Exhibit 10.2

 

LIMITED PARTNERSHIP INTERESTS IN THE PARTNERSHIP HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES OR BLUE SKY LAWS OF
ANY STATE OR OTHER JURISDICTION. WITHOUT SUCH REGISTRATION, SUCH INTERESTS MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, EXCEPT UPON
DELIVERY TO THE GENERAL PARTNER OF AN OPINION OF COUNSEL SATISFACTORY TO THE
GENERAL PARTNER OF THE PARTNERSHIP THAT REGISTRATION IS NOT REQUIRED FOR SUCH
TRANSFER OR OTHER EVIDENCE SATISFACTORY TO THE GENERAL PARTNER TO THE EFFECT
THAT ANY SUCH TRANSFER SHALL NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OR ANY APPLICABLE SECURITIES OR BLUE SKY LAWS OF ANY STATE OR OTHER
JURISDICTION. IN ADDITION, ANY TRANSFER OF INTERESTS REQUIRES THE PRIOR WRITTEN
CONSENT OF THE GENERAL PARTNER AND IS SUBJECT TO OTHER RESTRICTIONS PURSUANT TO
THIS AGREEMENT.

 

 

AGREEMENT OF LIMITED PARTNERSHIP

 

OF

 

LARCLAY, L.P.

 

(a Texas limited partnership)

 

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TABLE OF CONTENTS

 

 

Page

 

 

 

ARTICLE 1

 

 

DEFINITIONS

 

 

 

 

1.1

Certain Definitions

1

1.2

Construction

7

 

 

 

 

ARTICLE 2

 

 

ORGANIZATION

 

 

 

 

2.1

Formation

7

2.2

Name

7

2.3

Registered Office; Registered Agent; Other Offices

8

2.4

Purposes

8

2.5

Certificate; Foreign Qualification

8

2.6

Term

8

 

 

 

 

ARTICLE 3

 

 

GENERAL PARTNER; MANAGEMENT

 

 

 

 

3.1

Authority of General Partner

8

3.2

Certain Restrictions on General Partner’s Power and Authority

9

3.3

Duties and Services of General Partner

10

3.4

Withdrawal of General Partner

10

3.5

General Partner as Limited Partner

10

3.6

Officers

10

 

 

 

 

ARTICLE 4

 

 

LIMITED PARTNERS

 

 

 

 

4.1

Limited Partner Information

10

4.2

Restrictions on Limited Partners

10

4.3

Access to Information

11

4.4

Admission of Additional Limited Partners

11

4.5

Representations of the Limited Partners

11

4.6

Specific Performance

12

 

 

 

 

ARTICLE 5

 

 

CAPITAL CONTRIBUTIONS

 

 

 

 

5.1

Capital Contributions of Limited Partners

13

5.2

Capital Contributions of General Partner

13

5.3

Required Advances by Limited Partners

13

5.4

Additional Advances by CWEI

14

5.5

Capital Accounts

15

5.6

Return of Capital Contribution.

16

5.7

GAAP Capital Accounts

16

 

 

 

 

ARTICLE 6

 

 

ALLOCATIONS

 

 

 

 

6.1

Allocations of Profits and Losses

16

6.2

Regulatory Allocations

17

 

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6.3

Curative Allocations

18

6.4

Income Tax Allocations

18

6.5

Other Allocation Rules

19

 

 

 

 

ARTICLE 7

 

 

DISTRIBUTIONS

 

 

 

 

7.1

Distributions

19

 

 

 

 

ARTICLE 8

 

 

BOOKS, RECORDS AND BANK ACCOUNTS

 

 

 

 

8.1

Maintenance of Books

19

8.2

Accounts

19

 

 

 

 

ARTICLE 9

 

 

DISSOLUTION, LIQUIDATION AND TERMINATION

 

 

 

 

9.1

Dissolution

20

9.2

Liquidation and Termination

20

9.3

Distributions in Kind

21

9.4

Deemed Liquidation

21

9.5

Termination

21

 

 

 

 

ARTICLE 10

 

 

RESTRICTIONS ON TRANSFERS

 

 

 

 

10.1

Restrictions on Transfer

22

10.2

Right of First Refusal on Transfer of Interests

23

10.3

Rights of Transferees

24

 

 

 

 

ARTICLE 11

 

 

GENERAL PROVISIONS

 

 

 

 

11.1

Offset

24

11.2

Notices

24

11.3

Entire Agreement

24

11.4

Effect of Waiver or Consent

24

11.5

Amendment or Modification.

25

11.6

Binding Effect

25

11.7

Governing Law; Jurisdiction and Venue

25

11.8

Severability

25

11.9

Further Assurances

25

11.10

Waiver of Certain Rights

25

11.11

Insurance

25

11.12

Indemnification

26

11.13

Power of Attorney

26

11.14

Counsel to the Partnership

27

11.15

Taxation as a Partnership

27

11.16

Counterparts

27

 

 

 

 

 

 

Exhibit A – Schedule of Partners

 

Exhibit B – Limited Liability Company Agreement of Larclay GP, LLC

 

 

ii

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AGREEMENT OF LIMITED PARTNERSHIP

OF

LARCLAY, L.P.

 

This Agreement of Limited Partnership (the “Agreement”) of Larclay, L.P., a
Texas limited partnership (the “Partnership”), is entered into on April 21, 2006
(the “Effective Date”) by the Partners named on Exhibit A hereto.

 

Recitals:

 

The Partners desire to form the Partnership for the purposes set forth herein.

 

Accordingly, the Partners hereby agree as follows:

 

ARTICLE 1
DEFINITIONS

 

1.1          Certain Definitions.  As used in this Agreement, the following
terms have the following meanings:

 

“Adjusted Capital Account” means the Capital Account maintained for each
Partner, (a) increased by any amounts that such Partner is obligated to restore
or is treated as obligated to restore under Treasury Regulation Sections
1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5)), and (b) decreased by any
amounts described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5)
and (6) with respect to such Partner.

 

“Affiliate” means, when used with reference to a specified Person, (a) any
Person directly or indirectly owning, controlling or holding power to vote 25%
or more of the outstanding voting securities of the specified Person, (b) any
Person 25% or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote by the specified Person,
(c) any Person directly or indirectly controlling, controlled by or under common
control with the specified Person, (d) if the specified Person is a corporation,
any officer or director of the specified Person or of any corporation directly
or indirectly controlling that specified Person, (e) if the specified Person is
a partnership, any general partner or if the general partner is a partnership,
the general partners of that partnership, and (f) if the specified Person is an
individual, such individual’s spouse and natural and adoptive lineal descendants
and trusts for the benefit of any such Persons. For purposes of this definition,
the ability through share ownership or contractual arrangement to elect or cause
the election of a majority of the board of directors of a corporation shall
constitute “control.”

 

“Agreed Rate” means the Interest Rate as defined under the Loan Facility.

 

“Agreement” means this Agreement of Limited Partnership, as amended or restated
from time to time.

 

“Book Value” means, with respect to any property of the Partnership, such
property’s adjusted basis for federal income tax purposes, except as follows:

 

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(a)           the initial Book Value of any property contributed by a Partner to
the Partnership shall be the Fair Market Value of such property as of the date
of such contribution;

 

(b)           the Book Values of all properties shall be adjusted to equal their
respective Fair Market Values in connection with (i) the acquisition of an
additional interest in the Partnership by any new or existing Partner in
exchange for more than a de minimis Capital Contribution to the Partnership or
in exchange for the performance of services to or for the benefit of the
Partnership, (ii) the distribution by the Partnership to a Partner of more than
a de minimis amount of property as consideration for an interest in the
Partnership, or (iii) the liquidation of the Partnership within the meaning of
Treasury Regulation Section 1.704 1(b)(2)(ii)(g)(1) (other than pursuant to
Section 708(b)(1)(B) of the Code); provided that adjustments pursuant to clauses
(i) and (ii) above shall be made only if the General Partner reasonably
determines that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership;

 

(c)           the Book Value of property distributed to a Partner shall be the
Fair Market Value of such property as of the date of such distribution;

 

(d)           the Book Value of all property shall be increased (or decreased)
to reflect any adjustments to the adjusted basis of such property pursuant to
Code Section 734(b) or Code Section 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Treasury Regulation Section 1.704 1(b)(2)(iv)(m) and clause (f) of the
definition of Profits and Losses; and

 

(e)           if the Book Value of property has been determined or adjusted
pursuant to clauses  (b) or (d) hereof, such Book Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such property
for purposes of computing Profits and Losses and other items allocated pursuant
to Article 6.

 

“Capital Account” has the meaning set forth in Section 5.5 of this Agreement.

 

“Capital Contribution” means, for any Partner, the amount of any cash
contributed to the capital of the Partnership and the Fair Market Value of any
property contributed to the Partnership by such Partner.

 

“Certificate” means the certificate of formation of the Partnership filed with
the Secretary of State of Texas, as amended or restated from time to time.

 

“Code” means the Internal Revenue Code of 1986, as amended.

 

“Curative Allocations” means the allocations pursuant to Section 6.3 of this
Agreement.

 

“CWEI” means Clayton Williams Energy, Inc., a Delaware corporation, and any
successor entity.

 

“Default Rate” means the lesser of (a) Prime Rate plus 4.0% per annum, and (b)
the maximum rate allowed by law.

 

2

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“Defaulting Limited Partner” has the meaning set forth in Section 5.3(b) of this
Agreement.

 

“Depreciation” means, for each Fiscal Year or other period, an amount equal to
the depreciation, amortization or other cost recovery deduction allowable for
federal income tax purposes with respect to property for such Fiscal Year or
other period, except that (A) with respect to any property the Book Value of
which differs from its adjusted tax basis for federal income tax purposes and
which difference is being eliminated by use of the “remedial method” pursuant to
Treasury Regulation Section 1.704-3(d), Depreciation for such taxable year shall
be the amount of book basis recovered for such Fiscal Year or other period under
the rules prescribed by Treasury Regulation Section 1.704-3(d)(2), and (B) with
respect to any other property the Book Value of which differs from its adjusted
tax basis at the beginning of such Fiscal Year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Book Value as
the federal income tax depreciation, amortization, or other cost recovery
deduction for such Fiscal Year or other period bears to such beginning adjusted
tax basis; provided that if the adjusted tax basis of any property at the
beginning of such Fiscal Year or other period is zero, Depreciation with respect
to such property shall be determined with reference to such beginning value
using any reasonable method selected by the General Partner.

 

“Distributable Property” means the excess of cash and property on hand over the
amount that the General Partner determines is required to be retained as a
reasonable reserve to meet any liabilities or proposed expenditures of the
Partnership which are accrued or reasonably foreseeable or that is reasonably
necessary to be retained.

 

“Drilling Rigs” means the drilling rigs and related equipment, including,
without limitation, transportation equipment, acquired by the Partnership as
contemplated herein.

 

“Economic Risk of Loss” has the meaning set forth in Treasury Regulation Section
1.752-2(a).

 

“Fair Market Value” of any property means the fair market value of such property
as determined (i) by an appraiser of recognized standing (an “Independent
Appraiser”) selected by the General Partner, or (ii) at the election of the
General Partner, in good faith by the General Partner, which determination shall
be conclusive for all purposes and shall be made within 15 days of any event
that requires a determination of Fair Market Value.

 

“Financing Obligation” means the aggregate amount of obligations incurred by the
Partnership under the Loan Facility.

 

“Fiscal Year” means the fiscal year ending on December 31 of each calendar year,
unless, for United States federal income tax purposes, another fiscal year is
required. The Partnership shall have the same fiscal year for United States
federal income tax purposes and for accounting purposes.

 

“GAAP Capital Account” has the meaning set forth in Section 5.7.

 

3

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“General Partner” means Larclay GP LLC, a Texas limited liability company, and
any successor entity.

 

“GP LLC Agreement” means the Limited Liability Company Agreement of the General
Partner in the form attached as Exhibit B.

 

“GP LLC Interests” means Interests representing limited liability company
interests in the General Partner.

 

“Indemnified Person” has the meaning set forth in Section 11.12.

 

“Interest” means the interest of a Partner in the Partnership as determined
under this Agreement and the Limited Partnership Law. The Interest of each
Partner as of the date of this Agreement, expressed as a percentage based on the
Interest held by such Partner as a percentage of the total Interests held by all
Partners, is set forth on Exhibit A, as such Exhibit A may be amended from time
to time as necessary to reflect additional Capital Contributions or upon the
admittance of additional Limited Partners.

 

“Lariat” means Lariat Services, Inc., a Texas corporation, and any successor
entity.

 

“Letter Agreement” means the letter agreement dated October 20, 2005, as
amended, by and between CWEI and Lariat.

 

“Limited Partner” means CWEI and Lariat and each other Person admitted as an
additional or successor Limited Partner pursuant to Section 4.4.

 

“Limited Partnership Law” means the Texas Limited Partnership Law (Chapters 151,
153 and 154 and, to the extent applicable to limited partnerships, the
provisions of Title 1 of the Texas Business Organizations Code), as amended from
time to time.

 

“Loan” has the meaning assigned to that term under the Loan Facility.

 

“Loan Facility” means that certain Term Loan and Security Agreement, to be
entered into on or about April 21, 2006, between the Partnership and Merrill
Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., a
corporation organized and existing under the laws of the State of Delaware, as
agent for the Lenders defined therein, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.

 

“Loan Purpose” has the meaning assigned to that term under the Loan Facility.

 

“Minimum Gain” has the meaning assigned to that term in Treasury Regulation
Section 1.704-2(d).

 

“Nonrecourse Deduction” has the meaning assigned to that term in Treasury
Regulation Section 1.704-2(b)(1).

 

4

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“Nonrecourse Liability” has the meaning assigned to that term in Treasury
Regulation Section 1.752-1(a)(2).

 

“Non-Defaulting Limited Partner” has the meaning set forth in Section 5.3(b).

 

“Notice” has the meaning set forth in Section 10.2(a).

 

“Offeree” has the meaning set forth in Section 10.2(a).

 

“Oil and Gas Business” means (a) the business of acquiring, exploring,
exploiting, developing, producing, operating and disposing of interests in oil,
gas, liquid natural gas and other hydrocarbon properties, (b) the business of
gathering, marketing, treating, processing, storage, repairing, selling and
transporting any production from such interests or properties and products
produced in association therewith or providing drilling and related services and
supplies and equipment and (c) any business or activity relating to, arising
from, or necessary, appropriate or incidental to the activities described in the
foregoing clauses (a) and (b) of this definition.

 

“Operating Agreement” means that certain Operating Agreement to be entered into
on or about April 21, 2006 by and between the Partnership and Lariat providing,
among other things, for Lariat to act as the sole operator of the Drilling Rigs,
as amended, restated, modified, renewed, extended or replaced from time to time.

 

“Ownership Percentage” means, with respect to a Partner, the percentage
ownership of the Partnership of such Partner equal to a percentage obtained by
dividing (i) the Interests held by such Partner by (ii) the total Interests held
by all Partners.

 

“Partner” means any General Partner or any Limited Partner.

 

“Partner Nonrecourse Debt” has the meaning assigned to that term in Treasury
Regulation Section 1.704-2(b)(4).

 

“Partner Nonrecourse Debt Minimum Gain” has the meaning assigned to that term in
Treasury Regulation Section 1.704-2(i)(2).

 

“Partner Nonrecourse Deduction” has the meaning assigned to that term in
Treasury Regulation Section 1.704-2(i)(1).

 

“Partnership” means the limited partnership formed by the Partners pursuant to
this Agreement.

 

“Partnership Property” means the Drilling Rigs and all other property of any
character, tangible or intangible, real, personal or mixed, now or hereafter
owned, held or acquired by the Partnership.

 

“Permitted Transfer” means any of the following Transfers:  (i) a Transfer of
Interests by a Partner (A) to any Affiliate of such Partner or (B) to an entity
owned by or organized for the benefit of the stockholders, officers, directors,
employees, affiliates or beneficiaries of such Partner, as applicable; and (ii)
a pledge by a Partner of Interests

 

5

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owned or held by such Partner to secure the payment of bona fide indebtedness
owing by such Partner; provided, that such Partner retains the power to vote the
Interests so pledged until such time as the pledgee shall have realized on the
pledge; and, provided further, that the provisions of Section 10.2 shall apply
to the Transfer of such Interests upon exercise of such pledge and after such
exercise.

 

“Permitted Transferee” means a transferee of Interests in a Permitted Transfer.

 

“Person” means an individual, corporation, partnership, limited partnership,
limited liability company, business trust or other legal entity.

 

“Prime Rate” means the prime rate publicly announced on the date in question by
JPMorgan Chase Bank.

 

“Profits” or “Losses” means, for each Fiscal Year or other period, an amount
equal to the Partnership’s taxable income or loss for such taxable year or other
period, determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments (without duplication):

 

(a)           Any income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in computing Profits and Losses
pursuant to this definition of “Profits” and “Losses” shall be added to such
taxable income or loss;

 

(b)           Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this definition of
“Profits” and “Losses” shall be subtracted from such taxable income or loss;

 

(c)           In the event the Book Value of any asset is adjusted pursuant to
clause (b) or clause (c) of the definition of Book Value, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
Book Value of the asset) or an item of loss (if the adjustment decreases the
Book Value of the asset) from the disposition of such asset and shall be taken
into account for purposes of computing Profits or Losses;

 

(d)           Gain or loss resulting from any disposition of property with
respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Book Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Book 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 taxable year; and

 

(f)            To the extent an adjustment to the adjusted tax basis of any
asset pursuant to Code Section 734(b) is required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Account balances as a

 

6

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result of a distribution other than in liquidation of a Partner’s interest in
the Partnership, the amount of such adjustment shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or an item of loss (if
the adjustment decreases such basis) from the disposition of such asset and
shall be taken into account for purposes of computing Profits or Losses.

 

“Regulatory Allocations” means the allocations pursuant to Section 6.2 of this
Agreement.

 

“Required Advance” has the meaning set forth in Section 5.3(a).

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations thereunder as in effect from time to time.

 

“Selling Partner” has the meaning set forth in Section 10.2(a).

 

“Transfer” means any sale, transfer, assignment, exchange, pledge, encumbrance,
hypothecation, gift or other disposition of an Interest in whole or in part, or
any rights or benefits to which a holder of an Interest may be entitled as
provided in this Agreement or the Limited Partnership Law, including, without
limitation, the right to receive distributions in cash or in kind.

 

“Treasury Regulations” means the Income Tax Regulations promulgated under the
Code, as they may be amended from time to time. All references herein to
sections of the Treasury Regulations shall include corresponding provision or
provisions of succeeding, similar, substitute, temporary or final Treasury
Regulations.

 

“Unreturned Capital Contribution Balance” of a Partner at any time means the
excess, if any, of (i) the cumulative amount of Capital Contributions made by
such Partner to the Partnership at and prior to such time over (ii) the
cumulative amount of distributions made by the Partnership to such Partner
pursuant to Section 7.1(a) at and prior to such time.

 

1.2          Construction.  Whenever the context requires, the gender of all
words used in this Agreement includes the masculine, feminine and neuter. All
references to Articles and Sections refer to articles and sections of this
Agreement, and all references to exhibits are to Exhibits attached to this
Agreement, each of which is made a part of this Agreement for all purposes.

 

ARTICLE 2
ORGANIZATION

 

2.1          Formation.  The Partners agree to form the Partnership as a limited
partnership under the Limited Partnership Law for the purposes and upon the
terms and subject to the conditions set forth in this Agreement.

 

2.2          Name.  The business of the Partnership shall be conducted under the
name of “Larclay, L.P.” or such other names that comply with applicable law as
the General Partner may select from time to time.

 

7

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2.3          Registered Office; Registered Agent; Other Offices.  The registered
office of the Partnership in the State of Texas shall be at such place as the
General Partner may designate from time to time. The registered agent for
service of process on the Partnership in the State of Texas or in any other
jurisdiction shall be such Person or Persons as the General Partner may
designate from time to time. The Partnership may have such other offices as the
General Partner may designate from time to time.

 

2.4          Purposes.  The purposes for which the Partnership is formed are to
(i) acquire, own, hold, maintain, operate and dispose of the Drilling Rigs, (ii)
provide drilling and related services and supplies and equipment, and (iii)
engage in any other business or activity that now or in the future may be
necessary, incidental, proper, advisable or convenient to accomplish the
foregoing purposes (including, without limitation, acquiring, owning, holding,
maintaining, operating and disposing of additional Partnership Property) and
that is not prohibited by the law of the jurisdiction in which the Partnership
engages in such business or activity.

 

2.5          Certificate; Foreign Qualification.  The General Partner shall
execute and cause the Certificate to be filed with the Secretary of State of
Texas on or as soon as practicable after the Effective Date. Prior to the
Partnership’s conducting business in any jurisdiction other than the State of
Texas, the General Partner shall cause the Partnership to comply, to the extent
those matters are reasonably within the control of the General Partner, with all
requirements necessary to qualify the Partnership as a foreign limited
partnership (or a partnership in which the Limited Partners have limited
liability) in that jurisdiction. At the request of the General Partner, each
Limited Partner shall execute, acknowledge, swear to and deliver all
certificates and other instruments conforming with this Agreement that are
necessary or appropriate to form, qualify, continue, dissolve and terminate the
Partnership as a limited partnership under the law of the State of Texas and to
qualify, continue, dissolve and terminate the Partnership as a foreign limited
partnership (or a partnership in which the Limited Partners have limited
liability) in all other jurisdictions in which the Partnership may conduct
business, and to this end the General Partner may use the power of attorney set
forth in Section 11.13.

 

2.6          Term.  The term of Partnership shall commence on the date of filing
of the Certificate and shall continue until the earlier of (a) April 21, 2026 or
(b) the dissolution and liquidation of the Partnership in accordance with this
Agreement or the Limited Partnership Law.

 

ARTICLE 3
GENERAL PARTNER; MANAGEMENT

 

3.1          Authority of General Partner.  In addition to the powers now or
hereafter granted to a general partner of a limited partnership under the
Limited Partnership Law, other applicable law or any other provision of this
Agreement, and subject only to any express limitations set forth in this
Agreement, the General Partner shall have the full and exclusive power and
authority to do any and all things necessary, incidental, proper, advisable or
convenient for the furtherance of the purposes of the Partnership, for the
management of the business and affairs of the Partnership and for the protection
and benefit of the Partnership, including without limitation:

 

(a)           to acquire (including, without limitation, to purchase at premium
prices when deemed appropriate by the General Partner), exchange, sell, lease,
dispose of or exchange any or all Partnership Property;

 

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(b)           to incur, pay and reimburse the payment of any expenditures and
incur any obligations it deems appropriate for the conduct of the activities of
the Partnership;

 

(c)           to use Partnership Property or credit of the Partnership
(including without limitation, cash on hand), for any purpose not inconsistent
with this Agreement and on any terms it deems appropriate, including, without
limitation, the financing of Partnership operations and activities and the
repayment of obligations of the Partnership;

 

(d)           to negotiate, execute, deliver and perform, in the name and on
behalf of the Partnership, any contracts, conveyances or other instruments which
it considers appropriate for the conduct of Partnership operations or the
implementation of its powers under this Agreement;

 

(e)           to distribute cash, Partnership Property or other assets of the
Partnership to the Partners in accordance with this Agreement;

 

(f)            to select and dismiss attorneys, accountants, consultants and
contractors of the Partnership and to determine their compensation and other
terms of engagement;

 

(g)           to acquire and maintain such insurance, if any, for the benefit of
the Partnership and the Partners as it deems appropriate;

 

(h)           to establish operating and other offices and facilities;

 

(i)            to borrow money, incur indebtedness or make guaranties in the
name or on behalf of the Partnership and to secure the same by mortgages, deeds
of trust, security interests, pledges or other liens or encumbrances on all or
any part of the Partnership Property; and

 

(j)            to control any matters affecting the rights and obligations of
the Partnership, including, without limitation, the conduct of litigation and
other incurring of legal expenses and the settlement of claims in litigation;
provided, that the General Partner shall not be authorized to settle any claims
for which any Limited Partner has, or may have, any individual liability without
the Limited Partner’s prior written consent.

 

Any person dealing with the Partnership shall be entitled to rely, and shall be
fully protected in relying, on the authority of the General Partner to act for
the Partnership.

 

3.2          Certain Restrictions on General Partner’s Power and Authority.  The
General Partner shall not have the power or authority to, and shall not, do,
form or authorize any of the following without the prior written consent of the
Limited Partners:

 

(a)           do any act in contravention of this Agreement;

 

(b)           do any act which would make it impossible to carry on the ordinary
business of the Partnership;

 

(c)           possess Partnership Property or other assets of the Partnership or
assign any rights in specific Partnership Property or assets for other than a
Partnership purpose;

 

(d)           change or reorganize the Partnership into any other legal form; or

 

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(e)           commingle the funds of the Partnership with the funds of any other
person or entity.

 

3.3          Duties and Services of General Partner.  The General Partner shall
comply in all respects with the terms of this Agreement and shall use its
reasonable efforts to cause the Partnership to: (i) comply in all material
respects with the terms and provisions of all agreements to which the
Partnership is a party or to which its properties are subject; (ii) comply in
all material respects with all applicable laws, ordinances or governmental rules
and regulations to which the Partnership is subject; and (iii) obtain all
licenses, permits, franchises and other governmental authorizations material and
necessary with respect to the ownership of Partnership properties and the
conduct of Partnership business and operations. During the existence of the
Partnership, the General Partner shall devote such time and effort to the
Partnership business and operations as shall be necessary for the furtherance of
the purposes of the Partnership.

 

3.4          Withdrawal of General Partner.  The General Partner may not
voluntarily withdraw from the Partnership without the prior unanimous written
consent of the Limited Partners. The General Partner may not be removed as the
General Partner.

 

3.5          General Partner as Limited Partner.  The General Partner shall also
be treated as a Limited Partner to the extent that it acquires, holds or becomes
an assignee of Interests of a Limited Partner.

 

3.6          Officers.  The General Partner may designate one or more persons to
be officers of the Partnership, having such titles and authority as the General
Partner may from time to time designate, to act on behalf of the General Partner
and the Partnership. Any officers who are so designated shall have such titles
and authority and duties as the General Partner may delegate to them. The
salaries or other compensation, if any, of the officers of the Partnership shall
be fixed by the General Partner. Any officer may be removed as such, either with
or without cause, by the General Partner. Designation of an officer shall not of
itself create contract rights.

 

ARTICLE 4
LIMITED PARTNERS

 

4.1          Limited Partner Information.  The identity of the Limited Partners
and the Interest held by each Limited Partner are reflected on Exhibit A
attached hereto, which shall be amended as necessary to reflect any changes in
such information.

 

4.2          Restrictions on Limited Partners.  Notwithstanding any other
provision of this Agreement, a Limited Partner, in its capacity as such, shall
not be:

 

(a)           allowed to manage or control or take part in the management or
control of the Partnership business or to act for or bind the Partnership, such
power being vested solely and exclusively in the General Partner;

 

(b)           entitled to be paid any fee, salary or other compensation by the
Partnership or General Partner or to have a Partnership drawing account;

 

(c)           entitled to receive any interest or a return of Capital
Contributions except as expressly provided for herein;

 

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(d)           entitled to a partition of Partnership Property or other assets of
the Partnership;

 

(e)           bound by, nor be individually liable for, the expenses,
liabilities or obligations of the Partnership; provided, however, that the
foregoing shall not limit or expand any obligation or liability of any Limited
Partner to the Partnership set forth in this Agreement or to the extent such
obligation or liability is required by law; or

 

(f)            entitled to withdraw from the Partnership.

 

4.3          Access to Information

 

(a)           A Limited Partner or a Permitted Transferee, on written request to
the General Partner stating a proper purpose, may examine and copy, at any
reasonable time, and at the expense of the Limited Partner or assignee, records
required to be kept by the Partnership under the Limited Partnership Law and
other information regarding the business affairs and financial condition of the
Partnership as is just and reasonable for the Person to examine and copy.

 

(b)           On written request to the General Partner by a Limited Partner or
a Permitted Transferee, the Partnership shall provide to the requesting Limited
Partner or Permitted Transferee, without charge, copies of:

 

(i)            this Agreement and the Certificate and all amendments and
restatements; and

 

(ii)           any tax returns described in Section 153.551(a)(2) of the Limited
Partnership Law.

 

Information provided to or obtained by a Limited Partner or an assignee of
Interests relating to the Partnership or Partnership Property shall be used by
such Limited Partner or assignee solely in furtherance of its interests as a
Limited Partner and shall not be used for any other purpose. Limited Partners
and assignees of Interests shall maintain the confidentiality of all such
information and shall not disclose such information to any other Person unless
required by law. If a Limited Partner or assignee of an Interest receives a
request to disclose information relating to the Partnership or Partnership
Property under the terms of a subpoena, investigative demand or order issued by
a court or governmental agency, the Limited Partner or assignee shall promptly
notify the General Partner of the existence, terms and circumstances surrounding
such request, so that the General Partner may seek a protective order or
confidential treatment of such information.

 

4.4          Admission of Additional Limited Partners.  The General Partner may
admit a Permitted Transferee of Interests in a Transfer permitted under Article
10 as an additional or successor Limited Partner to the Partnership at such
times and upon such terms and conditions as may be determined by the General
Partner, in its sole discretion.

 

4.5          Representations of the Limited Partners.

 

(a)           Each Limited Partner is admitted to the Partnership in reliance
upon such Limited Partner’s representation to the General Partner and the
Partnership, which by executing this Agreement each Limited Partner hereby
confirms, that such Limited Partner is acquiring its

 

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Interests for its own account, for investment purposes only and not with a view
to the resale or distribution thereof, in whole or in part. Each Limited Partner
understands that the Interests have not been registered under the Securities Act
and that any Transfer of Interests may not be made without registration under
the Securities Act or pursuant to an applicable exemption therefrom. The Limited
Partners understand that no market exists for Interests and that it is unlikely
that a market will ever exist for Interests.

 

(b)           Each Limited Partner represents that it has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of an investment in the Partnership.

 

(c)           Each Limited Partner represents that this Agreement, when executed
and delivered by such Limited Partner or pursuant to its authority on its
behalf, will have been duly and validly executed and delivered by or on behalf
of such Limited Partner; and such execution and delivery will have been duly
authorized by all necessary action (whether corporate or otherwise) of such
Limited Partner.

 

(d)           Each Limited Partner acknowledges that no Limited Partner shall
have any authority or responsibility to act for, or to assume any obligations or
responsibility on behalf of, the other Limited Partner or the Partnership. Each
Limited Partner acknowledges and agrees that any Limited Partner may at any time
and from time to time engage in and possess interests in other business ventures
of any and every type and description, independently or with others, including
in the Oil and Gas Business and whether in competition with the Partnership or
another Limited Partner, with no obligation to offer to the Partnership or
another Limited Partner the right to participate in those activities. To the
fullest extent permitted by law and subject only to the express terms of the
Operating Agreement or other agreement or contract between or among the Limited
Partners or one or more of the Limited Partners and the Partnership, each
Limited Partner on behalf of itself, the Partnership and their respective
affiliates, successors and assigns, expressly renounces any interest or
expectancy in, or in being offered an opportunity to participate in, all
business opportunities that are developed by or presented to the other Limited
Partners. The Partnership may transact business with any Limited Partner or an
affiliate of a Limited Partner, provided that the terms of each such transaction
are no less favorable than those that could be obtained in a comparable
transaction at the time of such transaction in arm’s-length dealings with an
unrelated third party.

 

4.6          Specific Performance.  The parties agree that the Partnership and
each Partner would be irreparably damaged if any of the provisions of this
Article 4 are not performed in accordance with their specific terms and that
monetary damages would not provide an adequate remedy in such event.
Accordingly, it is agreed that, in addition to any other remedy to which they
may be entitled, at law or in equity, the Partnership, the General Partner and
any nondefaulting Limited Partner shall be entitled to injunctive relief to
prevent breaches of the provisions of this Article 4 and specifically to enforce
the terms and provisions hereof in any action instituted in any court of
competent jurisdiction.

 

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ARTICLE 5
CAPITAL CONTRIBUTIONS

 

5.1          Capital Contributions of Limited Partners.  On the Effective Date,
each Limited Partner agrees to make cash Capital Contributions to the
Partnership in the amount set forth opposite such Limited Partner’s name on
Exhibit A. A Limited Partner shall not be obligated to make additional Capital
Contributions to the Partnership in excess of the amount set forth on Exhibit A;
provided, however, that the Limited Partners may, by unanimous written consent,
agree to make additional Capital Contributions to the Company; provided further,
that in no event shall additional capital contributions be permitted if
following such additional Capital Contributions either Limited Partner owns
greater than 49.5% of the outstanding Partnership Interests.

 

5.2          Capital Contributions of General Partner.  The initial Capital
Contribution of the General Partner is set forth opposite the General Partner’s
name on Exhibit A. On any subsequent date that a Limited Partner makes a Capital
Contribution, the General Partner shall make a cash Capital Contribution to the
Partnership cash in an amount equal to one ninety-ninth (1/99th) of the
aggregate Capital Contributions contributed by the Limited Partners on that
date.

 

5.3          Required Advances by Limited Partners

 

(a)           If the General Partner determines, in its sole discretion, that
cash advances (each, a “Required Advance”) from the Limited Partners are
required to fund the operations of the Partnership, the General Partner shall
send written notice to this effect to the Limited Partners (an “Advance Notice”)
setting forth the date on which such Required Advance shall be payable (the
“Advance Date”), which date shall be not less than 10 days after the date of the
Advance Notice, the total amount of the Required Advances payable by the Limited
Partners and the amount of the Required Advance to be made by each Limited
Partner pursuant to this Section 5.3(a), which amount shall be such Limited
Partner’s pro rata share of the total amount of the Required Advances based on
its Ownership Interest. Each Limited Partner agrees to advance to the
Partnership cash in the amount of each Required Advance on or before the date
such Required Advance is payable as set forth in the Advance Notice. A Required
Advance made by a Limited Partner shall constitute a loan by the Limited Partner
to the Partnership, shall bear interest at the Agreed Rate and shall not be a
Capital Contribution.

 

(b)           If a Limited Partner fails to make all or any portion of any
Required Advance by the Advance Date (a “Defaulting Limited Partner”), the other
Limited Partner (the “Non-Defaulting Limited Partner”), provided that it is not
also a Defaulting Limited Partner, upon notice to the Defaulting Limited Partner
and to the General Partner may exercise one or more of the following remedies:

 

(i)            to institute appropriate legal proceedings in its own behalf or
derivatively on behalf the Partnership to enforce the obligation of the
Defaulting Limited Partner to make such Required Advance, together with interest
thereon at the Agreed Rate from the Advance Date until the date that it is paid;

 

(ii)           advance the portion of the Defaulting Limited Partner’s Required
Advance that is in default, with the following results:

 

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(A)          the amount advanced by the Non-Defaulting Limited Partner shall
constitute a loan by the Non-Defaulting Limited Partner to the Defaulting
Limited Partner;

 

(B)           interest shall accrue on the outstanding principal amount of such
loan at the Default Rate;

 

(C)           the outstanding principal balance of such loan and all accrued
unpaid interest thereon shall be due and payable in full on written demand for
payment by the Non-Defaulting Limited Partner to the Defaulting Limited Partner;

 

(D)          all distributions from the Partnership that otherwise would be
payable to the Defaulting Limited Partner (whether before or after dissolution
of the Partnership) instead shall be paid to the Non-Defaulting Limited Partner
until the outstanding principal balance of such loan and all accrued unpaid
interest thereon shall have been paid in full to the Non-Defaulting Limited
Partner (with payments being applied first to accrued unpaid interest and then
to principal); and

 

(E)           the payment of the outstanding principal balance of such loan and
all accrued unpaid interest thereon shall be secured by a security interest in
the Defaulting Limited Partner’s Interests.

 

(iii)          exercise the rights of a secured party under the Uniform
Commercial Code of the State of Texas; or

 

(iv)          exercise any other rights and remedies available at law or in
equity.

 

5.4          Additional Advances by CWEI.

 

(a)           The Partnership shall enter into the Loan Facility to finance the
acquisition of the Drilling Rigs and to provide funding for other Loan Purposes.
The General Partner shall use all commercially reasonable efforts to timely
request and obtain Loan advances under the Loan Facility and shall apply the
proceeds of all Loan advances under the Loan Facility to acquire the Drilling
Rigs and for other Loan Purposes. If the General Partner reasonably determines
that Loan advances are not available under the Loan Facility to pay amounts due
or to become due and payable by the Partnership to acquire one or more Drilling
Rigs or that the proceeds of Loan advances available to the Partnership are not
sufficient to fully fund the payment of amounts due or to become due and payable
by the Partnership to acquire such Drilling Rigs, the General Partner shall send
written notice to this effect to the Limited Partners (a “Shortfall Notice”)
setting forth (i) the amount (the “Shortfall Amount”) by which the amount due or
to become due and payable by the Partnership to acquire such Drilling Rigs
exceeds the amount of Loan advances available to the Partnership under the Loan
Facility to fund the payment of such amounts and (ii) the date on which such
Shortfall Amount is payable by the Partnership. CWEI agrees to advance to the
Partnership cash in an amount equal to the Shortfall Amount on or before the
date for payment specified in the Shortfall Notice. Each advance of a Shortfall
Amount made by CWEI shall constitute a loan by CWEI to the Partnership, shall
bear interest at the Agreed Rate and shall not be a Capital Contribution.
Whenever and as soon as the Partnership is financially able to repay advances of
Shortfall Amounts previously made by

 

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CWEI pursuant to this Section 5.4 in compliance with the terms and conditions of
the Loan Facility, the General Partner shall use all commercially reasonable
efforts to do so, which may include requesting and obtaining Loan advances under
the Loan Facility for this purpose and applying the proceeds of such Loan
advances to repay CWEI. Lariat shall not be required to make advances to the
Partnership pursuant to this Section 5.4.

 

(b)           The General Partner shall not request a Loan advance under the
Loan Facility for any Loan Purpose other than to acquire Drilling Rigs if, after
giving effect to such Loan advance, there is a reasonable possibility that CWEI
could be required to advance Shortfall Amounts to fully fund the payment of
amounts due or to become due and payable by the Partnership to acquire Drilling
Rigs, it being understood and agreed by the Limited Partners that the General
Partner shall, to the fullest extent practicable, maintain and preserve the
availability of Loan advances under the Loan Facility and use the proceeds of
such Loan advance to acquire Drilling Rigs, even if this results in a
determination by the General Partner that Limited Partners make Required
Advances under Section 5.3 to fund the operations of the Partnership.

 

5.5          Capital Accounts.

 

(a)           Solely for federal and state income tax purposes, a separate
capital account (a “Capital Account”) will be maintained for each Partner. Each
Partner’s Capital Account will be increased by:  (i) the amount of money
contributed by such Partner to the Partnership; (ii) the Fair Market Value of
property contributed by such Partner to the Partnership (net of liabilities
secured by such contributed property that the Partnership is considered to
assume or take subject to under Section 752 of the Code); and (iii) allocations
to such Partner of Profits and other items of income and gain pursuant to the
Regulatory Allocations or the Curative Allocations. Each Partner’s Capital
Account will be decreased by:  (A) the amount of money distributed to such
Partner by the Partnership; (B) the Fair Market Value of property distributed to
such Partner by the Partnership (net of liabilities secured by such distributed
property that such Partner is considered to assume or take subject to under
Section 752 of the Code); and (iv) allocations to the account of such Partner of
Losses and other items of loss and deduction pursuant to the Regulatory
Allocations or the Curative Allocations.

 

(b)           In the event of a Transfer of Interests, the Capital Account of
the transferor shall become the Capital Account of the transferee to the extent
it relates to the transferred Interests in accordance with Section
1.704-l(b)(2)(iv) of the Treasury Regulations.

 

(c)           The manner in which Capital Accounts are to be maintained pursuant
to this Section 5.5 is intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder. If in
the opinion of the Partnership’s legal counsel the manner in which Capital
Accounts are to be maintained pursuant to the preceding provisions of this
Section 5.5 should be modified in order to comply with Section 704(b) of the
Code and the Treasury Regulations thereunder, then notwithstanding anything to
the contrary contained in the preceding provisions of this Section 5.5, the
method in which Capital Accounts are maintained shall be so modified; provided,
however, that any change in the manner of maintaining Capital Accounts shall not
materially alter the economic agreement and relative economic benefits between
or among the Partners.

 

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(d)           Except as otherwise required by the Limited Partnership Law, no
Partner shall have any liability to restore all or any portion of a deficit
balance in such Partner’s Capital Account.

 

5.6          Return of Capital Contribution.

 

No interest shall accrue on any Capital Contributions, and no Partner shall have
the right to withdraw or be repaid any Capital Contributions made by such
Partner except as expressly provided for herein.

 

5.7          GAAP Capital Accounts.  In addition to the Capital Account
established and maintained solely for federal and state income tax purposes
pursuant to Section 5.5, the Partnership shall establish and maintain a capital
account for each Partner, pursuant to generally accepted accounting principles
(a “GAAP Capital Account”). Profits and Losses for each Fiscal Year or other
period shall be allocated among the GAAP Capital Accounts in accordance with
generally accepted accounting principles.

 

ARTICLE 6
ALLOCATIONS

 

6.1          Allocations of Profits and Losses.  Subject to Section 6.2 and
Section 9.2, Profits and Losses for each Fiscal Year or other period shall be
allocated among the Partners, solely for federal and state income tax purposes,
in the following order and priority:

 

(a)           Profits shall be allocated as follows:

 

(i)            First, to the Partners in proportion to the deficit balances  (if
any) in their Capital Accounts, in an amount necessary to eliminate any deficits
in the Partners’ Capital Accounts and restore such Capital Accounts balances to
zero;

 

(ii)           Next, to the Partners, to the greatest extent possible, an amount
required to cause the positive Capital Account balances of each of the Partners
to be in the same proportion as are the Partners’ respective Ownership
Percentages; and

 

(iii)          Thereafter, to the Partners pro rata in proportion to their
respective Ownership Percentages.

 

(b)           Losses shall be allocated as follows:

 

(i)            First, to the Partners, to the greatest extent possible, an
amount required to cause the positive Capital Account balances to each of the
Partners to be in the same proportion as the Partner’s respective Ownership
Percentages;

 

(ii)           Next, to the Partners in proportion to the respective Capital
Account balances of the Partners until the Capital Account balance of each
Partner shall have been reduced to zero (0); and

 

(iii)          Thereafter, to the Partners pro rata in proportion to their
respective Ownership Percentages.

 

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6.2          Regulatory Allocations.  Solely for federal and state income tax
purposes, the following allocations shall be made in the following order:

 

(a)           Nonrecourse Deductions shall be allocated to the Partners in
accordance with their respective Ownership Percentages.

 

(b)           Partner Nonrecourse Deductions attributable to Partner Nonrecourse
Debt shall be allocated to the Partners bearing the Economic Risk of Loss for
such Partner Nonrecourse Debt as determined under Treasury Regulation Section
1.704-2(b)(4). If more than one Partner bears the Economic Risk of Loss for such
Partner Nonrecourse Debt, the Partner Nonrecourse Deductions attributable to
such Partner Nonrecourse Debt shall be allocated among the Partners according to
the ratio in which they bear the Economic Risk of Loss. This Section 6.2(b) is
intended to comply with the provisions of Treasury Regulation Section 1.704-2(i)
and shall be interpreted consistently therewith.

 

(c)           Notwithstanding any other provision hereof to the contrary, if
there is a net decrease in Minimum Gain for a taxable year (or if there was a
net decrease in Minimum Gain for a prior taxable year and the Partnership did
not have sufficient amounts of income and gain during prior years to allocate
among the Partners under this Section 6.2(c)), items of income and gain shall be
allocated to each Partner in an amount equal to such Partner’s share of the net
decrease in such Minimum Gain (as determined pursuant to Treasury Regulation
Section 1.704-2(g)(2)). This Section 6.2(c) is intended to constitute a minimum
gain chargeback under Treasury Regulation Section 1.704-2(f) and shall be
interpreted consistently therewith.

 

(d)           Notwithstanding any provision hereof to the contrary except
Section 6.2(c) (dealing with Minimum Gain), if there is a net decrease in
Partner Nonrecourse Debt Minimum Gain for a taxable year (or if there was a net
decrease in Partner Nonrecourse Debt Minimum Gain for a prior taxable year and
the Partnership did not have sufficient amounts of income and gain during prior
years to allocate among the Partners under this Section 6.2(d), items of income
and gain shall be allocated to each Partner in an amount equal to such Partner’s
share of the net decrease in Partner Nonrecourse Debt Minimum Gain (as
determined pursuant to Treasury Regulation Section 1.704-2(i)(4)). This Section
6.2(d) is intended to constitute a partner nonrecourse debt minimum gain
chargeback under Treasury Regulation Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.

 

(e)           Notwithstanding any provision hereof to the contrary except
Section 6.2(c) and Section 6.2(d) (dealing with Minimum Gain and Partner
Nonrecourse Debt Minimum Gain), a Partner who unexpectedly receives an
adjustment, allocation or distribution described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) shall be allocated items of income and gain
(consisting of a pro rata portion of each item of income, including gross
income, and gain for the taxable year) in an amount and manner sufficient to
eliminate any deficit balance in such Partner’s Adjusted Capital Account as
quickly as possible. This Section 6.2(e) is intended to constitute a qualified
income offset under Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall
be interpreted consistently therewith.

 

(f)            In the event that any Partner has a negative Adjusted Capital
Account at the end of any taxable year, such Partner shall be allocated items of
Partnership income and gain in the amount of such deficit as quickly as
possible; provided that an allocation pursuant to this

 

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Section 6.2(f) shall be made only if and to the extent that such Partner would
have a negative Adjusted Capital Account after all other allocations provided
for in this Section 6.2(f) have been tentatively made as if Section 6.2(e) and
this Section 6.2(f) were not in this Agreement.

 

(g)           To the extent an adjustment to the adjusted tax basis of any
Partnership properties pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(2) or
1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts
as the result of a distribution to any Partner in complete liquidation of such
Partner’s Interests, the amount of such adjustment to Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis) and such gain or loss shall be
allocated to the Partners in accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(m)(2) if such Section applies, or to the Partner to whom such
distribution was made if Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(4)
applies.

 

6.3          Curative Allocations.  The Regulatory Allocations are intended to
comply with certain requirements of Treasury Regulations Sections 1.704-1(b) and
1.704-2. The Regulatory Allocations may affect the results which would be
inconsistent with the manner in which the Partners intend to divide Partnership
distributions. Accordingly, the General Partner is authorized to divide other
allocations of Profits, Losses, and other items among the Partners, to the
extent that they exist, so that the net amount of the Regulatory Allocations and
the Curative Allocations to each Partner is zero. The General Partner will have
discretion to accomplish this result in any reasonable manner that is consistent
with Code Section 704 and the related Treasury Regulations.

 

6.4          Income Tax Allocations.  All items of income, gain, loss and
deduction for Federal income tax purposes shall be allocated in the same manner
as the corresponding item of Profits and Losses is allocated, except as
otherwise provided in this Section 6.4.

 

(a)           In accordance with Code Section 704(c) and the applicable Treasury
Regulations thereunder, income, gain, loss, and deduction with respect to any
property contributed to the Partnership shall, solely for tax purposes, be
allocated among the Partners so as to take account of any variation between the
adjusted basis of such property to the Partnership for federal income tax
purposes and its initial Book Value. In the event the Book Value of any property
is adjusted pursuant to clause (b) or (d) of the definition of Book Value,
subsequent allocations of income, gain, loss, and deduction with respect to such
property shall take account of any variation between the adjusted basis of such
property for federal income tax purposes and its Book Value in the same manner
as under Code Section 704(c) and the applicable Regulations thereunder.

 

(b)           Any (i) recapture of depreciation, depletion, intangible drilling
costs or any other item of deduction shall be allocated, in accordance with
Treasury Regulations Sections 1.1245-1(e) and 1.1254-5, to the Partners who
received the benefit of such deductions (taking into account the effect of
remedial allocations), and (ii) recapture of credits shall be allocated to the
Partners in accordance with applicable law.

 

(c)           Allocations pursuant to this Section 6.4 are solely for purposes
of federal, state, and local taxes and shall not affect, or in any way be taken
into account in computing, any

 

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Partner’s Capital Account or share of Profits, Losses, other items or
distributions pursuant to any provision of this Agreement.

 

6.5          Other Allocation Rules.

 

(a)           All items of income, gain, loss, deduction and credit allocable to
an interest in the Partnership that may have been transferred shall be allocated
between the transferor and the transferee based on the portion of the calendar
year during which each was recognized as the owner of such interest, without
regard to the results of Partnership operations during any particular portion of
that calendar year and without regard to whether cash distributions were made to
the transferor or the transferee during that calendar year; provided, however,
that this allocation must be made in accordance with a method permissible under
Code Section 706 and the regulations thereunder.

 

(b)           The Partners’ proportionate shares of the “excess nonrecourse
liabilities” of the Partnership, within the meaning of Treasury Regulation
Section 1.752-3(a)(3), shall be determined in accordance with their Ownership
Percentages.

 

ARTICLE 7

DISTRIBUTIONS

 

7.1          Distributions.  Subject to Sections 5.3(b)(ii)(D) and 9.2, all
Distributable Property of the Partnership and any or all other property of the
Partnership shall be distributed at such time or times (if any) as the General
Partner determines in its sole discretion to the Partners in the following order
and priority:

 

(a)           First, to the Partners to the extent of and in proportion to the
Unreturned Capital Contribution Balance of each Partner until the Unreturned
Capital Contribution Balance of each Partner has been reduced to zero; and

 

(b)           Thereafter, to the Partners pro rata in proportion to the
respective Ownership Percentages.

 

ARTICLE 8
BOOKS, RECORDS AND BANK ACCOUNTS

 

8.1          Maintenance of Books.  The books of account for the Partnership
shall be maintained on an accrual basis in accordance with the terms of this
Agreement, except that the Capital Accounts of the Partners shall be maintained
in accordance with Section 5.5 and the GAAP Capital Accounts shall be maintained
in accordance with generally accepted accounting principles. The accounting year
of the Partnership shall be the calendar year.

 

8.2          Accounts.  The General Partner shall establish and maintain one or
more separate bank and investment accounts and arrangements for Partnership
funds in the Partnership name with financial institutions and firms that the
General Partner determines.

 

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ARTICLE 9
DISSOLUTION, LIQUIDATION AND TERMINATION

 

9.1          Dissolution.  The Partnership shall dissolve and its business and
affairs shall be wound up upon the occurrence of any dissolution event specified
in the Limited Partnership Law or upon the election of the General Partner
pursuant to the terms of the GP LLC Agreement; provided, that in no event shall
the Partnership be dissolved prior to payment of 50% of the Financing
Obligation.

 

9.2          Liquidation and Termination.  Upon dissolution of the Partnership,
the General Partner shall act as liquidator and shall liquidate the Partnership
in accordance with the terms of this Agreement, the GP LLC Agreement and the
Limited Partnership Law. The General Partner shall proceed to wind up the
affairs of the Partnership and make final distributions as provided in this
Agreement. The costs of liquidation shall be borne as a Partnership expense. The
General Partner shall use commercially reasonable efforts to distribute
Partnership Property in kind to the Partners, including, without limitation, the
distribution of the Drilling Rigs to the Partners. The steps to be accomplished
by the liquidator are as follows:

 

(a)           As promptly as practicable after dissolution and again after final
liquidation, the General Partner shall cause a proper accounting to be made of
the Partnership’s assets, liabilities and operations through the last day of the
calendar month in which the dissolution occurs or the final liquidation is
completed, as applicable; and

 

(b)           The General Partner shall proceed to sell and assign Partnership
Property at such prices and on such terms as the General Partner, in the
exercise of prudent business judgment under the circumstances then presented,
deems in the best interest of all of the Partners. Except as may be otherwise
required by law and as set forth in Section 5.3(b)(ii)(D), the proceeds of any
sale of Partnership Property and all Partnership cash shall be distributed in
the following order:

 

(i)            First, there shall be distributed to Partnership creditors
(including Partners who are creditors as a result of making Required Advances
under Section 5.3, Section 5.4 or otherwise, to the extent otherwise permitted
by law) funds, to the extent same are available, sufficient to extinguish
Partnership liabilities and obligations, including the cost and expense of
liquidation (whether by payment or the making of reasonable provision for
payment thereof), other than liabilities for which reasonable provision for
payment has been made and liabilities for distributions to Partners under
Sections 153.110, 153.158 and 153.209 of the Limited Partnership Law;

 

(ii)           Thereafter, any gains or losses attributable to the disposition
of the assets and properties of the Partnership and any operating income or loss
for the year shall be allocated among the Partners to the greatest extent
possible to cause each Partner’s Capital Account to be equal the amount
distributable to such Partner pursuant in this Section 9.2, and subsequent to
the distributions made under subparagraphs (b)(i) above, the remaining amounts
of undistributed proceeds, if any, shall be distributed to the Partners in
accordance with the provisions of Section 7.1.

 

In the event the allocations of income, gain, loss and deductions pursuant to
Section 6.1 through 6.5 are reallocated among the Partners by the Internal
Revenue Service for any reason, such

 

20

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reallocation shall have no effect on the distributions to the Partners pursuant
to this Section 9.2. In the event of a deferred payment sale of any Partnership
property or asset, interest payable by the purchaser shall not be considered to
be proceeds of the sale but shall be distributed to the persons having an
interest in the unpaid portion of the purchase price in accordance with their
respective interests in such amount. The General Partner will use commercially
reasonable efforts to distribute all Partnership property and assets in kind and
the number or amount of property and assets each Partner is entitled to receive
shall be determined under this Section 9.2 by reference to Section 9.3; provided
that the General Partner may vary the amount or number of each particular piece
of Partnership Property a Partner is entitled to receive, or place such
Partnership Property in a liquidating trust, in order to effect a more
reasonable and equitable distribution of such properties and assets among the
Partners in accordance with their overall interests in all properties and assets
to be distributed.

 

9.3          Distributions in Kind.  In the event that the General Partner
determines to distribute Partnership Property to the Partners in kind, such
distribution shall be made and the number or amount of Drilling Rigs or other
Partnership Property to be received by each Partner shall be determined in the
manner provided by Section 7.1 as if the distribution were a distribution of
cash to the extent of the Fair Market Value of such Drilling Rigs of other
Partnership Property as of the date of distribution. The Partner’s Capital
Accounts shall be adjusted to reflect the manner in which the unrealized income,
gain, loss and deduction inherent in such Drilling Rigs or other Partnership
Property (that has not been previously reflected in Capital Accounts) would be
allocated among the Partners if there were a taxable disposition of such
Drilling Rigs or other Partnership Property for the Fair Market Value thereof on
the date of distribution, followed by a decrease in the Partner’s Capital
Accounts as if the distribution were a distribution of cash to the extent of the
Fair Market Value of such Drilling Rigs or other Partnership Property on the
date of distribution. It is acknowledged by the Partners that additional Capital
Contributions by the Partners may be necessary in order to allow a reasonable
and equitable distribution of the Partnership Property.

 

9.4          Deemed Liquidation.  In the event the Partnership is liquidated
within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g) but a
distribution of the Partnership’s assets is not otherwise required pursuant to
this Section 9, the Partnership assets shall not be distributed to the Partners.
Instead, the Partnership shall be deemed to have distributed its assets in kind
to the Partners, who shall be deemed to have assumed and taken subject to all
Partnership liabilities, all in accordance with their respective Capital Account
balances. Immediately thereafter, the Partners shall be deemed to have
recontributed such assets in kind to the Partnership, which shall be deemed to
have assumed and taken subject to all such liabilities.

 

9.5          Termination.  On completion of the distribution of Partnership
assets as provided in this Agreement, the Partnership is terminated, and the
General Partner (or such other Person or Persons as the Limited Partnership Law
may require or permit) shall cause the cancellation of the Certificate and any
filings made as provided in Section 2.5 and shall take such other actions as may
be necessary to terminate the Partnership.

 

21

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ARTICLE 10
RESTRICTIONS ON TRANSFERS

 

10.1        Restrictions on Transfer.  A Limited Partner may Transfer its
Interest, in whole or in part, only if:

 

(a)           except to the extent such opinion is waived in whole or in part by
the General Partner, in its sole discretion, the Partnership obtains an opinion
of counsel of the Partnership or an opinion of counsel for such transferor
satisfactory to the General Partner to the effect that (i) the Transfer may be
made without registration under the Securities Act; (ii) such Transfer complies
with applicable state securities and blue sky laws; (iii) such Transfer will not
subject the Partnership to registration as an “investment company” or election
as a “business development company” under the Investment Company Act, or subject
the General Partner or the Partnership to registration as an “investment
adviser” under the Investment Advisers Act of 1940, as amended; and (iv) such
Transfer will not cause the dissolution of the Partnership or lead to the
classification of the Partnership as an association taxable as a corporation for
federal income tax purposes;

 

(b)           the transferee furnishes to the General Partner a written
confirmation, in form and substance satisfactory to the General Partner and its
counsel, executed by the transferee making each of the representations and
agreements of a Limited Partner contained in this Agreement, including but not
limited to the grant of a power of attorney to the General Partner in accordance
with Section 11.13, and agreeing to be bound by the terms and provisions hereof;

 

(c)           after giving effect to such Transfer, less than 50% of the
aggregate interests in Partnership profits and capital will have been sold or
exchanged (within the meaning of Code Section 708) within the preceding 12-month
period and the Transfer will not otherwise cause a termination of the
Partnership for tax purposes;

 

(d)           except in the case of a transfer by a Limited Partner to a
Permitted Transferee, in which case no consent shall be required (provided that
the Transfer meets the other requirements of this Section 10.1 and that
admission of the transferee as an additional or substituted Limited Partner
remains at the sole discretion of the General Partner), the General Partner
gives its written consent to such Transfer, (the General Partner may consent to
the Transfer without consenting to the admission of the transferee as an
additional or substituted Limited Partner);

 

(e)           the Selling Partner (defined below) has complied with the
provisions of Section 10.2;

 

(f)            the transferee has paid all costs and expenses incurred by the
Partnership in connection with such Transfer; and

 

(g)           the General Partner has not determined, in its sole discretion,
that such Transfer will either cause the Partnership to be characterized as a
“publicly traded partnership” or will materially increase the risk that the
Partnership will be so characterized. For purposes of this paragraph the phrase
“publicly traded partnership” shall have the meanings set forth in Section
7704(b) and 469(k) of the Code. In particular and without limiting the
foregoing, no Transfer shall be permitted, given effect or otherwise recognized,
and such Transfer (or purported Transfer) shall be void ab initio, if at the
time of such Transfer interests in the Partnership are

 

22

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traded on an “established securities market” (within the meaning of Treasury
Regulation Section 1.7704-1(b)) or are “readily tradeable on a secondary market
or the equivalent thereof” (within the meaning of Treasury Regulation Section
1.7704-1(c)).

 

If and when all the foregoing conditions to Transfer are satisfied and the
General Partner consents to the admission of the transferee as a Limited
Partner, which consent may be withheld in the sole discretion of the General
Partner, the transferee shall become an additional or substituted Limited
Partner as to the Interest or part thereof so transferred. In accordance with
Section 153.253(b) of the Limited Partnership Law, such transferee, if admitted
to the Partnership, will have the rights and powers and will be subject to the
restrictions and liabilities of a Limited Partner under this Agreement and under
the Limited Partnership Law. For purposes of this Agreement the transferee shall
be treated as (i) having made previous Capital Contributions to the Partnership
equal to the previous Capital Contributions by the Selling Partner that
correspond to the Interest or part thereof Transferred and (ii) having an
Unreturned Capital Contribution Balance equal to the Unreturned Capital
Contribution Balance of the Selling Partner that correspond to the Interest or
part thereof Transferred. Regardless of whether such substitution actually
occurs, however, the Selling Partner whose Interest or part thereof is
Transferred, voluntarily or involuntarily, shall be and remain obligated for the
performance and payment of any and all obligations incurred, if any, by such
Selling Partner prior to the date of such Transfer. All costs incurred in
connection with any proposed Transfer, including without limitation fees and
disbursements for counsel to the Partnership or the General Partner, shall be
borne by the Limited Partner proposing such Transfer.

 

10.2        Right of First Refusal on Transfer of Interests.

 

(a)           Whenever and as often as any Limited Partner or Permitted
Transferee desires to Transfer any Interests pursuant to a bona fide written
offer to purchase such Interests, such Limited Partner (the “Selling Partner”)
shall give written notice (the “Notice”) to each other Limited Partner (the
“Offeree”) to such effect, enclosing a copy of such offer and specifying the
Interests that the Selling Partner desires to Transfer, the name of the person
or persons to whom the Selling Partner desires to make such sale and the
consideration for the Interests that has been offered in connection with such
offer. Upon receipt of the Notice, the Offeree initially shall have the first
right and option to purchase the Interests proposed to be transferred for cash
at the purchase price specified in the Notice, exercisable for 20 business days
after receipt of the Notice. Failure of the Offeree to respond to such Notice
within such 20-day period shall be deemed to constitute a notification to the
Selling Partner of the Offeree’s decision not to exercise the first right and
option to purchase such Interests under this Section 10.2. In the event such
consideration includes non-cash consideration, the dollar value of such non-cash
consideration shall be its Fair Market Value.

 

(b)           The Offeree may exercise its right and option to purchase such
Interests by giving written notice of exercise to the Selling Partner within
such 20-day period, specifying the date (not later than five business days after
the date of such notice) upon which payment of the purchase price for the
Interests shall be made. The Selling Partner shall deliver to the Offeree’s
principal office, on or before the payment date specified in such notice,
document(s) effectuating the transfer of the Interests being purchased by the
Offeree, against payment of the purchase price therefor by the Offeree in
immediately available funds.

 

23

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(c)           If all of the Interests proposed to be transferred are not
purchased by the Offeree in accordance with this paragraph, the Selling Partner
shall not be required to sell any of the Interests proposed to be transferred to
the Offeree, and during the 30-day period commencing on the expiration of the
rights and options provided for in this paragraph, may sell all (but not less
than all) of such Interests to the transferee named in the Notice for
consideration equal to or greater than the consideration specified in the
Notice.

 

(d)           No Transfer of any Interests otherwise permitted by this Section
10.2 (including Permitted Transfers) shall be made unless simultaneously with
such transfer of Interests to a Transferee, the Selling Partner transfers to
such Transferee an equal number of GP LLC Interests owned by such Selling
Partner.

 

(e)           The provisions of this Section 10.2 shall not apply to any
Permitted Transfer by a Limited Partner or a Permitted Transferee.

 

10.3        Rights of Transferees.  Unless and until any assignee, transferee,
legal representative or successor in interest of a Limited Partner becomes a
substituted Limited Partner in accordance with Section 10.1, its status and
rights shall be limited to the rights of an assignee of a limited partnership
interest under Section 153.251(b) of the Limited Partnership Law.

 

ARTICLE 11
GENERAL PROVISIONS

 

11.1        Offset.  Any amounts owed by a Partner to the Partnership or the
General Partner or its Affiliates may be deducted from any payments or
distributions required to be made by the Partnership hereunder.

 

11.2        Notices.  All notices, requests or consents required or permitted to
be given under this Agreement must be in writing and shall be considered as
properly given if mailed by first class United States mail, postage paid, and
registered or certified with return receipt requested, or if delivered to the
recipient in person, by courier or by facsimile transmission. Notices, requests
and consents shall be sent to a Limited Partner at the address shown on its
Signature Page for Limited Partners. A Limited Partner may change its address by
giving written notice to the General Partner. Any notice, request or consent to
the Partnership or to the General Partner shall be sent to the General Partner
at its principal place of business, to the attention of the Chief Executive
Officer.

 

11.3        Entire Agreement.  This Agreement and the Letter Agreement set forth
the entire understanding and agreement of the Partners relating to the subject
matter hereof and thereof and supersede all prior contracts or agreements,
whether oral or written, between the Partners with respect thereto. In case of
any conflict between any provision of this Agreement and the Letter Agreement,
the terms of this Agreement shall prevail.

 

11.4        Effect of Waiver or Consent.  A waiver or consent, express or
implied, to or of any breach or default by any Person in the performance by that
Person of its obligations with respect to the Partnership is not a consent or
waiver to or of any other breach or default in the performance by that Person of
the same or any other obligations of that Person with respect to the
Partnership. Failure on the part of a Person to complain of any act of any
Person or to declare any Person in default with respect to the Partnership,
irrespective of how long that failure

 

24

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continues, does not constitute a waiver by that Person of its rights with
respect to that default until the applicable statute of limitations period has
run.

 

11.5        Amendment or Modification.

 

(a)           Except as otherwise provided in this Section 11.5, any amendment
to this Agreement must be proposed by the General Partner and approved in
writing by the General Partner and all of the Limited Partners to be effective.

 

(b)           The General Partner may amend this Agreement without the consent
of any Limited Partner (i) to remove or correct any inconsistency, ambiguity or
error contained herein, provided that such amendment does not materially and
adversely affect the Limited Partners, or (ii) to reflect any Transfer of
Interests pursuant to Article 10.

 

11.6        Binding Effect.  Subject to the restrictions on Transfers set forth
in this Agreement, this Agreement is binding on and inures to the benefit of the
Partners and their respective successors and permitted assigns.

 

11.7        Governing Law; Jurisdiction and Venue.  THIS AGREEMENT IS GOVERNED
BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS,
EXCLUDING ANY CONFLICT OF LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE
OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION.

 

11.8        Severability.  If any provision of this Agreement or its application
to any Person or circumstance is held invalid or unenforceable to any extent,
the remainder of this Agreement and the application of that provision to other
Persons or circumstances is not affected and that provision shall be enforced to
the fullest extent permitted by law.

 

11.9        Further Assurances.  In connection with this Agreement and the
transactions contemplated by it, each Partner shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.

 

11.10      Waiver of Certain Rights.  Except for the General Partner, each
Partner irrevocably waives any right it may have to maintain any action for
dissolution of the Partnership or for partition of the property of the
Partnership.

 

11.11      Insurance.  The Partnership may purchase and maintain insurance or
enter into other arrangements on behalf of the Partnership, the General Partner
or any other Person who is or was a “general partner,” as defined in the Limited
Partnership Law, or a Limited Partner, who is or was serving at the request of
the Partnership or the General Partner as a “representative,” as defined in the
Limited Partnership Law, of any other enterprise, against any liability asserted
against the Person and incurred by the Person in that capacity or arising out of
the Person’s status in that capacity, regardless of whether the Partnership
would have the power to indemnify the Person against that liability under this
Agreement or the Limited Partnership Law. In the absence of actual fraud, the
judgment of the General Partner as to the terms and conditions of the insurance
or other arrangement and the identity of the insurer or other Person
participating in an arrangement shall be conclusive, and the insurance or other
arrangement shall not be voidable

 

25

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and shall not subject the General Partner approving the insurance or other
arrangement to liability, on any ground, regardless of whether the General
Partner will be a beneficiary.

 

11.12      Indemnification.

 

(a)           The Partnership agrees to indemnify and hold harmless the General
Partner, its Affiliates, and their respective officers, directors, partners,
members, managers, employees and agents (each, an “Indemnified Person”), only
out of Partnership funds and other Partnership Property, to the fullest extent
permitted by the Limited Partnership Law, from and against all losses, costs,
liabilities, damages, and expenses (including, without limitation, costs of suit
and attorneys’ fees) paid or incurred in connection with or resulting from any
and all claims, actions or demands against such Indemnified Person that arise
out of or in any way relate to or are incidental to the Partnership, the
Partnership Property or the business or affairs of the Partnership; provided,
however, that this indemnity shall not extend to any bad faith, willful
misconduct, gross negligence or deliberate or intentional breach of any material
provision of this Agreement by such Indemnified Person. THE PARTIES INTEND THAT
THE INDEMNIFIED PERSONS BE INDEMNIFIED PURSUANT TO THIS AGREEMENT FROM LIABILITY
FOR THEIR OWN SOLE, PARTIAL OR CONCURRENT NEGLIGENCE.

 

(b)           The indemnification rights contained in this Section 11.12 shall
be cumulative of and in addition to any and all other rights, remedies and
recourses to which any Indemnified Person or their respective heirs, personal
representatives, successors and assigns shall be entitled, whether pursuant to
some other provisions of this Agreement, at law or in equity.

 

(c)           The Partnership shall advance to any Indemnified Person all
reasonable fees, costs and expenses (including attorneys’ fees and related
costs), of defending any claim, action or demand that arises out of or in any
way relates to or is incidental to the Partnership, the Partnership Property,
business or affairs; provided, that such Indemnified Person agrees in writing to
repay to the Partnership all such advances in the event that it is finally
determined that such Indemnified Person is not entitled to indemnification
hereunder with respect to such claim, action or demand.

 

(d)           All damages awarded by any court or paid in settlement in
connection with any action in the nature of a derivative action shall be paid to
the Partnership by the Person bringing such action. As used herein, derivative
action shall mean an action brought by a Limited Partner on behalf of the
Partnership.

 

11.13      Power of Attorney.  By the execution of this Agreement, each Limited
Partner does irrevocably constitute and appoint the General Partner, with full
power of substitution, as true and lawful attorney-in-fact and agent with full
power and authority to act in such Limited Partner’s name, place and stead and
to execute, file and record the Certificate as required under the Limited
Partnership Law and to execute all other documents which such attorney-in-fact
deems necessary or reasonably appropriate:

 

(a)           to qualify or continue the Partnership as a limited partnership in
the State of Texas and in all jurisdictions in which the Partnership may or
intends to conduct business or own property;

 

26

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(b)           to reflect a change in the identity of any Limited Partner or the
admission of additional Partners pursuant to this Agreement;

 

(c)           to reflect any modification or amendment of this Agreement;

 

(d)           to reflect any Transfer of Interests pursuant to Article 10;

 

(e)           to reflect the dissolution and termination of the Partnership; or

 

(f)            to comply with applicable assumed name laws.

 

11.14      Counsel to the Partnership.  Counsel to the Partnership may also be
counsel to the General Partner. The General Partner may execute on behalf of the
Partnership any consent to the representation of the Partnership that counsel
may request pursuant to the rules of professional conduct or similar rules in
any other jurisdiction. The Partnership has selected Vinson & Elkins L.L.P.
(“Partnership Counsel”) as legal counsel to the Partnership. Each Limited
Partner acknowledges that Partnership Counsel does not represent any Limited
Partner in its capacity as a Limited Partner in the absence of a clear and
explicit agreement in writing to such effect between the Limited Partner and
Partnership Counsel (and then only to the extent specifically set forth in such
agreement) and that, in the absence of any such written agreement, Partnership
Counsel shall owe no duties directly to a Limited Partner. Each Limited Partner
further acknowledges that, whether or not Partnership Counsel has in the past
represented or is currently representing such Limited Partner with respect to
other matters, Partnership Counsel has not represented the interests of any
Limited Partner in the preparation and negotiation of this Agreement.

 

11.15      Taxation as a Partnership.  The General Partner and each Limited
Partner (in their respective capacities as such) agree that such Partners shall
not undertake any action, including (without limitation) making regular bid or
offer quotes to buy or sell interests or derivative interests in the
Partnership, that will cause the Partnership to be, or create a substantial risk
that the Partnership will be treated as, a “publicly traded partnership” with
the meaning of Sections 469 or 7704 of the Code. The General Partner (in its
capacity as such) further agrees that, at the expense of the Partnership, it
shall use commercially reasonable efforts to avoid taking any actions and to bar
the undertaking of any activity of which it has knowledge, including (without
limitation) the public quotation of regular offers to buy or sell interests or
derivative interests in the Partnership, that will cause the Partnership to be,
or create a substantial risk that the Partnership will be treated as, a
“publicly traded partnership” within the meaning of Section 469 or 7704 of the
Code. The General Partner will not admit a Partner or consent to the Transfer of
a Partner’s Interest if that admission or transfer would result in the
Partnership having more than 100 Limited Partners.

 

11.16      Counterparts.  This Agreement may be executed in any number of
counterparts (including by facsimile transmission) with the same effect as if
all signing parties had signed the same document. All counterparts shall be
construed together and constitute the same instrument.

 

[Signature Pages Follow]

 

27

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IN WITNESS WHEREOF, the parties have executed this Partnership Agreement as of
the Effective Date.

 

 

GENERAL PARTNER:

 

 

 

LARCLAY GP, LLC

 

 

 

 

 

 

 

By:

/s/ Michael L. Pollard

 

 

 

Michael L. Pollard

 

 

Manager

 

B-1

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SIGNATURE PAGE FOR LIMITED PARTNER

 

The undersigned, desiring to become a limited partner in Larclay, L.P., a Texas
limited partnership (“Partnership”), does hereby agree to all the terms and
provisions of the Agreement of Limited Partnership of the Partnership,
including, without limitation, the power of attorney set forth in Section 11.13
thereof.

 

Date: April 21, 2006

CLAYTON WILLIAMS ENERGY, INC.

 

 

 

 

 

By:

/s/ Mel G. Riggs

 

 

 

Mel G. Riggs

 

 

Senior Vice President and Chief
Financial Officer

 

B-2

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

 

SIGNATURE PAGE FOR LIMITED PARTNER

 

The undersigned, desiring to become a limited partner in Larclay, L.P., a Texas
limited partnership (“Partnership”), does hereby agree to all the terms and
provisions of the Agreement of Limited Partnership of the Partnership,
including, without limitation, the power of attorney set forth in Section 11.13
thereof.

 

Date: April 21, 2006

LARIAT SERVICES, INC.

 

 

 

 

 

By:

 

/s/ N. Malone Mitchell

 

 

Name:

N. Malone Mitchell

 

Title:

President

 

B-3

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

 

EXHIBIT A

 

Schedule of Partners

 

 

 

Initial

 

Ownership

 

Partners

 

Capital Contributions

 

Percentage

 

 

 

 

 

 

 

Larclay GP, LLC

 

$

10,000.00

 

1

%

CWEI

 

$

495,000.00

 

49.5

%

Lariat

 

$

495,000.00

 

49.5

%

 

 

 

 

 

 

 

 

$

1,000,000.00

 

100

%

 

B-4

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