Document:

Exhibit 10.2

 

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

 

 

AGREEMENT OF LIMITED PARTNERSHIP

 

OF

 

LARCLAY, L.P.

 

(a Texas limited partnership)

 

 

TABLE OF CONTENTS

 

	
   

  	
  Page

  
	
   

  	
   

  
	
   

  	
  ARTICLE 1

  	
   

  
	
   

  	
  DEFINITIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  1.1

  	
  Certain Definitions

  	
  1

  
	
  1.2

  	
  Construction

  	
  7

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 2

  	
   

  
	
   

  	
  ORGANIZATION

  	
   

  
	
   

  	
   

  	
   

  
	
  2.1

  	
  Formation

  	
  7

  
	
  2.2

  	
  Name

  	
  7

  
	
  2.3

  	
  Registered Office;
  Registered Agent; Other Offices

  	
  8

  
	
  2.4

  	
  Purposes

  	
  8

  
	
  2.5

  	
  Certificate; Foreign
  Qualification

  	
  8

  
	
  2.6

  	
  Term

  	
  8

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 3

  	
   

  
	
   

  	
  GENERAL PARTNER; MANAGEMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  3.1

  	
  Authority of General
  Partner

  	
  8

  
	
  3.2

  	
  Certain Restrictions on
  General Partner’s Power and Authority

  	
  9

  
	
  3.3

  	
  Duties and Services of
  General Partner

  	
  10

  
	
  3.4

  	
  Withdrawal of General
  Partner

  	
  10

  
	
  3.5

  	
  General Partner as Limited
  Partner

  	
  10

  
	
  3.6

  	
  Officers

  	
  10

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 4

  	
   

  
	
   

  	
  LIMITED PARTNERS

  	
   

  
	
   

  	
   

  	
   

  
	
  4.1

  	
  Limited Partner
  Information

  	
  10

  
	
  4.2

  	
  Restrictions on Limited
  Partners

  	
  10

  
	
  4.3

  	
  Access to Information

  	
  11

  
	
  4.4

  	
  Admission of Additional
  Limited Partners

  	
  11

  
	
  4.5

  	
  Representations of the
  Limited Partners

  	
  11

  
	
  4.6

  	
  Specific Performance

  	
  12

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 5

  	
   

  
	
   

  	
  CAPITAL CONTRIBUTIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  5.1

  	
  Capital Contributions of
  Limited Partners

  	
  13

  
	
  5.2

  	
  Capital Contributions of
  General Partner

  	
  13

  
	
  5.3

  	
  Required Advances by
  Limited Partners

  	
  13

  
	
  5.4

  	
  Additional Advances by
  CWEI

  	
  14

  
	
  5.5

  	
  Capital Accounts

  	
  15

  
	
  5.6

  	
  Return of Capital
  Contribution.

  	
  16

  
	
  5.7

  	
  GAAP Capital Accounts

  	
  16

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 6

  	
   

  
	
   

  	
  ALLOCATIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  6.1

  	
  Allocations of Profits and
  Losses

  	
  16

  
	
  6.2

  	
  Regulatory Allocations

  	
  17

  
				

 

i

 

	
  6.3

  	
  Curative Allocations

  	
  18

  
	
  6.4

  	
  Income Tax Allocations

  	
  18

  
	
  6.5

  	
  Other Allocation Rules

  	
  19

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 7

  	
   

  
	
   

  	
  DISTRIBUTIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  7.1

  	
  Distributions

  	
  19

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 8

  	
   

  
	
   

  	
  BOOKS, RECORDS AND BANK ACCOUNTS

  	
   

  
	
   

  	
   

  	
   

  
	
  8.1

  	
  Maintenance of Books

  	
  19

  
	
  8.2

  	
  Accounts

  	
  19

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 9

  	
   

  
	
   

  	
  DISSOLUTION, LIQUIDATION AND TERMINATION

  	
   

  
	
   

  	
   

  	
   

  
	
  9.1

  	
  Dissolution

  	
  20

  
	
  9.2

  	
  Liquidation and
  Termination

  	
  20

  
	
  9.3

  	
  Distributions in Kind

  	
  21

  
	
  9.4

  	
  Deemed Liquidation

  	
  21

  
	
  9.5

  	
  Termination

  	
  21

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 10

  	
   

  
	
   

  	
  RESTRICTIONS ON TRANSFERS

  	
   

  
	
   

  	
   

  	
   

  
	
  10.1

  	
  Restrictions on Transfer

  	
  22

  
	
  10.2

  	
  Right of First Refusal on
  Transfer of Interests

  	
  23

  
	
  10.3

  	
  Rights of Transferees

  	
  24

  
	
   

  	
   

  	
   

  
	
   

  	
  ARTICLE 11

  	
   

  
	
   

  	
  GENERAL PROVISIONS

  	
   

  
	
   

  	
   

  	
   

  
	
  11.1

  	
  Offset

  	
  24

  
	
  11.2

  	
  Notices

  	
  24

  
	
  11.3

  	
  Entire Agreement

  	
  24

  
	
  11.4

  	
  Effect of Waiver or
  Consent

  	
  24

  
	
  11.5

  	
  Amendment or Modification.

  	
  25

  
	
  11.6

  	
  Binding Effect

  	
  25

  
	
  11.7

  	
  Governing Law;
  Jurisdiction and Venue

  	
  25

  
	
  11.8

  	
  Severability

  	
  25

  
	
  11.9

  	
  Further Assurances

  	
  25

  
	
  11.10

  	
  Waiver of Certain Rights

  	
  25

  
	
  11.11

  	
  Insurance

  	
  25

  
	
  11.12

  	
  Indemnification

  	
  26

  
	
  11.13

  	
  Power of Attorney

  	
  26

  
	
  11.14

  	
  Counsel to the Partnership

  	
  27

  
	
  11.15

  	
  Taxation as a Partnership

  	
  27

  
	
  11.16

  	
  Counterparts

  	
  27

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit A – Schedule of
  Partners

  	
   

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

  	
   

  
				

 

ii

 

AGREEMENT OF LIMITED PARTNERSHIP

OF

LARCLAY, L.P.

 

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

 

Recitals:

 

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

 

Accordingly, the Partners hereby agree as follows:

 

ARTICLE 1

DEFINITIONS

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

4

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 2

ORGANIZATION

 

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

 

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

 

7

 

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

 

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

 

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

 

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

 

ARTICLE 3

GENERAL PARTNER; MANAGEMENT

 

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

 

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

 

8

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 4

LIMITED PARTNERS

 

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

 

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

 

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

 

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

 

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

 

10

 

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

 

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

 

(f)            entitled
to withdraw from the Partnership.

 

4.3          Access to
Information

 

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

 

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

 

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

 

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

 

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

 

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

 

4.5          Representations
of the Limited Partners.

 

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

 

11

 

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

 

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

 

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

 

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

 

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

 

12

 

ARTICLE 5

CAPITAL CONTRIBUTIONS

 

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

 

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

 

5.3          Required
Advances by Limited Partners

 

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

 

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

 

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

 

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

 

13

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5.4          Additional
Advances by CWEI.

 

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

 

14

 

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

 

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

 

5.5          Capital
Accounts.

 

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

 

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

 

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

 

15

 

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

 

5.6          Return of
Capital Contribution.

 

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

 

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

 

ARTICLE 6

ALLOCATIONS

 

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

 

(a)           Profits
shall be allocated as follows:

 

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

 

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

 

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

 

(b)           Losses
shall be allocated as follows:

 

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

 

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

 

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

 

16

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

17

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

18

 

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

 

6.5          Other
Allocation Rules.

 

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

 

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

 

ARTICLE 7

DISTRIBUTIONS

 

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

 

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

 

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

 

ARTICLE 8

BOOKS, RECORDS AND BANK ACCOUNTS

 

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

 

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

 

19

 

ARTICLE 9

DISSOLUTION, LIQUIDATION AND TERMINATION

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

20

 

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

 

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

 

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

 

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

 

21

 

ARTICLE 10

RESTRICTIONS ON TRANSFERS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

22

 

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

 

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

 

10.2        Right of
First Refusal on Transfer of Interests.

 

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

 

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

 

23

 

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

 

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

 

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

 

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

 

ARTICLE 11

GENERAL PROVISIONS

 

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

 

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

 

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

 

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

 

24

 

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

 

11.5        Amendment or
Modification.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

25

 

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

 

11.12      Indemnification.

 

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

 

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

 

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

 

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

 

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

 

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

 

26

 

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

 

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

 

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

 

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

 

(f)            to
comply with applicable assumed name laws.

 

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

 

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

 

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

 

[Signature
Pages Follow]

 

27

 

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

 

	
   

  	
  GENERAL PARTNER:

  
	
   

  	
   

  
	
   

  	
  LARCLAY GP, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael L. Pollard

  	
   

  
	
   

  	
   

  	
  Michael L.
  Pollard

  
	
   

  	
   

  	
  Manager

  

 

B-1

 

SIGNATURE
PAGE FOR LIMITED PARTNER

 

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

 

	
  Date: April
  21, 2006

  	
  CLAYTON WILLIAMS
  ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mel G.
  Riggs

  	
   

  
	
   

  	
   

  	
  Mel G. Riggs

  
	
   

  	
   

  	
  Senior Vice
  President and Chief

  Financial Officer

  

 

B-2

 

SIGNATURE
PAGE FOR LIMITED PARTNER

 

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

 

	
  Date: April
  21, 2006

  	
  LARIAT
  SERVICES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ N. Malone Mitchell

  	
   

  
	
   

  	
  Name:

  	
  N. Malone Mitchell

  
	
   

  	
  Title:

  	
  President

  

 

B-3

 

EXHIBIT
A

 

Schedule
of Partners

 

	
   

  	
   

  	
  Initial

  	
   

  	
  Ownership

  	
   

  
	
  Partners

  	
   

  	
  Capital Contributions

  	
   

  	
  Percentage

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Larclay GP, LLC

  	
   

  	
  $

  	
  10,000.00

  	
   

  	
  1

  	
  %

  
	
  CWEI

  	
   

  	
  $

  	
  495,000.00

  	
   

  	
  49.5

  	
  %

  
	
  Lariat

  	
   

  	
  $

  	
  495,000.00

  	
   

  	
  49.5

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  	
  100

  	
  %

  

 

B-4Exhibit 10.3

 

DRILLING
CONTRACT FOR

MULTIPLE
RIGS

 

This Contractis entered into on this 21st day
of April, 2006, by LARCLAY, L.P. a Texas limited partnership, whose address is
701 South Taylor, Suite 426, Amarillo Texas, 79101 (together with its
successors and permitted assigns, “Contractor”) and Clayton Williams Energy, Inc.,
whose address is Six Desta Drive, Suite 3000, Midland Texas, 79705
(together with its successors and permitted assigns, “Operator” and together
with Contractor, “Parties”).

 

WHEREAS, Contractor has contracted for the
construction and delivery of twelve new drilling rigs to be delivered to
Houston, Texas, as identified on Exhibit “A” (individually a “Rig” or
collectively “Rigs”);

 

WHEREAS, Operator has agreed to enter into a
long term contract for the use of the Rigs;

 

WHEREAS, Lariat Services, Inc. (‘Lariat”)
has agreed to operate the Rigs on behalf of Contractor; and

 

WHEREAS, the Parties desire to set forth the
terms and conditions under which the Rigs will be operated;

 

NOW, THEREFORE, for and in consideration of
the mutual premises herein set for the Parties agree as follows:

 

1.               Commencement Date and Term. At such time as
a Rig has been appropriately equipped and ready for use (the “Commencement Date”),
the terms of this Contract and the attachments hereto shall govern the
operation of such Rig for a period of three years from the Commencement Date,
unless sooner terminated pursuant to the terms hereof. As a Rig becomes
available for service, Operator shall provide to Contractor a proposed schedule of
wells to be drilled and the location thereof, and shall use its best efforts to
notify Contactor of changes thereto.

 

2.               Form of Drilling Contract. There shall
be deemed a separate drilling contract for each Rig, as set forth on Exhibit “B”
(a “Drilling Contract”) but subject to the general provisions of this Contract.
This Contract shall govern in the event of a conflict between the provisions of
a Drilling Contract and the terms of this Contract and with respect to matters
not covered in a Drilling Contract.

 

 

3.               Daywork Rates. The rates to be charged by
Contractor to Operator for the use of each Rig shall be the then-current market
rates being charged for similarly sized, and similarly equipped, rigs in the
same geographic area, and in all events each Rig shall be contracted to
Operator upon terms that are no less favorable to Operator or Contractor than
those that would have been obtained in a comparable transaction with an
unrelated third party. These rates will be determined at the time the Rig is
appropriately equipped, ready for use and movement to a drilling location when
assembled at a yard, or upon mobilization when the Rig is outfitted on a
location. Mobilization, demobilization and moving rates shall include the
actual expenses incurred in moving the Rig. At such times that a Rig is not
employed on an Operator location or under a contract to a third party (“Idle
Rig”), the rate charged therefor (“Idle Rig Rate”) shall be as follows: $8,100
per day for a 1000HP Rig, $8,600  per day
for a 1350HP Rig and $10,300 per day for a 2000HP Rig; provided that during
times in which the Idle Rig Rate is in effect and Contractor, in consultation
with Operator, elects not to release the crew, but rather retain the crew on
payroll, the Operator shall be responsible for the actual cost of the crew in
addition to the Idle Rig Rate. The Idle Rig Rate shall be used as the Force
Majeure Rate and rate during times of Rig repair commencing 36 hours from the
event giving rise to the Force Majeure or the shut down of the Rig for repair.

 

4.               Third Party Contracts. From time to time
during the term hereof, one or more Rigs may be contracted  by Contractor to third parties as follows:

 

a.               At Operator’s
request during such time that Operator does not have a location ready for an
available Rig. Such contract shall not exceed a term of three (3) months
or provide for the drilling of more than three (3) wells without the
consent of Operator.

 

b.              At Operator’s
direction in the event that Operator has elected to make a Rig available to a
third party for use in a prospect in which operator shall earn an interest.

 

c.               A contract for a
Rig with third party shall be made on a separate IADC Daywork Drilling Contract
form which shall provide for terms and rates that are at the time of the
contract representative of market in the geographic area of operation for such
Rig for a similarly sized, and similarly equipped rig  This Contract shall be subordinated to the
third party contract for the term thereof; provided, however,  if the revenues generated and collected from
the third party contract are less than the amount that Operator would otherwise
have been required to pay Contractor for such Rig under paragraph 3 of this
Contract had the Rig been an Idle Rig with crew, Operator shall pay Contractor
the amount of such deficit. Except as to any leasehold interest earned by
Operator in connection with contracting a Rig to a third party, Operator shall

 

 

not be entitled to any portion of the
drilling rates or other consideration provided in the third party contract.

 

d.              During any period in
which Operator does not utilize a Rig in its drilling program, which shall
include third party prospects in which Operator will earn an interest by making
a Rig available, Contractor shall offer such Rig to Lariat or its affiliates
for use during such period in preference to other third parties. Lariat and
each of its affiliates who contract for a Rig pursuant to this paragraph 4
shall be deemed to be a third party for all purposes herein.

 

5.               Deployment of Rigs. Operator and Contractor
shall consult in the area of operation for each Rig, but Operator shall have
final authority for the location to which a Rig is to be deployed and operated.

 

6.               Indemnities and Allocation of Risk. Each
party agrees to carry insurance to support the indemnities assumed under the
terms of the Drilling Contract. The insurance shall be of the types and amounts
set forth on Exhibit “C.”

 

7.               Early Termination. This Contract shall
expire on December 31, 2009. Each Party hereto shall have the right to
terminate this Contract only if the other Party (a) is dissolved or
liquidated, (b) begins an Insolvency Proceeding, or (c) an Insolvency
Proceeding is begun against such other Party and not dismissed or stayed within
30 days. For the purposes of this Agreement,  an “Insolvency Proceeding”
is a proceeding by or against any Party under the United States Bankruptcy
Code, or any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.

 

8.               Choice of Law. This Contract and all
attachments hereto are to be governed in accordance with the laws of the State
of Texas, without regard to any conflict of law provisions.

 

9.               Counterparts. This Contract may be
executed in multiple counterparts, and counterparts thus executed shall be
treated as the same instrument.

 

 

IN WITNESS WHEREOF, the parties have caused this Contract to be executed
effective as of the 21st day of April, 2006.

 

	
   

  	
  LARCLAY, L.P., by

  
	
   

  	
  LARCLAY GP, LLC

  
	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
  /s/  Michael W.
  Burnett

  	
   

  
	
   

  	
  Michael W. Burnett, Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CLAYTON WILLIAMS ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
  /s/ T. Mark Tisdale

  	
   

  
	
   

  	
  T. Mark Tisdale, Vice President

  
	
   

  	
  and General Counsel

  
				

 

 

EXHIBIT “A”

To
Drilling Contract For Multiple Rigs

Dated
April     2006

Schedule of
Rigs

 

	
   

  	
   

  	
   

  	
   

  	
  Estimated

  
	
  Rig No.

  	
   

  	
  Size (HP)

  	
   

  	
  Commencement Date

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  21

  	
   

  	
  1350

  	
   

  	
  5/1/2006

  
	
  23

  	
   

  	
  1350

  	
   

  	
  6/1/2006

  
	
  25

  	
   

  	
  1350

  	
   

  	
  7/1/2006

  
	
  27

  	
   

  	
  1350

  	
   

  	
  8/1/2006

  
	
  29

  	
   

  	
  2000

  	
   

  	
  10/1/2006

  
	
  31

  	
   

  	
  1350

  	
   

  	
  9/1/2006

  
	
  32

  	
   

  	
  1000

  	
   

  	
  10/1/2006

  
	
  33

  	
   

  	
  2000

  	
   

  	
  11/1/2006

  
	
  34

  	
   

  	
  1000

  	
   

  	
  10/1/2006

  
	
  35

  	
   

  	
  1000

  	
   

  	
  11/1/2006

  
	
  36

  	
   

  	
  1000

  	
   

  	
  11/1/2006

  
	
  37

  	
   

  	
  1000

  	
   

  	
  12/1/2006

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00102-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00102-of-00352.parquet"}]]