THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

This Third Amendment to Amended and Restated Credit Agreement (hereinafter
referred to as the “Amendment”) executed as of June 30, 2006, by and among
Clayton Williams Energy Inc., a Delaware corporation (“CWEI”), Southwest
Royalties, Inc. (successor by merger to CWEI-SWR, Inc.), a Delaware corporation
(“SWR”, and together with CWEI and each of their respective successors and
permitted assigns, the “Borrowers” and each a “Borrower”), Warrior Gas Co., a
Texas corporation (“Warrior”), CWEI Acquisitions, Inc. a Delaware corporation
(“CWEI Acquisitions”), Romere Pass Acquisition L.L.C., a Delaware limited
liability company (“Romere”), CWEI Romere Pass Acquisition Corp., a Delaware
corporation (“Romere Corp”), Blue Heel Company, a Delaware corporation (“Blue
Heel”), and Tex-Hal Partners, Inc., a Delaware corporation (“Tex-Hal,” and
together with Warrior, CWEI Acquisitions, Romere, Romere Corp and Blue Heel and
each of their successors and permitted assigns, the “Guarantors” and each a
“Guarantor”), JPMorgan Chase Bank, N.A. (successor by merger to Bank One, N.A.
(Illinois)), a national banking association (“JPMorgan Chase”), each of the
financial institutions which is a party hereto (as evidenced by the signature
pages to this Amendment) or which may from time to time become a party to the
Agreement pursuant to the provisions of Section 14.3 thereof or any successor or
permitted assignee thereof (hereinafter collectively referred to as “Lenders”,
and individually, “Lender”), JPMorgan Chase, as Administrative Agent (in its
capacity as Administrative Agent and together with its successors in such
capacity, “Administrative Agent”). Capitalized terms used but not defined in
this Amendment have the meanings assigned to such terms in that certain Amended
and Restated Credit Agreement dated as of May 21, 2004, by and among Borrowers,
Guarantors, Administrative Agent and Lenders (as amended, supplemented or
otherwise modified from time to time, the “Agreement”).

WITNESSETH:

WHEREAS, the Borrowers and the Guarantors have requested, among other things,
that the Administrative Agent and the Lenders amend the Agreement to
(i) increase the Borrowing Base to $200,000,000, (ii) increase the maximum
permitted amount of LC Obligations to $25,000,000, (iii) permit the use of
proceeds of the Loans to acquire, construct and operate drilling rigs and
related drilling equipment and (iv) extend the Facility Termination Date; and
the Administrative Agent and the Lenders (or at least the requisite percentage
thereof)  have agreed to do so on the terms and conditions hereinafter set
forth; and

NOW, THEREFORE, for and in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, the Borrowers, the
Guarantors, the Administrative Agent and the Lenders, hereby agree as follows:

SECTION 1.   Amendments to the Agreement. Subject to the satisfaction or waiver
in writing of each condition precedent set forth in Section 3 hereof, and in
reliance on the representations, warranties, covenants and agreements contained
in this Amendment, the Agreement shall be amended in the manner provided in this
Section 1.

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1.1   Amended Definitions.  Article I   of the Agreement shall be and it hereby
is amended by amending and restating the following definitions to read in their
entirety as follows:

“Facility Termination Date” means May 21, 2009.

“Larclay” means, collectively, Larclay GP and Larclay LP and its Subsidiaries.

“Permitted Liens”  means (i) royalties, overriding royalties, reversionary
interests, production payments and similar burdens granted by any Credit Party
or Related Partnership with respect to the Oil and Gas Interests owned by such
Credit Party or Related Partnership, as the case may be, if the net cumulative
effect of such burdens does not operate to deprive any Credit Party or any
Related Partnership of any material right in respect of its assets or properties
(except for rights customarily granted with respect to such interests);
(ii) statutory Liens, including Liens for taxes or other assessments that are
not yet delinquent (or that, if delinquent, are being contested in good faith by
appropriate proceedings and for which a Credit Party, or a Related Partnership,
as the case may be, has set aside on its books adequate reserves in accordance
with Agreement Accounting Principles); (iii) easements, rights of way,
servitudes, permits, surface leases and other rights in respect to surface
operations, pipelines, grazing, logging, canals, ditches, reservoirs or the
like, conditions, covenants and other restrictions, and easements of streets,
alleys, highways, pipelines, telephone lines, power lines, railways and other
easements and rights of way on, over or in respect of any Credit Party’s or
Related Partnership’s assets or properties; (iv) materialmen’s, mechanic’s,
repairman’s, employee’s, contractor’s, sub-contractor’s, operator’s and other
Liens incidental to the construction, maintenance, development or operation of
any Credit Party’s or any Related Partnership’s assets or properties to the
extent not delinquent (or which, if delinquent, are being contested in good
faith by appropriate proceedings and for which such Credit Party or such Related
Partnership has set aside on its books adequate reserves in accordance with
Agreement Accounting Principles); (v) all contracts, agreements and instruments,
and all defects and irregularities and other matters affecting any Credit
Party’s or any Related Partnership’s assets and properties which were in
existence at the time such Credit Party’s or such Related Partnership’s assets
and properties were originally acquired by a Credit Party or a Related
Partnership and all routine operational agreements entered into in the ordinary
course of business, which contracts, agreements, instruments, defects,
irregularities and other matters and routine operational agreements are not such
as to, individually or in the aggregate, interfere materially with the
operation, value or use of any Credit Party’s or any Related Partnership’s
assets and properties, considered in the aggregate; (vi) Liens in connection
with workmen’s compensation, unemployment insurance or other social security,
old age pension or public liability obligations; (vii) legal or equitable
encumbrances deemed to exist by reason of the existence of any litigation or
other legal proceeding or arising out of a judgment or award with respect to
which an appeal is being prosecuted in good faith; (viii) rights reserved to or
vested in any municipality, governmental, statutory or other public authority to
control or regulate any Credit Party’s or any Related Partnership’s assets and
properties in any manner, and all applicable laws, rules and orders from any
governmental authority; (ix) other Liens imposed by law, such as carriers’,
warehousemen’s and landlord’s liens and other similar liens arising in the

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ordinary course of business of a Credit Party or a Related Partnership which
secures payment of obligations not more than 60 days past due or which are being
contested in good faith by appropriate proceedings and for which adequate
reserves shall have been set aside on the books of such Credit Party or Related
Partnership; (x) Liens created by or pursuant to this Agreement or the
Collateral Documents; (xi) Liens existing at the date of this Agreement which
have been disclosed to the Lenders on Schedule 1.1(d) hereto; (xii) Liens to
secure Vendor Financings and (xiii) Liens to secure the Indebtedness permitted
pursuant to Section 8.11(vii); provided that, with respect to this clause (xiii)
only, the Property subject to such Liens is not Property of the Rig Subsidiary.

1.2   Additional Definitions. Article I   of the Agreement shall be and it
hereby is amended by adding the following definitions in the correct
alphabetical order:

“Larclay GP” means Larclay GP, LLC, a Texas limited liability company.

“Larclay LP” means Larclay, L.P., a Texas limited partnership.

“Rig Subsidiary” means a Subsidiary formed after the Third Amendment Effective
Date for the purpose of acquiring, constructing and operating drilling rigs and
related drilling equipment.

“Third Amendment Effective Date” means June 30, 2006.

1.3   Facility LCs. Section 2.19.1   of the Agreement shall be and it hereby is
amended in its entirety to read as follows:

2.19.1.   Issuance. The LC Issuer hereby agrees, on the terms and conditions set
forth in this Agreement, to issue standby and commercial letters of credit
(each, a “Facility LC”) and to renew, extend, increase, decrease or otherwise
modify each Facility LC (“Modify,” and each such action a “Modification”), from
time to time from and including the date of this Agreement and prior to the
Facility Termination Date upon the request of any Borrower Representative;
provided that immediately after each such Facility LC is issued or Modified,
(i) the aggregate amount of the outstanding LC Obligations shall not exceed
$25,000,000 and (ii) the Aggregate Outstanding Credit Exposure shall not exceed
the Borrowing Base. No Facility LC shall have an expiry date later than the
earlier of (x) the fifth Business Day prior to the Facility Termination Date and
(y) one year after its issuance (or in the case of any renewal or extension
thereof, one year after such renewal or extension).

1.4   Borrowing Base. Section 4.1   of the Agreement shall be and it hereby is
amended in its entirety to read as follows:

4.1.   Borrowing Base. The aggregate amount of credit available to the Borrowers
under this Agreement shall be limited by a Borrowing Base (herein so called)
which shall be determined by the Lenders at the times and in accordance with the
standards and procedures set forth in this Article IV. Subject to Section 4.2
hereof, during the period from the Third Amendment Effective Date to the first
Determination Date after the Third Amendment Effective Date, the Borrowing Base
shall be $200,000,000.

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1.5   Use of Proceeds. Section 8.2   of the Agreement shall be and it hereby is
amended in its entirety to read as follows:

8.2.   Use of Proceeds. The Borrowers will use the proceeds of the Credit
Extensions for (i) financing the SWR Acquisition, (ii) refinancing the
Indebtedness evidenced by the Existing Credit Agreements, (iii) financing the
exploration, development and/or acquisition of Oil and Gas Interests, related
and ancillary pipelines and related assets, (iv) the acquisition and
construction of drilling rigs and related drilling equipment in an aggregate
amount not to exceed $30,000,000 and (v) working capital and other general
corporate purposes.

1.6   Indebtedness. Section 8.11   of the Agreement shall be and it hereby is
amended by adding the following as clause (xii) of such section:

(xii)   Indebtedness of CWEI consisting of an unsecured guarantee of
Indebtedness for borrowed money of Larclay, in an aggregate amount at any time
outstanding not to exceed $19,500,000 (which guaranteed amount shall be
determined based on the maximum committed amount of the Indebtedness so
guaranteed).

1.7   Investments in the Rig Subsidiary.   Clause (iv) of Section 8.15 of the
Agreement shall be and it hereby is amended in its entirety to read as follows:

(iv)   Investments by any Credit Party consisting of intercompany Indebtedness
permitted under Section 8.11(v) and other Investments by any Credit Party in any
other Credit Party other than Capital Stock of any direct or indirect parent of
such Credit Party; provided, that the aggregate amount of Investments made by
the Credit Parties, taken as a whole, in the Rig Subsidiary shall not exceed
$30,000,000 in the aggregate.

1.8   Investments and Acquisitions.   Clause (viii) of Section 8.15 of the
Agreement shall be and it hereby is amended in its entirety to read as follows:

(viii)   (a) Prior to the Third Amendment Effective Date, Investments by CWEI in
the Drilling Venture, including loans, advances or other extensions of credit to
Lariat; provided that the amount of such Investments made pursuant to this
clause (viii)(a) of Section 8.15 does not exceed in the aggregate, $20,000,000
and the proceeds of such Investments are used by Lariat to make deposits on
drilling rigs and related equipment to be acquired by Larclay or Larclay’s
Subsidiaries and by Larclay or Larclay’s Subsidiaries to acquire, own, operate
and maintain drilling rigs and related equipment or pay Indebtedness incurred by
Larclay in connection with the acquisition ownership, operation and maintenance
of such drilling rigs and related equipment and (b) on and after the Third
Amendment Effective Date, Investments by CWEI in Larclay provided that the
amount of such Investments made pursuant to this clause (viii)(b) of
Section 8.15 does not exceed in the aggregate $3,000,000 at any time (and for
the avoidance of doubt, amounts drawn under letters of credit issued for the
account of Larclay and amounts paid under guarantees by any Credit Party of any
Indebtedness of Larclay shall not constitute an Investment).

1.9   Financial Covenants. Section 8.22   of the Agreement shall be and it
hereby is amended by inserting the following at the end of such section:

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For purposes of determining compliance with the financial covenants set forth in
this  Section 8.22, the consolidated accounts of Larclay shall be excluded.

1.10   Exploratory Drilling Expenses. Section 8.26 of the Agreement shall be and
it hereby is amended in its entirety to read as follows:

8.26   Reserved.

SECTION 2.   Consent and Reaffirmation of Guarantors. By their execution hereof,
each Guarantor hereby (i) acknowledges receipt of this Amendment, (ii) consents
to the Borrowers’ execution and delivery hereof; (iii) agrees to be bound
hereby; (iv) affirms that nothing contained therein shall modify in any respect
whatsoever its guaranty of the obligations of the Borrowers to Lenders pursuant
to the terms of its Guaranty in favor of Administrative Agent and the Lenders
and (v) reaffirms that its Guaranty is and shall continue to remain in full
force and effect.

SECTION 3.   Conditions. The amendments to the Agreement contained in Section 1
of this Amendment shall be effective upon the satisfaction of each of the
conditions set forth in this Section 3.

3.1   Execution and Delivery.   Each Borrower and each Guarantor shall have
executed and delivered this Amendment.

3.2   Representations and Warranties.   The representations and warranties of
each Borrower under the Agreement, as amended by the Amendment are true and
correct in all material respects as of such date, as if then made (except to the
extent that such representations and warranties relate solely to an earlier
date).

3.3   No Event of Default.   No Event of Default shall have occurred and be
continuing nor shall any event have occurred or failed to occur which, with the
passage of time or service of notice, or both, would constitute an Event of
Default.

3.4   Upfront Fee.   The Borrower shall have paid to the Administrative Agent
for the ratable benefit of each Lender, an upfront fee of $400,000, payable in
immediately available funds, which fee has been fully earned and is
non-refundable.

3.5   Other Documents.   The Administrative Agent shall have received such other
instruments and documents incidental and appropriate to the transaction provided
for herein as the Administrative Agent or its special counsel may reasonably
request, and all such documents shall be in form and substance satisfactory to
the Administrative Agent.

SECTION 4.   Representations and Warranties of Borrowers. To induce the Lenders
to enter into this Amendment, the Borrowers hereby represent and warrant to the
Lenders as follows:

4.1   Reaffirmation of Representations and Warranties/Further Assurances.  
After giving effect to the amendments herein, each representation and warranty
of any Borrower or any Guarantor contained in the Agreement or in any of the
other Loan Documents is true and correct in all material respects on the date
hereof (except to the extent such representations and warranties relate solely
to an earlier date).

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4.2   Corporate Authority; No Conflicts.   The execution, delivery and
performance by each Borrower and each Guarantor (to the extent a party hereto or
thereto) of this Amendment and all documents, instruments and agreements
contemplated herein are within each such Borrower’s or such Guarantor’s
corporate or other organizational powers, have been duly authorized by necessary
action, require no action by or in respect of, or filing with, any court or
agency of government and do not violate or constitute a default under any
provision of any applicable law or other agreements binding upon any Borrower or
any Guarantor or result in the creation or imposition of any Lien upon any of
the assets of any Borrower or any Guarantor except for Permitted Liens and
otherwise as permitted in the Agreement.

4.3   Enforceability.   This Amendment constitutes the valid and binding
obligation of each Borrower and each Guarantor enforceable in accordance with
its terms, except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditor’s rights generally,
and (ii) the availability of equitable remedies may be limited by equitable
principles of general application.

SECTION 5..   Miscellaneous.

5.1   Reaffirmation of Loan Documents and Liens.   Any and all of the terms and
provisions of the Agreement and the Loan Documents shall, except as amended and
modified hereby, remain in full force and effect. Each Borrower hereby agrees
that the amendments and modifications herein contained shall in no manner affect
or impair the liabilities, duties and obligations of such Borrower or any
Guarantor under the Agreement and the other Loan Documents or the Liens securing
the payment and performance thereof.

5.2   Parties in Interest.   All of the terms and provisions of this Amendment
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns.

5.3   Legal Expenses.   The Borrowers hereby agree, jointly and severally, to
pay all reasonable fees and expenses of counsel to the Administrative Agent
incurred by the Administrative Agent in connection with the preparation,
negotiation and execution of this Amendment and all related documents.

5.4   Counterparts.   This Amendment may be executed in one or more counterparts
and by different parties hereto in separate counterparts each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document. However, this Amendment shall bind no party until the Borrowers, the
Guarantors, the Lenders (or at least the requisite percentage thereof), and the
Administrative Agent have executed a counterpart. Delivery of photocopies of the
signature pages to this Amendment by facsimile or electronic mail shall be
effective as delivery of manually executed counterparts of this Amendment.

5.5   Complete Agreement.   THIS AMENDMENT, THE AGREEMENT, AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR,

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CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.

5.6   Headings.   The headings, captions and arrangements used in this Amendment
are, unless specified otherwise, for convenience only and shall not be deemed to
limit, amplify or modify the terms of this Amendment, nor affect the meaning
thereof.

[Signature Pages Follow]

 

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IN WITNESS WHEREOF, the parties have caused this Third Amendment to Amended and
Restated Credit Agreement to be duly executed as of the date first above
written.

 

BORROWERS:

 

 

 

CLAYTON WILLIAMS ENERGY, INC.
a Delaware corporation

 

By:

T. Mark Tisdale

 

Mark Tisdale, Vice President and
General Counsel

 

 

 

SOUTHWEST ROYALTIES, INC.
a Delaware limited liability company

 

By:

T. Mark Tisdale

 

Mark Tisdale, Vice President

 

 

 

GUARANTORS:

 

 

 

WARRIOR GAS CO.
a Texas corporation

 

By:

T. Mark Tisdale

 

Mark Tisdale, Secretary

 

CWEI ACQUISITIONS, INC.
a Delaware corporation

 

By:

T. Mark Tisdale

 

Mark Tisdale, Secretary

 

ROMERE PASS ACQUISITION L.L.C.
a Delaware limited liability company

 

By:

T. Mark Tisdale

 

Mark Tisdale, Vice President

 

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CWEI ROMERE PASS ACQUISITION CORP.

 

By:

T. Mark Tisdale

 

Mark Tisdale, Vice President

 

 

 

BLUE HEEL COMPANY
a Delaware corporation

 

By:

T. Mark Tisdale

 

Mark Tisdale, Vice President

 

TEX-HAL PARTNERS, INC.
a Delaware corporation

 

By:

T. Mark Tisdale

 

Mark Tisdale, Vice President

 

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JPMORGAN CHASE BANK, N.A.,
(successor by merger to Bank One, N.A.
(Illinois)), as Administrative Agent and a Lender

 

 

 

 

By:

Wm Mark Cranmer

Name: Wm. Mark Cranmer
Title: Senior Vice President

 

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BANK OF SCOTLAND
as Co-Agent and a Lender

 

By:

Karen Welch

Name: Karen Welch
Title: Assistant Vice President

 

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UNION BANK OF CALIFORNIA, N.A.
as Syndication Agent and a Lender

 

By:

Kimberly Coll

Name: Kimberly Coll
Title: Vice President

 

 

 

 

By:

Alison Fuqua

Name: Alison Fuqua
Title: Investment Banking Officer

 

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BNP PARIBAS
as Documentation Agent and a Lender

 

By:

Polly Schott

Name: Polly Schott
Title: Vice President

 

 

 

 

By:

Robert Long

Name: Robert Long
Title: Vice President

 

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FORTIS CAPITAL CORP.
as a Lender

 

By:

Darrell Holley

Name: Darrell Holley
Title: Managing Director

 

 

 

 

By:

Casey Lowary

Name: Casey Lowary
Title: Senior Vice President

 

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COMERICA BANK
as a Lender

 

By:

Matthew J. Purchase

Name: Matthew J. Purchase
Title: Vice President

 

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GUARANTY BANK
as a Lender

 

By:

John A. Clark

Name: John A. Clark
Title: Senior Vice President

 

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NATEXIS BANQUES POPULAIRES
as a Lender

 

By:

Timothy L. Polvado

 

Name: Timothy L. Polvado
Title: Vice President & Group Manager

 

 

By:

Daniel Payer

Name: Daniel Payer
Title: Vice President

 

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BANK OF TEXAS, N.A.
as a Lender

 

By:

J. Michael Delbridge

Name: J. Michael Delbridge
Title: Senior Vice President

 

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