
Member was not offered to such Member by means of publicly disseminated
advertisements or sales literature, nor is such Member aware of any offers made
to other Persons by such means.

(c) Such Member is familiar with Regulation D promulgated under the Securities
Act, such Member is an “accredited investor” as defined in Rule 501(a) of such
Regulation D and such Member is able to bear the economic risk of an investment
in the Company Interest.

(d) Such Member acknowledges that the Company Interest is a speculative
investment that involves a high degree of risk and such Member can sustain a
complete loss of such Member’s investment in the Company Interest. Such Member
has adequate means of providing for its current needs and contingencies and can
afford a complete loss of its investment in the Company.

 

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(e) Such Member acknowledges that the Company Interest will be an illiquid
investment, that such Member will continue to bear the economic risk of the
investment in the Company Interest for an indefinite period and that the Company
Interest is being issued without registration for any subsequent sale under the
Securities Act and applicable state securities laws. Such Member has no need for
liquidity in such Member’s investment in the Company Interest.

(f) Such Member, by making other investments of a similar nature and/or by
reason of his/its business and financial experience or the business and
financial experience of those Persons it has retained to advise such Member with
respect to its investment in the Company, (i) is knowledgeable and experienced
in finance, securities and investing in securities similar to the Company
Interest, and (ii) is a sophisticated investor who has the capacity to protect
its own interest in investments of this nature, so as to be capable of
evaluating the merits and risks of an investment in the Company Interest.

(g) Prior to such Member’s decision to acquire the Company Interest, such
Member:

(i) Has been afforded access to, has been given an opportunity to review and has
provided to such Member’s accountants and advisors, as applicable, all of the
agreements and documents pertaining to the initial creation, organization and
capitalization of the Company, together with all other available information
relating to the Company, including all documents, records, books and due
diligence materials pertaining to this investment;

(ii) Has had an opportunity to ask questions of, and receive answers from,
representatives of the Company concerning such Member’s investment in the
Company Interest; and

(iii) Has received all information requested of the Company that such Member
deemed necessary or appropriate to evaluate the Member’s investment in the
Company Interest and the risks and merits thereof and to make an informed
decision concerning such Member’s investment in the Company Interest.

(h) Such Member is aware of the following:

(i) The Company is newly organized and has no financial or operating history
and, further, such Member’s investment in the Company is speculative and
involves a high degree of risk of loss by the Member of its entire investment,
with no assurance of any income from such investment;

(ii) No federal or state agency has made any finding or determination as to the
fairness of the investment, or any recommendation or endorsement, of such
investment;

 

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(iii) There are substantial restrictions on the Transferability of the Company
Interest of such Member, there will be no public market for the Company Interest
and, accordingly, it may not be possible for such Member readily to liquidate
its investment in the Company in case of emergency; and

(iv) Any federal or state income tax benefits which may be available to such
Member may be lost through changes to existing laws and regulations or in the
interpretation of existing laws and regulations and such Member, in making this
investment, is relying, if at all, solely upon the advice of its own tax
advisors with respect to the tax aspects of an investment in the Company.

(i) Such Member has evaluated the risk of investing in the Company Interest and
is acquiring the Company Interest based only upon such Member’s independent
examination and judgment as to the prospects of the Company as determined from
the information in such Member’s possession or obtained directly by such Member
from the Company.

(j) Such Member has a close business association with the Company or certain of
its Affiliates, thereby making the Member a well-informed investor for purposes
of this investment.

(k) Such Member’s Company Interest is being acquired by such Member for such
Member’s own investment portfolio and account (and not on behalf of, and without
the participation of, any other Person) with the intent of holding the Company
Interest for investment and without the intent of participating, directly or
indirectly, in a distribution of the Company Interest or a Transfer of the
Company Interest and not with a view to, or for resale in connection with, any
distribution of the Company Interest or Transfer of the Company Interest or any
portion thereof.

(l) Such Member has no contract, undertaking, agreement, or arrangement with any
Person to sell or otherwise Transfer to any Person, or to have any Person sell
on behalf of such Member, its Company Interest (or any portion thereof), and
such Member is not engaged in, and does not plan to engage within the
foreseeable future in, any discussion with any Person relative to the sale or
any Transfer of its Company Interest (or any portion thereof).

(m) Such Member is not aware of any occurrence, event, or circumstance upon the
happening of which such Member intends to attempt to Transfer its Company
Interest (or any portion thereof), and such Member does not have any present
intention of Transferring its Company Interest (or any portion thereof) after
the lapse of any particular period of time.

(n) Such Member understands that the Company Interest may not be offered for
sale, sold or Transferred other than in accordance with the Voting and Transfer
Restriction Agreement and this Agreement, including Article IX hereof, and
pursuant to (i) an effective registration under the Securities Act or in a
transaction that is otherwise in compliance with the Securities Act and
(ii) evidence satisfactory to the Company of compliance with the applicable
securities laws (which may require such Member to provide an opinion of legal
counsel satisfactory to the Company confirming compliance with such laws).

 

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(o) Such Member further covenants and agrees that such Member shall have no
right to require registration of its Company Interest under the Securities Act
or applicable state securities laws, and, in view of the nature of the Company
and its business, such registration is neither contemplated nor likely.

(p) Such Member understands that a legend indicating that the Company Interest
has not been registered under applicable federal and state securities laws and
referring to the restrictions on transferability and sale of the Company
Interest may be placed on any certificate(s) or other document delivered to such
Member or any substitute therefore and any transfer agent of the Company or its
affiliates may be instructed to require compliance therewith.

(q) Such Member confirms that such Member has been advised to consult with such
Member’s own attorney regarding legal matters concerning the Company and to
consult with independent tax advisors regarding the tax consequences of
investing in the Company.

(r) Such Member acknowledges that such Member understands the meaning and the
legal consequences of the representations, warranties, covenants and
certifications set forth in this Article X and that the Company has relied and
will rely upon such representations, warranties, covenants and certifications.

ARTICLE XI

MISCELLANEOUS

Section 11.1 Notices. All notices, elections, demands or other communications
required or permitted to be made or given pursuant to this Agreement shall be in
writing and shall be considered as properly given or made on the date of actual
delivery if given by (a) personal delivery, (b) United States mail,
(c) expedited overnight delivery service with proof of delivery, or (d) via
facsimile with confirmation of delivery, addressed to the respective
addressee(s). Any Member may change its address by giving notice in writing to
the other Members of its new address.

Section 11.2 Amendment.

(a) In addition to the right of the Board to amend this Agreement as provided
below, and except as otherwise provided below, any change, modification, or
amendment to this Agreement shall be effective if made by an instrument in
writing that has been duly approved by the Board and a Majority Interest of the
Members.

(b) Notwithstanding Section 11.2(a), with respect to any change, modification,
or amendment to this Agreement that would (i) increase the liability or duties
of any of the Members, (ii) change the contributions required of any of the
Members, (iii) cause the Company to be taxed as a corporation, or (iv) otherwise
result in any disproportionate and material adverse tax consequences for any
Member, such change, modification, or amendment shall not be binding on such
Member unless contained in a written instrument duly executed by such Member;
provided, however, that this Section 11.2(b) shall not apply to the Board’s
ability to amend this Agreement pursuant to Article III; provided, further, that
any amendment which is

 

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made to facilitate a merger or consolidation of the Company with any other
entity, to convert the Company into another entity, or to cause the Company to
participate in an exchange of interests or some type of business combination
with any other entity, shall require the approval only of the Board and a
Majority Interest of the Members, if each of the material terms and provisions
of such merger, consolidation, conversion, exchange or combination provides for
equal and/or proportionate treatment of each of the Members.

(c) With respect to any change, modification, or amendment to this Agreement
that would change the name of the Company, admit new or substituted Members in
accordance with the terms of Article IX, or any other change, modification or
amendment that does not adversely affect the Members in any disproportionate and
material respect, and any change, modification or amendment which the Board
determines is necessary or advisable to ensure that the Company is not and will
not be treated as an association taxable as a corporation for federal income tax
purposes or to conform with changes in applicable tax law (provided such changes
do not have a material adverse effect on the Members), such change,
modification, or amendment may be contained in a written instrument executed
solely by the Board; provided that the Board notifies the Members of such
change, modification, or amendment.

(d) With respect to any change, modification, or amendment to this Agreement
which the Board determines is necessary or advisable to comply with or
administer in an equitable manner the provisions of the Bipartisan Budget Act
and any Treasury Regulations or other administrative pronouncements promulgated
thereunder in any manner determined by the Board, such change, modification, or
amendment may be contained in a written instrument executed solely by the Board;
provided that the Board notifies the Members of such change, modification, or
amendment.

Section 11.3 Partition. Each of the Members hereby irrevocably waives for the
term of the Company any right that such Member may have to maintain any action
for partition with respect to the Company property.

Section 11.4 Amendment and Restatement of Original Agreement; Entire Agreement.
The parties hereto hereby agree to continue the Company and hereby amend and
restate the Original Agreement, which is replaced and superseded in its entirety
by this Agreement. This Agreement and the other documents contemplated hereby
constitute the full and complete agreement of the parties hereto with respect to
the subject matter hereof and supersede any prior agreement or understanding
among them with respect to such subject matter, including without limitation the
Original Agreement.

Section 11.5 Severability. Every provision in this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of this Agreement.

Section 11.6 No Waiver. The failure of any Member to insist upon strict
performance of a covenant hereunder or of any obligation hereunder, irrespective
of the length of time for which such failure continues, shall not constitute a
waiver of such Member’s right to demand strict compliance in the future. No
consent or waiver, express or implied, to or of any breach or default in the
performance of any obligation hereunder shall constitute a consent or waiver to
or of any other breach or default in the performance of the same or any other
obligation hereunder.

 

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Section 11.7 Applicable Law. This Agreement and the rights and obligations of
the parties hereunder shall be governed by and interpreted, construed and
enforced in accordance with the internal laws of the State of Texas, without
regard to rules or principles of conflicts of law requiring the application of
the law of another State.

Section 11.8 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns; provided, however, that no Member may
Transfer all or any part of its rights or Company Interest or any interest under
this Agreement except in accordance with Article IX.

Section 11.9 Arbitration. Any dispute arising out of or relating to this
Agreement, the Transaction Documents, or the Company, including claims sounding
in contract, tort, statutory or otherwise (a “Dispute”), shall be settled
exclusively and finally by arbitration in accordance with this Section 11.9.

(a) Rules and Procedures. Such arbitration shall be administered by
JAMS/Endispute, Inc., a Delaware corporation and national dispute resolution
company (“JAMS”), pursuant to (i) the JAMS Streamlined Arbitration Rules and
Procedures, if the amount in controversy is $250,000 or less, or (ii) the JAMS
Comprehensive Arbitration Rules and Procedures, if the amount in controversy
exceeds $250,000 (each, as applicable, the “Rules”). The making, validity,
construction, and interpretation of this Section 11.9, and all procedural
aspects of the arbitration conducted pursuant hereto, shall be decided by the
arbitrator(s). For purposes of this Section 11.9, “amount in controversy” means
the stated amount of the claim, not including interest or attorneys’ fees, plus
the stated amount of any counterclaim, not including interest or attorneys’
fees. If the claim or counterclaim seeks a form of relief other than damages,
such as injunctive or declaratory relief, it shall be treated as if the amount
in controversy exceeds $250,000, unless all parties to the Dispute otherwise
agree.

(b) Discovery. Discovery shall be allowed only to the extent permitted by the
Rules.

(c) Time and Place. All arbitration proceedings hereunder shall be conducted in
Dallas, Texas or such other location as all parties to the Dispute may agree.
Unless good cause is shown or all parties to the Dispute otherwise agree, the
hearing on the merits shall be conducted within one hundred eighty (180) days of
the initiation of the arbitration, if the arbitration is being conducted under
the Streamlined Arbitration Rules, or within two hundred seventy (270) days of
the initiation of the arbitration, if the arbitration is being conducted under
the Comprehensive Arbitration Rules. However, it shall not be a basis to
challenge the outcome or result of the arbitration proceeding that it was not
conducted within the specified timeframe, nor shall the failure to conduct the
hearing within the specified timeframe in any way waive the right to arbitration
as provided for herein.

 

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(d) Arbitrators.

(i) If the amount in controversy is $250,000 or less, the arbitration shall be
before a single arbitrator selected by JAMS in accordance with the Rules.

(ii) If the amount in controversy is more than $250,000, the arbitration shall
be before a panel of three arbitrators, selected in accordance with this
paragraph. The party initiating the arbitration shall designate, with its
initial filing, its choice of arbitrator. Within thirty (30) days of the notice
of initiation of the arbitration procedure, the opposing party to the Dispute
shall select one arbitrator. If any party to the Dispute shall fail to select an
arbitrator within the required time, JAMS shall appoint an arbitrator for that
party. In the event that the Dispute involves three or more parties, JAMS shall
determine the parties’ alignment pursuant to Rule 15 and each “side” shall have
the right to appoint one arbitrator as provided above. The two arbitrators so
selected shall select a third arbitrator, failing agreement on which, the third
arbitrator shall be selected in accordance with JAMS Rule 15. Notwithstanding
that each party may select an arbitrator, all arbitrators (whether selected by
the parties, JAMS or otherwise) shall be independent and shall disclose any
relationship that he or she may have with any party to the Dispute at the time
of their respective appointment. All arbitrators shall be subject to challenge
for cause under JAMS Rule 15. In the event that any party-selected arbitrator is
struck for cause, JAMS shall appoint the replacement arbitrator.

(e) Waiver of Certain Damages. Notwithstanding any other provision in this
Agreement to the contrary, the Company and the Members expressly agree that the
arbitrators shall have absolutely no authority to award consequential,
incidental, special, treble, exemplary or punitive damages of any type under any
circumstances regardless of whether such damages may be available under Texas
law, or any other laws, or under the Federal Arbitration Act or the Rules,
unless such damages are a part of a third party claim for which a Member is
entitled to indemnification hereunder.

(f) Limitations on Arbitrators. The arbitrators shall have authority to
interpret and apply the terms and conditions of this Agreement and to order any
remedy allowed by this Agreement, including specific performance of the
Agreement, but may not change any term or condition of this Agreement, deprive
any Member of a remedy expressly provided hereunder, or provide any right or
remedy that has been excluded hereunder.

(g) Form of Award. The arbitration award shall conform with the Rules, but also
contain a certification by the arbitrators that, except as permitted by
Section 11.9(e), the award does not include any consequential, incidental,
special, treble, exemplary or punitive damages.

(h) Fees and Awards. The fees and expenses of the arbitrator(s) shall be borne
equally by each side to the Dispute, but the decision of the arbitrator(s) may
include such award of the arbitrators’ expenses and of other costs to the
prevailing side as the arbitrators may determine. In addition, the prevailing
party shall be entitled to an award of its attorneys’ fees and interest.

 

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(i) Binding Nature. The decision and award shall be binding upon all of the
parties to the Dispute and final and nonappealable to the maximum extent
permitted by law, and judgment thereon may be entered in a court of competent
jurisdiction and enforced by any party to the Dispute as a final judgment of
such court.

Section 11.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which shall
constitute but one and the same document.

*    *    *    *

[Signature Pages of Company, Members and Managers Attached]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

 

COMPANY: ESQUISTO INVESTMENT HOLDINGS, LLC By:  

/s/ Richard D. Brannon

  Name: Richard D. Brannon   Title:    CEO MEMBERS: CH4 ENERGY III, LLC By:  

/s/ Richard D. Brannon

  Name: Richard D. Brannon   Title:    President CH4 ENERGY IV, LLC By:  

/s/ Richard D. Brannon

  Name: Richard D. Brannon   Title:    President CH4 ENERGY V, LLC By:  

/s/ Richard D. Brannon

  Name: Richard D. Brannon   Title:    President CROSSING ROCKS ENERGY, LLC By:
 

/s/ Bruce Selkirk

  Name: Bruce Selkirk   Title:    President and CEO

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

ESQUISTO INVESTMENT HOLDINGS, LLC

SIGNATURE PAGE

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GARLAND EXPLORATION, LLC By:  

/s/ Mike Hoover

  Name: Mike Hoover   Title:    President CALBRI ENERGY, INC. By:  

/s/ Clinton Seidel

  Name: Clinton Seidel   Title:    President

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

ESQUISTO INVESTMENT HOLDINGS, LLC

SIGNATURE PAGE

--------------------------------------------------------------------------------

MANAGERS:

/s/ Mike Hoover

Mike Hoover

/s/ Richard D. Brannon

Richard D. Brannon

/s/ Bruce Selkirk

Bruce Selkirk

/s/ David W. Hayes

David W. Hayes

/s/ Craig S. Glick

Craig S. Glick

/s/ Brian Minnehan

Brian Minnehan

/s/ David R. Albin

David R. Albin

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

ESQUISTO INVESTMENT HOLDINGS, LLC

SIGNATURE PAGE