Exhibit 10.1


 


UNITS OF LIMITED PARTNERSHIP INTEREST 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 UNITS 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 THE SUBMISSION TO THE GENERAL
PARTNER OF THE PARTNERSHIP OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO THE GENERAL PARTNER TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN
VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
SECURITIES OR BLUE SKY LAWS OF ANY STATE OR OTHER JURISDICTION. IN ADDITION,
ANY TRANSFER OF UNITS REQUIRES THE PRIOR WRITTEN CONSENT OF THE GENERAL PARTNER
AND IS SUBJECT TO OTHER RESTRICTIONS PURSUANT TO THIS AGREEMENT.


 


 


AGREEMENT
OF LIMITED PARTNERSHIP


 


OF


 


FLOYD PROSPECT II, L.P.


 

















 


TABLE OF
CONTENTS


 


	
   

  	
  Page

  
	
   

  	
   

  
	
  ARTICLE I

  	
   

  
	
  DEFINITIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  1.01

  	
  Certain Definitions

  	
  1

  
	
  1.02

  	
  Construction

  	
  4

  
	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
   

  
	
  ORGANIZATION

  	
   

  
	
   

  	
   

  	
   

  
	
  2.01

  	
  Formation

  	
  4

  
	
  2.02

  	
  Name

  	
  4

  
	
  2.03

  	
  Registered Office;
  Registered Agent; Other Offices

  	
  5

  
	
  2.04

  	
  Purposes

  	
  5

  
	
  2.05

  	
  Certificate; Foreign
  Qualification

  	
  5

  
	
  2.06

  	
  Term

  	
  5

  
	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
   

  
	
  GENERAL
  PARTNER; MANAGEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  3.01

  	
  Authority of General
  Partner

  	
  5

  
	
  3.02

  	
  Certain Restrictions on
  General Partner’s Power and Authority

  	
  7

  
	
  3.03

  	
  Duties and Services of
  General Partner

  	
  7

  
	
  3.04

  	
  Operating Agreements

  	
  8

  
	
  3.05

  	
  Admission of Additional
  General Partners

  	
  8

  
	
  3.06

  	
  Withdrawal of General
  Partner

  	
  8

  
	
  3.07

  	
  General Partner as
  Limited Partner

  	
  8

  
	
  3.08

  	
  General Partner as Limited Partner

  	
  8

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
   

  
	
  LIMITED
  PARTNERS

  	
   

  
	
   

  	
   

  	
   

  
	
  4.01

  	
  Restrictions on Limited
  Partners

  	
  9

  
	
  4.02

  	
  Access to Information

  	
  9

  
	
  4.03

  	
  Admission of Additional
  Limited Partners

  	
  10

  
	
  4.04

  	
  Investment
  Representations of the Limited Partners

  	
  10

  
	
  4.05

  	
  Transfer Restrictions

  	
  10

  
	
  4.06

  	
  Permitted Transfers;
  Status as Assignee

  	
  10

  
	
  4.07

  	
  General Partner’s Right
  of Purchase

  	
  11

  
	
  4.08

  	
  Specific Performance

  	
  11

  
	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
   

  
	
  CAPITAL
  CONTRIBUTIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  5.01

  	
  Capital Contributions
  of General Partner

  	
  11

  
	
  5.02

  	
  Initial Capital
  Contributions of Limited Partners

  	
  11

  
	
  5.03

  	
  Additional Capital Contributions
  of Limited Partners

  	
  11

  
	
  5.04

  	
  Capital Accounts

  	
  12

  
	
  5.05

  	
  Return of Capital
  Contribution

  	
  12

  



 


i





















 


	
  ARTICLE VI

  	
   

  
	
  SHARING,
  ALLOCATIONS AND DISTRIBUTIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  6.01

  	
  Sharing and Allocation
  of Costs and Expenses

  	
  12

  
	
  6.02

  	
  Sharing and Allocation
  of Revenues

  	
  13

  
	
  6.03

  	
  Allocations for Capital
  Account and Tax Purposes

  	
  13

  
	
  6.04

  	
  Distributions

  	
  13

  
	
  6.05

  	
  Withholding Taxes

  	
  13

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
   

  
	
  BOOKS,
  RECORDS AND BANK ACCOUNTS

  	
   

  
	
   

  	
   

  	
   

  
	
  7.01

  	
  Maintenance of Books

  	
  14

  
	
  7.02

  	
  Accounts

  	
  14

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
   

  
	
  DISSOLUTION,
  LIQUIDATION AND TERMINATION

  	
   

  
	
   

  	
   

  	
   

  
	
  8.01

  	
  Dissolution

  	
  14

  
	
  8.02

  	
  Liquidation and
  Termination

  	
  15

  
	
  8.03

  	
  Termination

  	
  16

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX

  	
   

  
	
  GENERAL
  PROVISIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  9.01

  	
  Offset

  	
  17

  
	
  9.02

  	
  Notices

  	
  17

  
	
  9.03

  	
  Entire Agreement

  	
  17

  
	
  9.04

  	
  Effect of Waiver or
  Consent

  	
  17

  
	
  9.05

  	
  Amendment or
  Modification

  	
  17

  
	
  9.06

  	
  Binding Effect

  	
  18

  
	
  9.07

  	
  Governing Law;
  Severability

  	
  18

  
	
  9.08

  	
  Further Assurances

  	
  18

  
	
  9.09

  	
  Waiver of Certain
  Rights

  	
  18

  
	
  9.10

  	
  Insurance

  	
  18

  
	
  9.11

  	
  Indemnification

  	
  18

  
	
  9.12

  	
  Counsel to the
  Partnership

  	
  19

  
	
  9.13

  	
  Power of Attorney

  	
  19

  
	
  9.14

  	
  Counterparts

  	
  20

  
	
  9.15

  	
  No Employment Contract

  	
  20

  



 


 


	
  Exhibit A
  – Schedule of Limited Partners

  	
   

  
	
  Exhibit B
  – Area of Interest

  	
   

  
	
  Exhibit C
  – Wells

  	
   

  
	
  Exhibit D
  – Allocations of Profits and Losses and Other Tax Matters

  	
   

  



 


ii





















 


AGREEMENT
OF LIMITED PARTNERSHIP


 


OF


 


FLOYD PROSPECT II, L.P.


 


This AGREEMENT OF LIMITED PARTNERSHIP OF FLOYD PROSPECT II, L.P. (this “Agreement”) is
made and entered into as of March 6, 2006
(the “Effective Date”),
by and among the Partners (as defined below).


 


FOR AND IN CONSIDERATION OF the mutual
covenants, rights, and obligations set forth in this Agreement, the benefits to
be derived from them, and other good and valuable consideration, the receipt
and the sufficiency of which is hereby acknowledged, the Partners agree as
follows:


 


ARTICLE I

DEFINITIONS


 


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


 


“Acquisition Costs” means (i) the costs
of acquiring a leasehold interest, including, without limitation, direct costs
of seismic data and interpretation, lease broker services, title examinations,
filing fees, and recording costs, and (ii) the fair value of Partnership
Properties contributed to the Partnership by the General Partner.


 


“Act” means the
Texas Revised Limited Partnership Act and any successor statute, as amended.


 


“Affiliate”
means, when used with reference to a specified Person, (a) any Person
directly or indirectly owning, controlling or holding power to vote 50% or more
of the outstanding voting securities of the specified Person, (b) any
Person 50% 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 4.74% per annum.


 


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


 





















 


“Area of Interest”
means the area described in Exhibit B.


 


“Capital Account” has the meaning set forth in
Section 5.04.


 


“Capital Contribution”
means, for any Partner, the dollar amount of any cash contributed to the
capital of the Partnership and the fair value of any property contributed to
the Partnership by such Partner.


 


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


 


“Change in Control” has the meaning set
forth in Section 8.01(d).


 


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


 


“Contribution Date” has the meaning set forth
in Section 5.03(a).


 


“Contribution Notice” has the meaning set
forth in Section 5.03(a).


 


“CWEI” means
Clayton Williams Energy, Inc., a Delaware corporation.


 


“Event of Forfeiture” has the meaning set
forth in Section 4.07.


 


“Event of Withdrawal” means the withdrawal of
the General Partner as provided in Section 3.06. The events
described in subdivisions (4), (5) and (8) of Section 4.02(a) of
the Act shall not be Events of Withdrawal, and a General Partner shall not
cease to be a General Partner upon the occurrence of any of such events.


 


“Exchange  Act” means the
Securities Exchange Act of 1934, as amended.


 


“General Partner” means CWEI and each other Person admitted as an
additional or successor General Partner pursuant to Section 3.05.


 


“Indemnified Person”
has the meaning set forth in Section 9.11.


 


“Lease” means a lease, mineral interest,
royalty or overriding royalty, fee right, mineral servitude, license,
concession or other right covering oil, gas and related hydrocarbons (or a
contractual right to acquire such an interest) or an undivided interest therein
or portion thereof, together with all appurtenances, easements, permits,
licenses, servitudes and rights-of-way situated upon or used or held for future
use in connection with such an interest or the exploration, development or
production thereof. A “Lease” shall also mean and include all rights and
interests in all lands and interests unitized or pooled therewith pursuant to
any law, rule, regulation or agreement.


 


“Limited Partner”
means each Person listed as a limited partner on Exhibit A
and each other Person admitted as an additional or successor Limited Partner
pursuant to Section 4.03.


 


“Majority in Interest” has the meaning set forth in Section 3.02.


 


2





















 


“Non-Contributing
Limited Partner” has the meaning set forth in Section 5.03(b).


 


“Operating Agreement” means an agreement between the operator and
non-operating interest owners in a Lease for the testing, development and
operation of a tract of land or Lease for the exploration and development of
oil, gas, minerals or hydrocarbons.


 


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


 


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


 


“Partnership Counsel” has the meaning set
forth in Section 9.12.


 


“Partnership Property” means Leases and Wells
in which the Partnership owns an undivided interest.


 


“Payout” means the earliest calendar month
during which the General Partner shall have received distributions pursuant to Section 6.04 in an aggregate amount equal
to the sum of (i) the cumulative Capital Contributions made by the General
Partner pursuant to Section 5.01, plus (ii) an annual rate of
return on such Capital Contributions equal to the Agreed Rate. For this
purpose, each distribution and Capital Contribution shall be deemed to have
been made on the last day of the month during which it was made or received.


 


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


 


“Regulations” mean the regulations
promulgated by the United States Department of Treasury pursuant to the Code. All
references herein to sections of the Treasury Regulations shall include
corresponding provision or provisions of succeeding, similar, substitute,
temporary or final Treasury Regulations.


 


“Securities Act”
means the Securities Act of 1933, as amended.


 


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


 


“Unit” means a Limited Partnership interest,
or fraction thereof, in the Partnership. The number of Units owned by each
Limited Partner and the total number of Units of the Partnership are set forth
on Exhibit A, as amended from time to time.


 


“Well” means a well in which the
Partnership holds a Working
Interest derived from its ownership of one or more Leases. The name and
location of each “Well” is shown on Exhibit C,
as amended from time to time.


 


3





















 


“Well Costs”
means the Partnership’s share of costs pursuant to any Operating Agreement for
the drilling, completing, equipping, deepening or sidetracking a Well,
including, without limitation:  (i) the
costs of surveying and staking the Well, the costs of any surface damages and
the costs of clearing, coring, testing, logging and evaluating the Well; (ii) the
costs of casing, cement and cement services for the Well; (iii) the cost
of plugging and abandoning the Well (including standard and customary
remediation activities associated therewith), if it is determined that the Well
would not produce in commercial quantities and should be abandoned; (iv) all
direct charges and overhead chargeable to the Partnership with respect to the
Well under any applicable Operating Agreement until such time as all operations
are carried out as required by applicable regulations and sound engineering
practices to make such Well ready for production, including the installation
and testing of wellhead equipment, or to plug and abandon a dry hole; (v) all
costs incurred by the Partnership in recompleting or plugging back any Well; (vi) all
costs incurred by the Partnership in reworking any Well if the rework is
covered by an authority for expenditure under the applicable Operating
Agreement; (vii) all costs incurred by the Partnership in locating,
drilling, completing, equipping, deepening or sidetracking any enhanced
recovery producer or injector Well (including the costs of all necessary
surface equipment such as steam generators, compressors, water treating
facilities, injection pumps, flow lines and steam lines); and (viii) the
costs of constructing production facilities, pipelines and other facilities
necessary to develop Partnership property acquired pursuant to the terms hereof
and produce, collect, store, treat, deliver, market, sell or otherwise dispose
of oil, gas and other hydrocarbons and minerals therefrom; provided,
that Well Costs shall not include any Acquisition Costs.


 


“Working Interest” means a fractional
operating interest in a Lease that permits the Partnership to explore, develop
and produce one or more properties in the Area of Interest and bear its
percentage of the costs and expenses relating to the maintenance and
development of and operations relating to such properties in return for a share
of the mineral production from the property.


 


1.02                           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 II

ORGANIZATION


 


2.01                           Formation. The Persons executing
this Agreement agree to form the Partnership as a limited partnership
under the Act for the purposes and upon the terms and subject to the conditions
set forth in this Agreement.


 


2.02                           Name. The name of the Partnership is
“FLOYD PROSPECT II, L.P.”, and all
Partnership business shall be conducted in that name or such other names that
comply with applicable law as the General Partner may select from time to
time.


 


4





















 


2.03                           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.


 


2.04                           Purposes. The purposes for which the
Partnership is formed are to (i) acquire, explore, hold, develop, produce,
dispose of and otherwise deal with Partnership Property, (ii) collect
proceeds, payments and other distributions from Partnership Property, (iii) make
distributions to the Partners in accordance with the terms hereof and (iv) 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, obtaining appropriate
financing) and that is not prohibited by the law of the jurisdiction in which
the Partnership engages in that business.


 


2.05                           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 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 9.13.


 


2.06                           Term. The term of Partnership shall
commence on the date of filing of the Certificate and shall continue until the
close of business on December 31, 2017, unless the Partnership is
dissolved and liquidated before such time in accordance with this Agreement.


 


ARTICLE III

GENERAL PARTNER; MANAGEMENT


 


3.01                           Authority
of General Partner. In addition to the powers now or hereafter
granted to a general partner of a limited partnership under applicable law or
which are granted to the General Partner under other provisions of this
Agreement, 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 and for the protection and
benefit of the Partnership, including without limitation:


 


5





















 


(a)                                  to
determine whether to acquire, hold, develop or produce Partnership Property and
other assets of the Partnership and whether, when and on what terms to
farm-out, sell, promote or otherwise transfer any particular prospect, or any
interest therein;


 


(b)                                 to
make all decisions concerning the desirability of payment, and the payment or
supervision of payment, of all delay rentals, shut-in royalty payments, minimum
royalty payments and any other similar or related payments;


 


(c)                                  to
drill, complete, control, rework, side-track, redrill, recomplete, produce,
plug and/or abandon any or all of the Wells;


 


(d)                                 to
form and participate in tax partnerships, joint ventures or other
relationships that it deems desirable with regard to Partnership prospects;


 


(e)                                  to
make any expenditures and incur any obligations it deems appropriate for the conduct
of the activities of the Partnership;


 


(f)                                    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;


 


(g)                                 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, the repayment of
obligations of the Partnership and the contribution obligations of others under
third-party joint operating agreements or similar agreements;


 


(h)                                 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, including, without limitation, Operating
Agreements, unit Operating Agreements and joint development agreements, and the
right to make any and all elections that are required or necessary under the
terms of any agreements;


 


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


 


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


 


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


 


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


 


(m)                               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;


 


6





















 


(n)                                 to
construct pipelines, drilling and production platforms and facilities, gas
plants, processing plants and other facilities incidental to the development of
Partnership Property and the production and marketing of oil and gas therefrom;


 


(o)                                 to
execute and deliver division orders and transfer orders upon such terms and
conditions and containing such provisions as the General Partner may consider
appropriate;


 


(p)                                 to
dissolve the Partnership if there is not Payout within a reasonable period of
time; and


 


(q)                                 to
control any matters affecting the rights and obligations of the Partnership
including 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.


 


3.02                           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 Limited
Partners holding a majority of the Units held by all Limited Partners (a “Majority in Interest”):


 


(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


 


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


 


3.03                           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; provided,
however, that the Partners acknowledge
and agree that neither the General Partner nor any 


 


7





















 


Affiliate thereof nor any of their respective officers, directors,
employees or agents shall be required to devote full time to Partnership
business and may 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 without limitation, the ownership, acquisition, exploration,
development, operation and management of oil and gas properties, oil and gas
drilling programs and other partnerships similar to this Partnership, and that
neither the Partnership nor any Limited Partner shall by virtue of this
Agreement have any right, title, interest or expectancy in or to such
activities or ventures. The Partners
acknowledge and agree that the General Partner engages in the same business as
the Partnership, and that that General Partner has no duty to any Limited
Partner with regard to the operation of the General Partner’s business affairs
or prospects outside of the Partnership. The Partners also agree and
acknowledge that the General Partner may operate the General Partner’s
business affairs or prospects outside of the Partnership without offering the
Partnership or any Limited Partner the right to participate in such other
affairs or prospects.


 


3.04                           Operating
Agreements.  The
General Partner shall use its reasonable efforts to cause the Partnership to
become a party to all applicable Operating Agreements for any Partnership
Property. To the extent the General Partner is not able to cause the
Partnership to become a party to an applicable Operating Agreement, the General
Partner agrees to use its reasonable efforts to act in accordance with the
provisions of such Operating Agreement as if the Partnership were a party to
such Operating Agreement. In addition, following dissolution and liquidation of
the Partnership, each Partner agrees to become a party to all Operating
Agreements in which the General Partner serves as operator, and further agrees
to use its reasonable efforts to become a party to all other applicable
Operating Agreements. To the extent any Partner is not able to become a party
to an applicable Operating Agreement, such Partner agrees to use its reasonable
efforts to act in accordance with the provisions of such Operating Agreement as
if it were a party to such Operating Agreement.


 


3.05                           Admission
of Additional General Partners. After the date of this
Agreement, the General Partner may admit one or more additional General
Partners at such times and upon such terms and conditions as may be
determined by the General Partner, in its sole discretion. Each such additional
General Partner, as a condition to its admission to the Partnership, shall
adopt and agree to be bound by the terms and provisions of this Agreement and
will assume all obligations and liabilities of the Partnership arising before
its admission as though it had been a General Partner when such obligations and
liabilities were incurred.


 


3.06                           Withdrawal
of General Partner. A General Partner shall cease to be a
General Partner and shall be deemed to have withdrawn from the Partnership upon
the General Partner’s written notice of its withdrawal to the other Partners. A
General Partner may not be removed as a General Partner.


 


3.07                           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 Units of a Limited Partner, whether pursuant to Section 5.03(b) or
otherwise.


 


3.08                           Excluded
Properties. Notwithstanding any provision of this Agreement to
the contrary, the General Partner may at any time and from time to time
and in its sole discretion


 


8





















 


determine that Leases acquired by the General Partner in the Area of
Interest, Wells in the Area of Interest or Working Interests derived from the
General Partner’s ownership of Leases in the Area of Interest shall not be Partnership
property and may designate such Leases, Wells or Working Interests or any
portion of the General Partner’s interest therein as “Excluded
Property” for purposes of this Agreement. The Limited Partners
acknowledge and agree that the General Partner (i) shall not have any
obligation to contribute Excluded Property to the Partnership, (ii) may acquire,
own, hold and develop Excluded Property for itself, its Affiliates or any other
Person and (iii) may transfer, assign or contribute any or all of its
interests in Excluded Property to any other Person, including, without
limitation, to a partnership or other entity formed by the General Partner or
an Affiliate of the General Partner and one or more Limited Partners or other
officers, employees, agents or contractors of the General Partner or an
Affiliate of the General Partner, in which one or more Limited Partners do not
participate or participate on a basis that differs from their ownership of
Units in the Partnership.


 


ARTICLE IV

LIMITED PARTNERS


 


4.01                           Restrictions
on Limited Partners. Notwithstanding any other provision of this
Agreement, a Limited Partner, in his or her capacity as such, shall not:


 


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


 


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


 


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


 


(e)                                  be
bound by, nor be personally 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)                                    be
entitled to withdraw from the Partnership.


 


4.02                           Access
to Information. A Limited Partner or a permitted assignee of
Units, on written request to the General Partner stating the purpose, may examine
and copy, at any reasonable time, for any proper purpose, and at the expense of
the Limited Partner or assignee, records required to be kept by the Partnership
under Section 1.07 of the Act 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. On the written request by any Limited
Partner or an assignee of Units made to the General Partner at the principal
place of business of the Partnership, the Partnership shall provide to the
requesting Limited Partner or assignee, without charge, true copies of:


 


9





















 


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


 


(b)                                 any
of the tax returns described in Subdivision (2) of Subsection (a) of
Section 1.07 of the Act.


 


Information provided to or obtained by a Limited Partner or an assignee
of Units relating to the Partnership or Partnership Property shall be used by
such Limited Partner or assignee solely in furtherance of his or her interests
as a Limited Partner and shall not be used for any other purpose. Limited
Partners and assignees of Units shall maintain the confidentiality of all such
information and shall not disclose such information to any other Person. If a
Limited Partner or assignee of a Unit 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.


 


4.03                           Admission
of Additional Limited Partners. The General Partner may admit
an assignee of Units who has acquired Units in a Transfer permitted under Sections 4.05, 4.06
or 5.03(b) 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.


 


4.04                           Investment
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 his or her Units for his or her 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 Units
have not been registered under the Securities Act and that any Transfer of the
Units 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 any Units and that it is unlikely that a market will
ever exist for any Units.


 


(b)                                 Each
Limited Partner represents that he or she 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 Units.


 


4.05                           Transfer
Restrictions. Except as provided in Sections
4.06 and 5.03(b), no Limited Partner shall Transfer
any Units or any interest therein without the prior written consent of the
General Partner. Any attempted Transfer in violation of this Section 4.05 shall be null and void, and
the Partnership shall refuse to recognize any such Transfer and shall not
reflect on its records any change in ownership of such Units pursuant to any
such Transfer.


 


4.06                           Permitted
Transfers; Status as Assignee. A Limited Partner may Transfer
all or any portion of his or her Units (i) to the Partnership, (ii) to
his or her spouse, parents or natural or adoptive lineal descendants, or to one
or more trusts or partnerships established exclusively for the benefit of his
or her spouse, parents or natural or adoptive lineal descendants, or (iii) pursuant


 


10





















 


to Section 4.07; provided,
that any such permitted assignee shall receive and hold such rights subject to
the provisions of this Agreement, including, without limitation, the provisions
of this Article IV. A Limited
Partner intending to Transfer Units pursuant to this Section 4.06
shall provide at least 10 days prior written notice of such proposed transfer
to the General Partner. An assignee of Units shall have only the rights of an
assignee under the Act and, except as expressly provided under the Act, shall
not be considered a Partner for any purpose under this Agreement or otherwise
unless and until such assignee is admitted to the Partnership as a Limited
Partner with the approval of the General Partner pursuant to Section 4.03.


 


4.07                           General
Partner’s Right of Purchase. The General Partner shall have the
right and option to purchase any and/or all Units held by a Limited Partner
following such Limited Partner’s admission to or conviction of a felony or
misdemeanor offense against CWEI or any of its Affiliates (“Event of Forfeiture”). The General Partner
may exercise such right and option of purchase within 60 days of an Event
of Forfeiture. The purchase price to be paid for the Units held by the Limited
Partner shall be equal to such Limited Partner’s Capital Contribution as set
forth on Exhibit A. To the extent the General Partner exercises its
option to purchase a Limited Partner’s Units under this provision, such Units
shall then be held by the General Partner in accordance with Section 3.07 hereof.


 


4.08                           Specific
Performance. The parties
agree that the Partnership and each Partner would be irreparably damaged if any
of the provisions of this Article IV 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 IV and specifically to enforce the terms and
provisions hereof in any action instituted in any court of competent
jurisdiction.


 


ARTICLE V

CAPITAL CONTRIBUTIONS


 


5.01                           Capital
Contributions of General Partner. The General Partner shall
contribute to the Partnership (i) cash in such amounts as shall be
necessary to pay timely the costs and expenses allocated and charged to the
General Partner pursuant to Section 6.01 and elsewhere herein, and (ii) an
undivided 6% of the General Partner’s interest in Partnership Property. In the
event any Partnership Property contributed to the Partnership are subject to
any liens or similar encumbrances, the General Partner shall use reasonable
efforts to cause such liens or similar encumbrances to be released prior to any
dissolution of the Partnership.


 


5.02                           Initial
Capital Contributions of Limited Partners. On the Effective
Date, each Limited Partner shall initially contribute to the Partnership cash
in the amount of $10.00 per Unit, as set forth on Exhibit A.


 


5.03                           Additional
Capital Contributions of Limited Partners.


 


(a)                                  After
Payout, if the General Partner determines, in its sole discretion, that
additional Capital Contributions from the Limited Partners are required to fund
the payment of


 


11





















 


costs and expenses allocated and charged to
the Limited Partners pursuant to Section 6.01 and elsewhere in this
Agreement, the General Partner shall send written notice to the Limited
Partners (a “Contribution Notice”) setting forth the date on which such
additional Capital Contributions shall be payable (the “Contribution Date”),
which date shall be not less than 10 days after the date of the Contribution
Notice, the total amount of the additional Capital Contributions required and
the amount of the additional Capital Contribution to be made by each Limited
Partner pursuant to this Section 5.03(a). Each Limited Partner’s
additional Capital Contribution shall be in proportion to the number of Units
held by such Limited Partner.


 


(b)                                 If
a Limited Partner does not make an additional Capital Contribution to the
Partnership in the amount, at the time or in the manner provided in Section 5.03(a) (a
“Non-Contributing Limited Partner”),
the General Partner, in its sole discretion, may make the additional
Capital Contribution that the Non-Contributing Limited Partner failed to make
within 20 days after the Contribution Date, in which case the Non-Contributing
Limited Partner, without further action on his or her part, shall be deemed to
have assigned to the General Partner on the Contribution Date the economic
rights to the Units held by the Non-Contributing Limited Partner, and the
General Partner, as the assignee of the Non-Contributing Limited Partner and
the holder of such Units, shall be entitled to receive all allocations of
income, gain, loss, deduction, credit or similar items, and all distributions,
to which the Non-Contributing Limited Partner would otherwise be entitled from
and after the Contribution Date. The General Partner shall hold such economic
rights to the Units attributable to the Non-Contributing Limited Partner until
such time as the General Partner, as the holder of such Units, shall have
received distributions pursuant to Section 6.04 in an aggregate
amount equal to the sum of (i) the additional Capital Contributions made
by the General Partner pursuant to this Section 5.03(b), plus (ii) an
annual rate of return on such additional Capital Contributions from the
Contribution Date equal to the prime rate as established from time to time by
Bank One NA, or its successors, plus 2%, whereupon the General Partner, without
further action on its part, shall be deemed to have re-assigned the economic
rights to such Units to the Non-Contributing Limited Partner. The General
Partner may use the power of attorney set forth in Section 9.13
to reflect any assignment pursuant to this Section 5.03(b).


 


5.04                           Capital
Accounts. An individual capital account (a “Capital Account”)
shall be established and maintained for each Partner as provided in Exhibit D.


 


5.05                           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 by such Partner
except as expressly provided for herein.


 


ARTICLE VI

SHARING, ALLOCATIONS AND DISTRIBUTIONS


 


6.01                           Sharing
and Allocation of Costs and Expenses. All costs and expenses of
the Partnership shall be allocated and charged to the Partners as follows:


 


(a)                                  Acquisition Costs shall be allocated (i) 100%
to the General Partner before Payout and (ii) 1% to the General Partner
and 99% to the Limited Partners as a class after Payout;


 


12

















 


(b)                                 Well Costs shall be
allocated (i) 100% to the General Partner before Payout and (ii) 100%
to the Limited Partners as a class after Payout;


 


(c)                                  All other costs and
expenses of the Partnership not specifically allocated above shall be allocated
(i) 100% to the General Partner before Payout and (ii) 100% to the
Limited Partners as a class after Payout.


 


All allocations made to Limited Partners “as a class” pursuant to this
Agreement shall be apportioned among the Limited Partners in proportion to the
number of Units held by such Limited Partners.


 


6.02                           Sharing
and Allocation of Revenues. All revenues of the Partnership
(which shall not include Capital Contributions and proceeds of loans to the
Partnership) shall be allocated (i) 100% to the General Partner before
Payout and (ii) 100% to the Limited Partners as a class after Payout.


 


6.03                           Allocations
for Capital Account and Tax Purposes. Subject to Section 8.02(c),
all items of income, gain, deduction, loss, credit and amount realized shall be
allocated to the Partners in accordance with the provisions of Exhibit D.


 


6.04                           Distributions.
At least monthly (commencing with the first full calendar month after the
receipt by the Partnership of its first revenues other than Capital
Contributions and proceeds of loans to the Partnership), all cash funds of the
Partnership (exclusive of Capital Contributions or proceeds of loans) which the
General Partner reasonably determines are not needed for the payment of any
existing or reasonably foreseeable Partnership obligations and expenditures
shall be distributed to the Partners. All such cash funds of the Partnership
shall be distributed to the Partners in the same respective percentages as the
revenues to which such cash funds are attributable were allocated to the Partners
pursuant to Section 6.02 (after deducting therefrom the costs and
expenses charged to the Partners pursuant to Section 6.01 and
elsewhere herein); provided, however, that if Payout would occur
as a result of a distribution of cash funds to the General Partner, such
distribution shall be deemed to constitute two distributions:  (i) the first distribution shall consist
of the amount of cash funds necessary to cause Payout to occur, and (ii) the
second distribution shall consist of the balance of the funds then distributed.


 


6.05                           Withholding
Taxes. The Partnership shall at all times be entitled (but not
obligated) to make payments required to discharge any obligation of the
Partnership or the General Partner to withhold or make payments to any
governmental authority with respect to any federal, state or local tax
liability of any Limited Partner for such taxes arising out of such Limited
Partner’s interest in the Partnership. The amount of each such payment made by
the Partnership with respect to any Limited Partner shall be deducted from any
distributions otherwise payable to such Limited Partner pursuant to this
Agreement. Notwithstanding anything contained in this Agreement to the
contrary, in the event the Partnership fails to withhold any federal, state or
local taxes in respect of any Limited Partner when required to do so (including
as a result of any change in law or interpretation thereof or otherwise) any
liability incurred by the Partnership (including any interest and penalties) as
a result of such failure shall be borne by such Limited Partner (and charged to
such Limited Partner’s Capital Account), and such Limited Partner shall
indemnify and hold harmless the Partnership and the General Partner


 


13





















 


from and against any and all claims, demands, liabilities, costs,
damages and causes of action of any nature whatsoever related to such
withholding obligation.


 


ARTICLE VII

BOOKS, RECORDS AND BANK ACCOUNTS


 


7.01                           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 Exhibit D. The
accounting year of the Partnership shall be the calendar year.


 


7.02                           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.


 


ARTICLE VIII

DISSOLUTION, LIQUIDATION AND TERMINATION


 


8.01                           Dissolution.
The Partnership shall dissolve and its business and affairs shall be wound up
on the first to occur of the following:


 


(a)                                  the expiration of the
term of the Partnership set forth in Section 2.06;


 


(b)                                 the election of the General Partner, in its
sole discretion, to dissolve and liquidate the Partnership;


 


(c)                                  an Event of Withdrawal; provided, that upon
the occurrence of an Event of Withdrawal if there is at least one remaining
General Partner, the business of the Partnership shall be carried on by the
remaining General Partner, and the Partnership shall not be dissolved and its
affairs shall not be wound up by reason of such Event of Withdrawal; or


 


(d)                                 a Change of Control
(as hereinafter defined); provided, that if a Change in Control occurs
prior to Payout, dissolution of the Partnership shall be postponed until Payout
occurs. For purposes of this Section 8.01(d), “Change in Control” shall be deemed to have
occurred if:


 


(i)                                     Any
Person, including a “group” as determined in accordance with Section 13(d)(3) of
the Exchange Act and the rules and regulations promulgated thereunder, is
or becomes, through one or a series of related transactions or through one
or more intermediaries, the beneficial owners, directly or indirectly, of
securities of CWEI representing 25% or more of the combined voting power of
CWEI’s then outstanding securities, other than a Person who is such a
beneficial owner on the Effective Date and any Affiliate of such Person;


 


(ii)                                  As
a result of, or in connection with, any tender offer or exchange offer, merger
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions (a “Transaction”),
the Persons who were


 


14





















 


directors of the Company before the
Transaction shall cease to constitute a majority of the Board of Directors of
CWEI or any successor to CWEI;


 


(iii)                               Following
the Effective Date, CWEI is merged or consolidated with another corporation and
as a result of such merger or consolidation less than 40% of the outstanding
voting securities of the surviving or resulting corporation shall then be owned
in the aggregate by the former stockholders of CWEI, other than any party to
such merger or consolidation or any Affiliates of such party;


 


(iv)                              A
tender offer or exchange offer is made and consummated for the ownership of
securities of CWEI representing 25% or more of the combined voting power of CWEI’s
then outstanding voting securities; or


 


(v)                                 CWEI
or a subsidiary of CWEI transfers more than 50% of its assets, or the last of a
series of transfers results in the transfer of more than 50% of the assets
of CWEI, to another corporation the capital stock of which is not wholly-owned
by CWEI. For this purpose, the determination of what constitutes 50% of the
assets of CWEI shall be determined based on the sum of the values attributed to
(A) the oil and gas reserves of CWEI as reflected by the most recent
reserve report prepared or audited by CWEI’s independent petroleum engineers, (B) CWEI’s
undeveloped oil and gas properties as determined by an independent appraisal
thereof, and (C) the net book value of all other assets of CWEI, each
taken as of the date of the related transfer of assets.


 


8.02                           Liquidation
and Termination. Upon dissolution of the Partnership, the
General Partner shall act as liquidator or may appoint one or more other
Persons to act as liquidator. The liquidator 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.
Until final distribution, the liquidator shall continue to operate the
Partnership properties with all of the power and authority of the General
Partner. The steps to be accomplished by the liquidator are as follows:


 


(a)                                  As
promptly as practicable after dissolution and again after final liquidation,
the liquidator 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;


 


(b)                                 From
Partnership funds, the liquidator shall pay all of the debts and liabilities of
the Partnership (including, without limitation, all expenses incurred in
liquidation) or otherwise make adequate provision for such debts and
liabilities, including, without limitation, by establishing a cash escrow fund
for contingent liabilities in such amount and for such term as the liquidator may reasonably
determine; and


 


(c)                                  All
remaining assets of the Partnership shall be distributed to the Partners as
follows:


 


15





















 


(i)                                     The liquidator may sell
any or all Partnership Property and other assets, including to Partners, and
any resulting gain or loss from each sale shall be computed and allocated to
the Capital Accounts of the Partners in accordance with Section 8.02(c)(iii);


 


(ii)                                  With respect to all
Partnership Property and other assets that have not been sold, the fair market
value of that Partnership Property and other assets shall be determined and any
unrealized income, gain, loss, and deduction inherent in property that has not been
reflected in the Capital Accounts of the Partners previously shall be allocated
among the Partners in accordance with Section 8.02(c)(iii);


 


(iii)                               All items of income,
gain, loss and deduction referred to in Sections 8.02(c)(i) and (ii) shall
be allocated among the Partners in such a manner as to cause, to the maximum
extent possible, the positive Capital Account balance of each Partner to equal
the distribution such Partner would receive if the distributions upon
liquidation were made in accordance with Section 6.04 of this
Agreement;


 


(iv)                              Partnership
Property and other assets shall then be distributed among the Partners in
accordance with the positive Capital Account balances of the Partners, as
determined after taking into account all Capital Account adjustments for the
taxable year of the Partnership during which the liquidation of the Partnership
occurs (other than those made by reason of distributions pursuant to this
clause (iv)), and those distributions shall be made by the end of the taxable year
of the Partnership during which the liquidation of the Partnership occurs (or,
if later, 90 days after the date of the liquidation);


 


(v)                                 It is intended that
the distributions made to each Partner pursuant to this Section 8.02(c) be equal to the
distributions to which such Partner would be entitled if liquidating
distributions were made in accordance with Section 6.04
of this Agreement. To the extent the Partners’ positive Capital Account
balances after application of Section 8.02(c)(iii) do not correspond
to the amounts of such intended distributions, the allocations provided for in Exhibit D for the fiscal year in which the
liquidation occurs shall be adjusted, to the maximum extent possible, to
produce Capital Account balances which correspond to the amount of such
intended distributions.


 


All distributions in kind to the Partners shall be made subject to the
liability of each distributee for his, her or its allocable share of costs,
expenses and liabilities previously incurred or for which the Partnership has
committed prior to the date of termination and those costs, expenses and
liabilities shall be allocated to the distributee under this Section 8.02.
The distribution of cash or property to a Partner in accordance with the
provisions of this Section 8.02
constitutes a complete return to the Partner of his, her or its Capital
Contributions and a complete distribution to the Partner of his, her or its
Units and all the Partnership Property and other assets and constitutes a
compromise to which all Partners have consented within the meaning of Section 5.02(d) of
the Act. To the extent that a Partner returns funds to the Partnership, it has
no claim against any other Partner for those funds.


 


8.03                           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 Act may require or permit) shall cause the
cancellation of the Certificate and any


 


16





















 


filings made as provided in Section 2.05 and shall take
such other actions as may be necessary to terminate the Partnership.


 


ARTICLE IX

GENERAL PROVISIONS


 


9.01                           Offset. Whenever the Partnership or
the General Partner is to pay any sum to any Partner, including pursuant to Section 4.07, any amounts that Partner
owes the Partnership or the General Partner or its Affiliates may be
deducted from that sum before payment.


 


9.02                           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 Executive Vice
President and Chief Operating Officer.


 


9.03                           Entire
Agreement. This Agreement constitutes the entire agreement of
the Partners relating to the Partnership and supersedes all prior contracts or
agreements with respect to the Partnership, whether oral or written.


 


9.04                           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 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.


 


9.05                           Amendment
or Modification.


 


(a)                                  Except
as otherwise provided in this Section 9.05, any amendment to this
Agreement must be proposed by the General Partner and approved in writing by
the General Partner and at least a Majority in Interest of the Limited Partners
within 90 days of its proposal 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, (ii) to admit additional Partners pursuant
to Sections 3.04 or 4.03 or (iii) to reflect any assignment
of Units pursuant to Section 5.03(b), or (iv) to amend Exhibit C
to designate leases, wells or Working Interests or any interest therein as
Excluded Properties.


 


17





















 


9.06                           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 assigns.


 


9.07                           Governing
Law; Severability. 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. 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.


 


9.08                           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.


 


9.09                           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.


 


9.10                           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 Section 11.01 of
the Act, 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 Section 11.01
of the Act, 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 Act. 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 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.


 


9.11                           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”) to the
fullest extent permitted by 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


 


18





















 


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 9.11
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.


 


9.12                           Counsel
to the Partnership. The General Partner may select and
retain legal counsel to the Partnership and may execute and deliver 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 jurisdiction. Counsel to the Partnership may also
be counsel to the General Partner. The Partnership has initially selected
Vinson & Elkins L.L.P. (“Partnership Counsel”) as legal counsel to the Partnership.
Each Limited Partner acknowledges that Partnership Counsel does not represent
such Limited Partner as a Limited Partner, and that Partnership Counsel shall
owe no duties directly to such 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 advised or represented the interests
of any Limited Partner in the negotiation, preparation, execution, delivery and
performance of this Agreement.


 


9.13                           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 Act 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;


 


19





















 


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


 


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


 


(d)                                 to
reflect the transfer or assignment of Units by a Limited Partner from time to
time in accordance with Section 4.08 or pursuant to Section 5.03(b),
including without limitation, a transfer or assignment of Units to the General
Partner;


 


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


 


(f)                                    to
comply with applicable assumed name laws.


 


9.14                           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.


 


9.15                           No Employment
Contract. Nothing contained in this Agreement shall be construed
as conferring upon any Limited Partner who is or may become an employee of
CWEI or any Affiliate of CWEI any right to continue in the employment of CWEI
or any Affiliate of CWEI for any period of time or interfere with or restrict
in any way the rights of CWEI or any Affiliate of CWEI or such Limited Partner
to terminate the employment of such Limited Partner at any time for any reason
(or without any reason) whatsoever, with or without cause.


 


[Signature Pages Follow]


 


20





















 


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


 


	
   

  	
  GENERAL PARTNER:

  
	
   

  	
   

  
	
   

  	
  CLAYTON WILLIAMS ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ L.
  Paul Latham

  	
   

  
	
   

  	
   

  	
  L. Paul
  Latham

  
	
   

  	
   

  	
  Executive
  Vice President

  
					



 


Signature Page for Agreement of Limited
Partnership


 





















 


SIGNATURE PAGE FOR LIMITED PARTNER


 


The undersigned, desiring to become a limited partner in Floyd Prospect II, 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 9.13
thereof.


 


	
  Date:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Fax:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Taxpayer I.D. No.

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of Units:

  	
   

  	
   

  
											



 





















 


EXHIBIT A


 


to Partnership Agreement of


 


FLOYD PROSPECT II,
L.P.


 


 


Schedule of Limited Partners


 


	
  Name

  	
   

  	
  No. of

  Units

  	
   

  	
  Initial

  Capital

  Contributions

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Pat Reesby

  	
   

  	
  25.00

  	
   

  	
  $

  	
  250.00

  	
   

  
	
  Kelly
  Beckham

  	
   

  	
  22.36

  	
   

  	
  $

  	
  223.60

  	
   

  
	
  Richard
  Wettaw

  	
   

  	
  4.75

  	
   

  	
  $

  	
  47.50

  	
   

  
	
  Kenneth
  Lipstreuer

  	
   

  	
  4.17

  	
   

  	
  $

  	
  41.70

  	
   

  
	
  Phil Amy

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  Martha
  Reesby

  	
   

  	
  1.67

  	
   

  	
  $

  	
  16.70

  	
   

  
	
  George
  Matthews

  	
   

  	
  1.50

  	
   

  	
  $

  	
  15.00

  	
   

  
	
  Dave Roberts

  	
   

  	
  0.89

  	
   

  	
  $

  	
  8.90

  	
   

  
	
  Jana Craig

  	
   

  	
  0.83

  	
   

  	
  $

  	
  8.30

  	
   

  
	
  Barbara Wynn

  	
   

  	
  0.83

  	
   

  	
  $

  	
  8.30

  	
   

  
	
  Terry
  Lengfeld

  	
   

  	
  0.83

  	
   

  	
  $

  	
  8.30

  	
   

  
	
  Tom Vinyard

  	
   

  	
  0.83

  	
   

  	
  $

  	
  8.30

  	
   

  
	
  Chris Hanson

  	
   

  	
  1.50

  	
   

  	
  $

  	
  15.00

  	
   

  
	
  Jean
  Gathmann

  	
   

  	
  0.25

  	
   

  	
  $

  	
  2.50

  	
   

  
	
  Paul Latham

  	
   

  	
  4.50

  	
   

  	
  $

  	
  45.00

  	
   

  
	
  Mel Riggs

  	
   

  	
  4.50

  	
   

  	
  $

  	
  45.00

  	
   

  
	
  Mark Tisdale

  	
   

  	
  1.71

  	
   

  	
  $

  	
  17.10

  	
   

  
	
  Sam Lyssy

  	
   

  	
  1.67

  	
   

  	
  $

  	
  16.70

  	
   

  
	
  Greg
  Wellborn

  	
   

  	
  1.75

  	
   

  	
  $

  	
  17.50

  	
   

  
	
  Margarita
  Sykes

  	
   

  	
  0.25

  	
   

  	
  $

  	
  2.50

  	
   

  
	
  Ron Gasser

  	
   

  	
  3.50

  	
   

  	
  $

  	
  35.00

  	
   

  
	
  Clarence
  Wolfshohl

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  John Kennedy

  	
   

  	
  2.25

  	
   

  	
  $

  	
  22.50

  	
   

  
	
  Ron Reutzel

  	
   

  	
  0.49

  	
   

  	
  $

  	
  4.90

  	
   

  
	
  Mike Pollard

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  Robert
  Thomas

  	
   

  	
  1.00

  	
   

  	
  $

  	
  10.00

  	
   

  
	
  Kim Jones

  	
   

  	
  1.00

  	
   

  	
  $

  	
  10.00

  	
   

  
	
  Bob Langford

  	
   

  	
  1.00

  	
   

  	
  $

  	
  10.00

  	
   

  
	
  Danny Alford

  	
   

  	
  1.00

  	
   

  	
  $

  	
  10.00

  	
   

  
	
  Janet
  Hamilton

  	
   

  	
  0.62

  	
   

  	
  $

  	
  6.20

  	
   

  
	
  Kathy
  Schwope

  	
   

  	
  0.25

  	
   

  	
  $

  	
  2.50

  	
   

  
	
  Mark Smith

  	
   

  	
  0.25

  	
   

  	
  $

  	
  2.50

  	
   

  
	
  Dennis Polson

  	
   

  	
  1.00

  	
   

  	
  $

  	
  10.00

  	
   

  
	
  Donnie
  Pruitt

  	
   

  	
  0.85

  	
   

  	
  $

  	
  8.50

  	
   

  
	
  Denise Kelly

  	
   

  	
  0.75

  	
   

  	
  $

  	
  7.50

  	
   

  
	
  Betsy Luna

  	
   

  	
  0.25

  	
   

  	
  $

  	
  2.50

  	
   

  
	
   

  	
   

  	
  100.00

  	
   

  	
  $

  	
  1000.00

  	
   

  



 


A-1





















 


EXHIBIT B


 


to Partnership Agreement of


 


FLOYD PROSPECT II,
L.P.


 


 


Area of Interest


 


The areas in                             
Counties covered by the leases described in the attachment hereto.


 


 


B-1





















 


EXHIBIT C


 


to Partnership Agreement of


 


FLOYD PROSPECT II,
L.P.


 


 


Wells


 


C-1





















 


EXHIBIT D


 


Allocations
of Profits and Losses and Other Tax Matters


 


 


ARTICLE I


 


TAX
DEFINITIONS


 


Section 1.01                                Definitions. All capitalized terms used herein shall
have the meanings assigned to them in the Agreement of Limited Partnership of Floyd Prospect II, L.P., dated March 6, 2006 (the “Agreement”), or as
follows:


 


“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 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 Regulation Section 1.704-1(b)(2)(ii)(d)(4),
(5) and (6) with respect to such Partner.


 


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


 


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


 


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


 


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


 


“Simulated Basis”
has the meaning set forth in Section 4.01(b) of this Exhibit.


 


“Simulated Depletion”
has the meaning set forth in Section 4.01(b) of this Exhibit.


 


“Simulated Gain”
has the meaning set forth in Section 4.01(b) of this Exhibit.


 


“Simulated Loss”
has the meaning set forth in Section 4.01(b) of this Exhibit.


 


ARTICLE II


 


ALLOCATIONS OF PROFIT AND LOSS


 


Section 2.01                                Allocations for Capital Account and Tax Purposes.      Subject to Section 8.02
of the Agreement and except as otherwise provided herein, for purposes of any
applicable federal, state or local income tax law, rule or regulation
items of income, gain, deduction, loss, credit and amount realized shall be
allocated to the Partners as follows:


 


D-1





















 


(a)                                  Income from the sale
of oil or gas production and any credits allowed by Section 29 of the Code
relating thereto shall be allocated in the same manner as revenue therefrom is
allocated and credited pursuant to Section 6.02 of the Agreement.


 


(b)                                 Cost and percentage
depletion deductions and the gain or loss on the sale or other disposition of
property the production from which is subject to depletion (herein sometimes
called “Depletable
Property”) shall be computed separately by the Partners rather than
the Partnership. For purposes of Section 613A(c)(7)(D) of the Code,
the Partnership’s adjusted basis in each Depletable Property shall be allocated
to the Partners in proportion to each Partner’s respective share of the costs
and expenses which entered into the Partnership’s adjusted basis for each
Depletable Property, and the amount realized on the sale or other disposition
of each Depletable Property shall be allocated to the Partners in proportion to
each Partner’s respective share of the revenue from the sale or other
disposition of such property provided for in Section 6.02 of the
Agreement. For purposes of allocating amounts realized upon any such sale or
disposition which are deemed to be received for federal income tax purposes and
are attributable to Partnership indebtedness or indebtedness to which the
Depletable Property is subject at the time of such sale or disposition, such
amounts shall be allocated in the same manner as Partnership revenues used for
the repayment of such indebtedness would have been allocated under Section 6.02
of the Agreement.


 


(c)                                  Items of deduction,
loss and credit not specifically provided for above (other than loss from the
sale or other disposition of Partnership property), including depreciation,
cost recovery and amortization deductions, shall be allocated to the Partners
in the same manner that the costs and expenses of the Partnership that gave
rise to such items of deduction, loss and credit were allocated pursuant to Section 6.01
of the Agreement.


 


(d)                                 Gain from the sale or
other disposition of Partnership property that is not specifically provided for
above shall be allocated to the Partners in a manner which reflects each
Partner’s allocable share of the revenue from the sale of the Partnership
property provided for in Section 6.02 of the Agreement, and loss
from the sale or other disposition of Partnership property that is not
specifically provided for above shall be allocated to the Partners in a manner
which reflects each Partner’s allocable share of the costs and expenses of the
Partnership property provided for in Section 6.01 of the Agreement.


 


(e)                                  All recapture of
income tax deduction resulting from the sale or other disposition of
Partnership property shall be allocated to the Partner to whom the deduction
that gave rise to such recapture was allocated hereunder to the extent that
such Partner is allocated any gain from the sale or other disposition of such
property.


 


(f)                                    Any other items of
Partnership income or gain not specifically provided for above shall be
allocated in the same manner as the revenue that resulted in such income or
gain is allocated and credited pursuant to Section 6.02 of the
Agreement.


 


(g)                                 Notwithstanding any of
the foregoing provisions of this Section 2.01 to the contrary:


 


D-2





















 


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


 


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


 


(iii)                               If
for any fiscal year of the Partnership there is a net decrease in Minimum Gain
attributable to a Partner Nonrecourse Debt, each Partner shall be allocated
items of Partnership income and gain for such year (consisting first of gain
recognized, including Simulated Gain, from the disposition of Partnership
property subject to Partner Nonrecourse Debt, and then, if necessary, a pro
rata portion of the Partnership’s other items of income and gain, and if
necessary, for subsequent years) equal to such Partner’s share of such net
decrease (except to the extent such Partner’s share of such net decrease is
caused by a change in debt structure or by the Partnership’s use of capital
contributed by such Partner to repay Partner Nonrecourse Debt) as determined in
accordance with applicable Regulations.


 


(h)                                 The General Partner
shall use all reasonable efforts to prevent any allocation or distribution from
causing a negative balance in a Limited Partner’s Adjusted Capital Account. Consistent
therewith, and notwithstanding any of the foregoing provisions of this Section 2.01
of this Exhibit to the contrary, if for any fiscal year of the Partnership
the allocation of any loss or deduction (net of any income or gain) to any
Limited Partner would cause or increase a negative balance in such Partner’s
Adjusted Capital Account as of the end of such fiscal year (the “Deficit Partner”)
after taking into account the provisions of Section 2.01(g) of
this Exhibit, only the amount of such loss or deduction that reduces the balance
to zero shall be allocated to such Deficit Partner and the remaining loss or
deduction shall be allocated to the Partners whose Adjusted Capital Accounts
have a positive balance remaining at such time (each, a “Positive Partner”). After any
such allocation, any Partnership income or gain (including Simulated Gain)


 


D-3





















 


that would otherwise be allocated to the Deficit Partner shall be
allocated instead to the Positive Partners up to an amount equal to the
Partnership loss or deduction allocated to each Positive Partner under the
preceding sentence; provided, however, that no allocation of income or gain
realized shall be made under this sentence if the effect of such allocation
would be to cause the Adjusted Capital Account of the Deficit Partner to be
less than zero. If, after taking into account the allocation in the first
sentence of this Section 2.01(h), the Adjusted Capital Account
balance of the Deficit Partner remains less than zero at the end of a fiscal
year, a pro rata portion of each item of Partnership income or gain (including
Simulated Gain) otherwise allocable to the Positive Partners for such fiscal
year (or if there is no such income or gain allocable to the Positive Partners
for such fiscal year, all such income or gain (including Simulated Gain) so
allocable in the succeeding fiscal year or years) shall be allocated to the
Deficit Partner in an amount necessary to cause its Adjusted Capital Account
balance to equal zero; provided, that no allocation under this sentence shall
have the effect of causing the Positive Partner’s Adjusted Capital Account to
be less than zero. After any such allocation, any Partnership gain (including
Simulated Gain) resulting from the sale or other disposition of Partnership
property that would otherwise be allocated to the Deficit partner for any
fiscal year under this Section 2.01 shall be allocated instead to
the Positive Partners until the amount of gain so allocated equals the amount
of gain (including Simulated Gain) previously allocated to such Deficit Partner
under the preceding sentence of this Section 2.01(h); provided,
however, that no allocation of gain (including Simulated Gain) shall be made
under this sentence if the effect of such allocation would be to cause the
Adjusted Capital Account of a Deficit Partner to be less than zero.


 


ARTICLE III


 


OTHER TAX MATTERS


 


Section 3.01                                Tax Elections.


 


(a)                                  For tax purposes, the
Partnership shall elect to use the calendar as its taxable year, and to report
income and loss under the accrual method of accounting.


 


(b)                                 For tax purposes, the
Partnership shall elect to deduct expenses incurred in organizing the
Partnership ratably over a 60-month period as provided in section 709 of
the Code.


 


(c)                                  For tax purposes, the
Partnership shall elect to treat all start-up expenditures as deferred expenses
and to deduct such expenses over a 60-month period as provided in section 195
of the Code.


 


(d)                                 In connection with any
Transfer or other assignment of an interest in the Partnership permitted by the
terms and provisions of this Agreement, the General Partner shall, at the
written request of the transferor, transferee or other successor, cause the
Partnership to make an election to adjust the basis of the Partnership’s
property in the manner provided in sections 734(b) and 743(b) of the
Code (or any like statute or regulation then in effect), and such transferor,
transferee or other successor shall pay all costs incurred by the Partnership
in connection therewith, including, without limitation, reasonable attorneys’
and accountants’ fees.


 


D-4





















 


(e)                                  Unless approved by
the Partners, the Partnership shall not file any election pursuant to sections
761 or 7701 of the Code, section 301.7701-3 of the Regulations or
otherwise, the effect of which would cause the Partnership not to be treated as
a partnership for Federal income tax purposes.


 


(f)                                    Except as otherwise
specifically provided herein, the General Partner shall have the sole and absolute
discretion to make any other available election under the Code on behalf of the
Partnership without the prior approval by the Partners.


 


Section 3.02                                Tax Matters Partner. The General Partner is hereby
designated the “tax matters partner” of the Partnership pursuant to Section 6231(a)(7) of
the Code.


 


ARTICLE IV


 


CAPITAL ACCOUNT MAINTENANCE


 


Section 4.01                                Maintenance of Capital Accounts. An individual Capital
Account (a “Capital
Account”) shall be maintained by the Partnership for each Partner as
provided below:


 


(a)                                  The Capital Account
of each Partner shall, except as otherwise provided herein, be (A) credited
by such Partner’s Capital Contributions when made (net of liabilities secured
by contributed property that the Partnership is considered to assume or take
subject to under Section 752 of the Code), (B) credited with the
amount of any item of taxable income or gain and the amount of any item of
income or gain exempt from tax allocated to such Partner, (C) credited
with the Partner’s share of Simulated Gain as provided in Section 4.01(b) of
this Exhibit, (D) debited by the amount of any item of tax deduction or
loss allocated to such Partner, (E) debited with the Partner’s share of
Simulated Loss and Simulated Depletion as provided in Section 4.01(b) of
this Exhibit, (F) debited by such Partner’s allocable share of
expenditures of the Partnership not deductible in computing the Partnership’s
taxable income and not properly chargeable as capital expenditures, including
any non-deductible book amortizations of capitalized costs, and (G) debited
by the amount of cash or the fair market value of any property distributed to
such Partner (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). Immediately prior to any distribution of assets by the Partnership
that is not pursuant to a liquidation of the Partnership or all or any portion
of a Partner’s interest therein, the Partners’ Capital Accounts shall be
adjusted by (X) assuming that the distributed assets were sold by the
Partnership for cash at their respective fair market values as of the date of
distribution by the Partnership and (Y) crediting or debiting each Partner’s
Capital Account with its respective share of the hypothetical gains or losses,
including Simulated Gains and Simulated Losses, resulting from such assumed
sales in the same manner as each such Capital Account would be debited or
credited for gains or losses on actual sales of such assets.


 


(b)                                 The allocation of
basis prescribed by Section 613A(c)(7)(D) of the Code and provided
for in Section 2.01(b) of this Exhibit and each Partner’s
separately computed depletion deductions shall not reduce such Partner’s
Capital Account, but such Partner’s Capital Account shall be decreased by an
amount equal to the product of the depletion deductions that would otherwise be
allocable to the Partnership in the absence of Section 613A(c)(7)(D) of
the Code


 


D-5





















 


(computed without regard to any limitations which theoretically could
apply to any Partner) times such Partner’s percentage share of the adjusted
basis of the property (determined under Section 2.01(b) of this
Exhibit) with respect to which such depletion is claimed (“Simulated Depletion”).
The Partnership’s basis in any Depletable Property is adjusted from time to
time for the Simulated Depletion allocable to all Partners (and where the
context requires, each Partner’s allocable share thereof, which share shall be
determined in the same manner as the allocation of basis prescribed in Section 2.01(b) of
this Exhibit) is herein called “Simulated Basis.”  No
Partner’s Capital Account shall be decreased, however, by Simulated Depletion
deductions attributable to any Depletable Property to the extent such
deductions exceed such Partner’s allocable share of the Partnership’s remaining
Simulated Basis in such property. The Partnership shall compute simulated gain
(“Simulated Gain”)
or simulated loss (“Simulated
Loss”) attributable to the sale or other disposition of a Depletable
Property based on the difference between the amount realized from such sale or
other disposition and the Simulated Basis of such property, as theretofore
adjusted. Any Simulated Gain shall be allocated to the Partners and shall
increase their respective Capital Accounts in the same manner as the amount
realized from such sale or other disposition in excess of Simulated Basis shall
have been allocated pursuant to Section 2.01(b). Any Simulated Loss
shall be allocated to the Partners and shall reduce their respective Capital
Accounts in the same percentages as the costs of the property sold were
allocated up to an amount equal to each Partner’s share of the Partnership’s
Simulated Basis in such property at the time of such sale.


 


(c)                                  Any adjustments of
basis of Partnership property provided for under Sections 734 and 743 of the
Internal Revenue Code and comparable provisions of state law (resulting from an
election under Section 754 of the Code or comparable provisions of state
law) and any election by an individual Partner under Section 59(e)(4) of
the Code to amortize such Partner’s share of intangible drilling and
development costs shall not affect the Capital Accounts of the Partners (unless
otherwise required by applicable Treasury Regulations), and the Partners’
Capital Accounts shall be debited or credited pursuant to the terms of this Section 4.01
as if no such election had been made.


 


(d)                                 Capital Accounts shall
be adjusted, in a manner consistent with this Section 4.01, to
reflect any adjustments in items of Partnership income, gain, loss or deduction
that result from amended returns filed by the Partnership or pursuant to an
agreement by the Partnership with the Internal Revenue Service or a final court
decision.


 


(e)                                  In the case of
property carried on the books of the Partnership at an amount which differs
from its adjusted basis, the Partners’ Capital Accounts shall be debited or
credited for items of depreciation, cost recovery, Simulated Depletion,
amortization and gain or loss (including Simulated Gain or Simulated Loss) with
respect to such property computed in the same manner as such items would be
computed if the adjusted tax basis of such property were equal to such book
value, in lieu of the capital account adjustments provided above for such
items, all in accordance with Regulation Section 1.704-1(b)(2)(iv)(g).


 


(f)                                    It is the intention
of the Partners that the Capital Accounts of each Partner be kept in the manner
required under Regulation Section 1.704-1(b)(2)(iv). To the extent any
additional adjustment to the Capital Accounts is required by such regulations,
the General Partner is hereby authorized to make such adjustment after notice
to the Limited Partner.   [End of Exhibit D]


 


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