Exhibit
10.1


LARIAT
SERVICES, INC.


P.O BOX
10209


AMARILLO,
TX  79116-0209


 


 


October 20, 2005


 


 


Clayton Williams Energy, Inc.                                           VIA FAX 


Attention: Mel Riggs


6 Desta Drive


Suite 6500


Midland, Texas 79705


 


Re: Drilling Rig Joint Venture (LARCLAY, LLC)


 


Dear Mel:


 


This letter, when executed by Clayton
Williams Energy, Inc. (“CWEI”), will constitute a binding agreement between
Lariat Services, Inc. (“Lariat”) and Williams to form an entity LARCLAY, LLC (“LARCLAY”)
to acquire at least 12 drilling rigs.  It
is contemplated that the parties will execute further agreements, including
Regulations to LARCLAY, an Operating Agreement between LARCLAY and Lariat,
which will operate the equipment, and other necessary documents to consummate
the transaction.


 


1.              THE
ENTITY


 


Though we may decide to acquire additional
equipment, we will form an entity to acquire drilling rigs from the
manufacturer in China.  The name of the
entity will be LARCLAY, LLC.  The
ownership will be 50% CWEI and 50% Lariat. The sole relationship of the parties
is one of members in LARCLAY.  Except as
set forth herein, neither party shall owe any duty to the other for business
opportunities arising in connection with the drilling rigs, such as for
drilling, exploring or operating.


 


2.              THE
EQUIPMENT


 


Although additional equipment may
subsequently be acquired, LARCLAY shall initially acquire four 1,300 hp, six
1000 hp and two 2000 hp drilling rigs.   Eight of the rigs will have 5,000 psi BOPs,
and four of the rigs will have 10,000 psi BOPs. 
The rigs shall be ordered for construction through Linggas, Limited and
are expected to be delivered in Houston, within six to twelve months from
order.  Attached hereto as schedule 1 is
the preferred order of construction of rigs, however the manufacturing process
may dictate the order the equipment is delivered.  Once the rigs are delivered in the United
States, the parties recognize that the additional work will be necessary to
assemble and outfit them to make ready for use, including the installation of
motors, electrical works, plumbing, 


 





















 


and mud pumps, which assembly and
installation may be performed at the delivery point or such other place as is
reasonable under the circumstances.  The
parties understand that this additional work may take as much as thirty days to
complete depending on the circumstances. 
Lariat shall be responsible with consultation with CWEI for the drafting
and negotiation of the contracts for the construction of the rigs, the
decisions with respect to the equipping and outfitting of the rigs, inspection
during the construction phase and arranging shipment to the states.  Costs incurred by Lariat in connection with
the foregoing shall be borne proportionately by Lariat and CWEI.  It is understood that concurrently with the
acquisition of the rigs contemplated herein, Lariat may acquire for its own
benefit rigs to be used in the conduct of its business.


 


3.              DEPLOYMENT
AND PRICING OF THE EQUIPMENT


 


It is contemplated that the equipment will be
utilized primarily on CWEI owned or operated properties or prospects.  The equipment will be priced at not less than
current market rates, and subject to changes in the market; provided if long
term contracts are required by the lender in order to obtain financing for the
rigs, any such contracts thus executed shall not be subject to the
foregoing.  Initially it is expected that
the two 2000HP rigs and two of the 1000HP 
rigs will go to the Northern Louisiana, one of the 1000 HP rigs might be
deployed to Colorado, depending upon delivery, one of the 1000HP rigs might be
deployed in the Giddings area of Texas and the remainder of the rigs are to be
deployed to West Texas.  CWEI and its
affiliates, shall have a preference for rig availability for drilling of its
prospects; provided that such preference shall not result in a breach of a
drilling contract with a third party. 
This preference shall include arrangements for the use of the rig to
earn an interest in a well or lease. 
There shall be no duty of the party having such arrangement to offer to
the other party.   At delivery of each
rig, CWEI shall provide Lariat a rig utilization schedule showing the
anticipated wells to be drilled with such rig during the following three
months. The schedule shall be updated monthly, or more often if necessary such
that necessary arrangements can be made for the efficient movement of the
rig.  CWEI shall notify Lariat promptly
upon learning that a CWEI location will not be available upon the completion of
the well then being drilled by such well, and shall give the estimated date
when such the rig shall be needed.  In
such event, Lariat shall attempt to contract the rig out to a third party for
the duration of time that the rig shall not be needed by CWEI


 


4.              FUNDING
THE PARTNERSHIP AND FINANCING THE EQUIPMENT


 


Other than funding the formation of LARCLAY,
neither party shall be required to make any additional capital contributions to
the joint venture.  It is hoped that
LARCLAY will be able to obtain 100% financing of the construction of the rigs
and the initial equipping thereof.  Such
debt and the financing costs thereof are referred to herein as the “Financing
Obligation”. The financing will be for a period of three years.  Lariat will cooperate with CWEI in exploring
all financing options, though it will be CWEI’s ultimate responsibility to
acquire financing for the construction and equipping the rigs acquired.   In the event 


 


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that LARCLAY is unable to finance 100% of the
equipment, CWEI invest or loan LARCLAY the balance necessary on the same terms
as the primary financing.


 


After the construction and the initial
equipping of the rigs, each party shall be responsible for its proportionate
share of all capital for the repair and maintenance of the rigs.  If CWEI determines prior to use of any rig
that it does not need such rig in connection with its drilling program, then it
shall promptly notify Lariat who shall have the option of buying such rig under
the same terms in which LARCLAY is purchasing the rig.  In the event of such a purchase, CWEI shall
be reimbursed for any costs or consideration made for the purchase of the
rig.  At any time subsequent to a rig
being utilized in the field, a member of LARCLAY wishes to sell a LARCLAY rig,
the other member of LARCLAY shall have a preferential right to buy such rig
under the same terms and conditions as the offer acceptable to LARCLAY.  Should LARCLAY receive an offer from an
unaffiliated third party for the sale of a rig acceptable to one member but not
acceptable to the other, the rig shall be sold at the terms of such offer with
the preferential rights available to the members.  Notwithstanding the foregoing, during the
first eighteen months from the date hereof, no rig(s) shall be offered for sale
or shall an offer for the sale of a rig be considered except in those
situations in which CWEI has determined that it no longer needs the rig(s) in
its drilling program, and the rig(s) is not being profitably marketed by Lariat.


 


5.              OPERATION
OF THE EQUIPMENT


 


Lariat will operate the equipment under its
name.  LARCLAY will be charged its
pro-rata share of Lariat’s reasonable overhead (based on the number of LARCLAY
rigs, divided by the total number of Lariat operated rigs).  In addition, Lariat, through its affiliate,
Alsate Management and Investment Company, will provide accounting
services.  Lariat will be responsible for
staffing decisions on the equipment. 
Lariat shall be responsible for obtaining insurance coverage for the
equipment and general liability coverage at competitive rates. Such insurance
shall be issued by rated companies acceptable to CWEI, and if required by the
lender. Prior to payment of all debt associated with the construction and
equipping of the rigs, any insurance proceeds attributable to the loss of a rig
shall be applied to the financing debts.  
The drilling crews shall be employed by Lariat and covered by Lariat’s
corporate policy, with LARCLAY reimbursing Lariat for its share of
premiums.  Lariat will bill LARCLAY for
payroll, benefits, and bonuses of the employees directly employed on the
equipment.  Lariat shall operate the rigs
in a good and workmanlike in accordance with industry standards, and shall
maintain the rigs in good working order; provided, however, Lariat shall not
undertake any single repair or maintenance reasonably estimated to exceed
$50,000 without the consent of CWEI.


 


6.              DISTRIBUTIONS


 


Prior to Payment of Debt.  LARCLAY shall amortize financing costs of
100% of the equipment cost over a three year time frame.  Cash from operations shall first be applied


 


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to direct operating costs, employee wages and
benefits and then to the debt and interest thereon.  Without the mutual consent of the parties, no
distribution of cash shall be made to a member until all debt obligations with
respect to all rigs acquired shall have been satisfied.


 


Subsequent to Payment of
Debt.  After payment of debt incurred
in connection with the Financing Obligation mutually agreed working capital
shall be maintained.  After satisfaction
of direct operating costs, Lariat overhead and working capital needs, cash
shall be distributed to each party on the basis of its ownership in LARCLAY.


 


7.              DISSOLUTION
LARCLAY 


 


 If at
any time following eighteen months either party is dissatisfied with the
operations of LARCLAY, then that party may call for dissolution of the
company.  If LARCLAY is dissolved, to the
extent possible, the equipment will be distributed in kind.  For example, if there is an even number of
equivalent rigs, CWEI would receive half of the rigs and Lariat would receive
half of the rigs.  It is agreed by the
parties that the drilling crew will go with each rig and the parties agree that
they will not solicit employees of the other company upon dissolution.  If either party calls for the dissolution of
LARCLAY, then any remaining portion of the Financing Obligation together with
any other debt obligations or disproportionate capital contributions shall be
borne equally by the parties and any prepayment penalty shall be borne solely
by the party requesting the dissolution.


 


In the event that Lariat sells all or
substantially all of its assets to a non-affiliated company or there is a
change in control of Lariat, then LARCLAY shall at CWEI’s election be
dissolved.  In such event, the assets of
the company shall be distributed as follows:


•                  After payment of the
Financing Obligations, other debt obligations, if any, and disproportionate
capital contributions: as set forth above.


•                  Prior to payment of all debt
obligations:  At CWEI’s election (i) each
party pays one-half of: the remaining Financing Obligation, other debt
obligations, if any, and any disproportionate capital contributions, and Lariat
shall pay any pre-payment penalties; or (ii) CWEI continues the debt facility
in LARCLAY and Lariat, in the event of a change in control, or the purchaser,
in the event of an asset sale, becomes responsible for one-half of: the
remaining Financing Obligation, other debt obligations, if any, as payments may
become due, and any disproportionate capital contributions.


 


 


8.   PREFERENTIAL
RIGHT.


 


In the event that either party wants to sell
its Membership interest in the LARCLAY, the nonselling party shall have a
preferential right to purchase such interest for the same terms as the selling
party is willing to contract to sell to a third party.


 


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                9.   PRESS
RELEASES.


 


No press releases shall be issued by either
party without the consent of the other party, except when such a release shall
be required by law.


 


 


If this letter properly sets forth our
general agreement, please sign below.


 


Sincerely,


 


Lariat Services, Inc.


 


	
  /s/ M. Malone Mitchell, 3rd

  	
   

  	
   

  



 


N. Malone Mitchell, 3rd


President


 


 


Clayton Williams Energy, Inc.


 


	
  By:

  	
  /s/ Mel G. Riggs   

  	
   

  	
   

  
	
   

  	
  Mel Riggs, Chief Financial
  Officer

  	
   

  	
   

  



 


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Schedule 1


Preferred
Order of Construction


 


1.               1350HP


2.               1000HP


3.               1000HP


4.               1000HP


5.               1350HP


6.               1000HP


7.               1350HP


8.               1000HP


9.               1350HP


10.         1000HP


 


The two large 2000 HP rigs will be ordered
under a separate contract from the above, and it is preferred to have these
rigs as soon as possible.


 


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