CONFIDENTIAL

 

 

 

                                  CONFIDENTIAL

 

For Private Placement Purposes Only

 

 

               UNIT 2004 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP

                          7130 South Lewis, Suite 1000

                              Tulsa, Oklahoma 74136

                                 (918) 493-7700

 

 

                               A PRIVATE OFFERING

                                       OF

                      UNITS OF LIMITED PARTNERSHIP INTEREST

 

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

 

     THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,

AS AMENDED, OR UNDER APPLICABLE STATE SECURITIES ACTS IN RELIANCE ON EXEMPTIONS

PROVIDED BY SUCH ACTS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE

ABSENCE OF AN EFFECTIVE REGISTRATION UNDER SUCH ACTS OR AN OPINION OF COUNSEL

ACCEPTABLE TO THE GENERAL PARTNER THAT SUCH REGISTRATION IS NOT REQUIRED.

FURTHER, THE RESALE OF A UNIT MAY RESULT IN SUBSTANTIAL TAX LIABILITY TO THE

INVESTOR. SEE "FEDERAL INCOME TAX CONSIDERATIONS." ACCORDINGLY, THESE UNITS

SHOULD BE CONSIDERED ONLY FOR LONG-TERM INVESTMENT. SEE "PLAN OF DISTRIBUTION --

SUITABILITY OF INVESTORS."

 

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

 

     THE INFORMATION CONTAINED IN THIS PRIVATE OFFERING MEMORANDUM IS PROVIDED

BY THE GENERAL PARTNER SOLELY FOR THE PERSONS RECEIVING IT FROM THE GENERAL

PARTNER AND ANY REPRODUCTION OR DISTRIBUTION OF THIS PRIVATE OFFERING

MEMORANDUM, IN WHOLE OR IN PART, OR THE DIVULGENCE OF ANY OF ITS CONTENTS IS

PROHIBITED AND MAY CONSTITUTE A VIOLATION OF CERTAIN STATE SECURITIES LAWS. THE

OFFEREE, BY ACCEPTING DELIVERY OF THIS PRIVATE OFFERING MEMORANDUM, AGREES TO

RETURN IT AND ALL ENCLOSED DOCUMENTS TO THE GENERAL PARTNER IF THE OFFEREE DOES

NOT UNDERTAKE TO PURCHASE ANY OF THE UNITS OFFERED HEREBY.

 

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

 

                Private Offering Memorandum Date January 8, 2004

 

 

 

 

<PAGE>

 

 

                                600 Preformation

                      Units of Limited Partnership Interest

                                     in the

                               UNIT 2004 EMPLOYEE

                         OIL AND GAS LIMITED PARTNERSHIP

 

 

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

 

                          $1,000 Per Unit Plus Possible

                     Additional Assessments of $100 Per Unit

                         (Minimum Investment - 2 Units)

                    Minimum Aggregate Subscriptions Necessary

                         to Form Partnership - 50 Units

 

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

 

     A maximum of 600 (minimum of 50) units of limited partnership interest

("Units") in the UNIT 2004 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP, a proposed

Oklahoma limited partnership (the "Partnership"), are being offered privately

only to certain employees of Unit Corporation ("UNIT") and its subsidiaries and

the directors of UNIT at a price of $1,000 per Unit. Subscriptions shall be for

not less than 2 Units ($2,000). The Partnership is being formed for the purpose

of conducting oil and gas drilling and development operations. Purchasers of the

Units will become Limited Partners in the Partnership. Unit Petroleum Company

("UPC" or the "General Partner") will serve as General Partner of the

Partnership. UPC's address is 7130 South Lewis, Suite 1000, Tulsa, Oklahoma

74136, and telephone (918) 493-7700.

 

                THE RIGHTS AND OBLIGATIONS OF THE GENERAL PARTNER

                  AND THE LIMITED PARTNERS ARE GOVERNED BY THE

               AGREEMENT OF LIMITED PARTNERSHIP (THE "AGREEMENT"),

               A COPY OF WHICH ACCOMPANIES THIS MEMORANDUM AND IS

                        INCORPORATED HEREIN BY REFERENCE

 

             AN INVESTMENT IN THE UNITS IS SPECULATIVE AND INVOLVES

               A HIGH DEGREE OF RISK. SEE "RISK FACTORS." CERTAIN

                           SIGNIFICANT RISKS INCLUDE:

 

     .    Drilling to establish productive oil and natural gas properties is

          inherently speculative.

 

     .    Participants will rely solely on the management capability and

          expertise of the General Partner.

 

     .    Limited Partners must assume the risks of an illiquid investment.

 

     .    Investment in the Units is suitable only for investors having

          sufficient financial resources and who desire a long-term investment.

 

     .    Conflicts of interest exist and additional conflicts of interest may

          arise between the General Partner and the Limited Partners, and there

          are no pre-determined procedures for resolving any such conflicts.

 

                                       ii

 

<PAGE>

 

 

     .    Significant tax considerations to be considered by an investor

          include:

 

     .    possible audit of income tax returns of the Partnership and/or the

          Limited Partners and adjustment to their reported tax liabilities; and

 

     .    a Limited Partner will not benefit from his or her share of

          Partnership deductions in excess of his or her share of Partnership

          income unless he or she has passive income from other activities.

 

     .    There can be no assurance that the Partnership will have adequate

          funds to provide cash distributions to the Limited Partners. The

          amount and timing of any such distributions will be within the

          complete discretion of the General Partner.

 

     .    The amount of any cash distribution which a Limited Partner may

          receive from the Partnership could be insufficient to pay the tax

          liability incurred by such Limited Partner with respect to income or

          gain allocated to such Limited Partner by the Partnership.

 

     .    Certain provisions in the Agreement modify what would otherwise be the

          applicable Oklahoma law as to the fiduciary standards for general

          partners in limited partnerships. Those standards in the Agreement

          could be less advantageous to the Limited Partners than the

          corresponding fiduciary standards otherwise applicable under Oklahoma

          law. The purchase of Units may be deemed as consent to the fiduciary

          standards set forth in the Agreement.

 

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

 

     EXCEPT AS STATED UNDER "ADDITIONAL INFORMATION," NO PERSON HAS BEEN

AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN

THOSE CONTAINED IN THIS PRIVATE OFFERING MEMORANDUM IN CONNECTION WITH THIS

OFFERING AND SUCH REPRESENTATIONS, IF ANY, MAY NOT BE RELIED UPON. THE

INFORMATION CONTAINED IN THIS PRIVATE OFFERING MEMORANDUM IS AS OF THE DATE OF

THIS MEMORANDUM UNLESS ANOTHER DATE IS SPECIFIED.

 

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

 

     PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS PRIVATE

OFFERING MEMORANDUM AS LEGAL, BUSINESS, OR TAX ADVICE. EACH INVESTOR SHOULD

CONSULT HIS OR HER OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR AS TO LEGAL,

BUSINESS, TAX AND RELATED MATTERS CONCERNING HIS OR HER INVESTMENT. PROSPECTIVE

INVESTORS ARE URGED TO REQUEST ANY ADDITIONAL INFORMATION THEY MAY CONSIDER

NECESSARY TO MAKE AN INFORMED INVESTMENT DECISION.

 

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

 

                                      iii

 

<PAGE>

 

 

 

     THE SECURITIES OFFERED BY THIS MEMORANDUM HAVE NOT BEEN APPROVED OR

DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, THE

OKLAHOMA SECURITIES COMMISSION OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY

OTHER STATE, NOR HAS ANY COMMISSION OR AUTHORITY PASSED UPON OR ENDORSED THE

MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS PRIVATE OFFERING

MEMORANDUM. ANY REPRESENTATION CONTRARY TO THE FOREGOING IS UNLAWFUL.

 

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

 

     THESE UNITS ARE BEING OFFERED SUBJECT TO PRIOR SALE, TO WITHDRAWAL,

CANCELLATION OR MODIFICATION OF THE OFFER WITHOUT NOTICE AND TO THE FURTHER

CONDITIONS SET FORTH HEREIN.

 

 

 

                             ADDITIONAL INFORMATION

 

     Each prospective investor, or his or her qualified representative named in

writing, has the opportunity (1) to obtain additional information necessary to

verify the accuracy of the information supplied herewith or hereafter, and (2)

to ask questions and receive answers concerning the terms and conditions of the

offering. If you desire to avail yourself of the opportunity, please contact:

 

                              Mark E. Schell, Esq.

                          7130 South Lewis, Suite 1000

                              Tulsa, Oklahoma 74136

                                 (918) 493-7700

 

 

 

 

 

                                       iv

 

<PAGE>

 

 

 

 

     The following documents and instruments are available to qualified offerees

upon written request:

 

     1.   Amended and Restated Certificate of Incorporation and By-Laws of UNIT.

 

     2.   Certificate of Incorporation and By-Laws of Unit Petroleum Company.

 

     3.   UNIT's Employees' Thrift Plan.

 

     4.   Restated Unit Corporation Amended and Restated Stock Option Plan and

          related prospectuses covering shares of Common Stock issuable upon

          exercise of outstanding options.

 

     5.   UNIT's 2002 Non-Employee Directors' Stock Option Plan.

 

     6.   The Credit Agreement and the notes payable of UNIT.

 

     7.   All periodic reports on Forms 10-K, 10-Q and 8-K and all proxy

          materials filed by or on behalf of UNIT with the Securities and

          Exchange Commission pursuant to the Securities Exchange Act of 1934,

          as amended, during calendar year 2003, the annual report to

          shareholders and all quarterly reports to shareholders submitted by

          UNIT to its shareholders during calendar year 2003.

 

     8.   The Registration Statement on Form S-3 (File No. 333-104165) and all

          supplemental prospectuses filed with the SEC pursuant to Rule 424.

 

     9.   The agreements of limited partnership for the prior oil and gas

          drilling programs and prior employee programs of Unit Petroleum

          Company, UNIT and Unit Drilling and Exploration Company ("UDEC").

 

     10.  All periodic reports filed with the Securities and Exchange Commission

          and all reports and information provided to limited partners in all

          limited partnerships of which Unit Petroleum Company, UNIT or UDEC now

          serves or has served in the past as a general partner.

 

     11.  The agreement of limited partnership for the Unit 1986 Energy Income

          Limited Partnership.

 

 

 

                                       v

 

<PAGE>

 

 

                               SUMMARY OF CONTENTS

 

 

                                                                        Page

SUMMARY OF PROGRAM.........................................................1

   Terms of the Offering...................................................1

   Risk Factors............................................................2

   Additional Financing....................................................4

   Proposed Activities.....................................................4

   Application of Proceeds.................................................4

   Participation in Costs and Revenues.....................................5

   Compensation............................................................6

   Federal Income Tax Considerations; Opinion of Counsel...................6

RISK FACTORS...............................................................7

     INVESTMENT RISKS......................................................7

     TAX STATUS AND TAX RISKS.............................................13

     OPERATIONAL RISKS....................................................14

TERMS OF THE OFFERING.....................................................16

   General................................................................16

   Limited Partnership Interests..........................................16

   Subscription Rights....................................................17

   Payment for Units; Delinquent Installment..............................18

   Right of Presentment...................................................19

   Rollup or Consolidation of Partnership.................................20

 ADDITIONAL FINANCING.....................................................21

   Additional Assessments.................................................21

   Prior Programs.........................................................21

   Partnership Borrowings.................................................22

PLAN OF DISTRIBUTION......................................................22

   Suitability of Investors...............................................23

RELATIONSHIP OF THE PARTNERSHIP, THE GENERAL PARTNER AND AFFILIATES.......24

PROPOSED ACTIVITIES.......................................................24

   General................................................................24

   Partnership Objectives.................................................27

   Areas of Interest......................................................27

   Transfer of Properties.................................................27

   Record Title to Partnership Properties.................................28

   Marketing of Reserves..................................................28

   Conduct of Operations..................................................28

APPLICATION OF PROCEEDS...................................................29

PARTICIPATION IN COSTS AND REVENUES.......................................29

COMPENSATION..............................................................31

   Supervision of Operations..............................................31

   Purchase of Equipment and Provision of Services........................32

   Prior Programs.........................................................32

MANAGEMENT................................................................34

   The General Partner....................................................34

   Officers, Directors and Key Employees..................................34

   Prior Employee Programs................................................37

   Ownership of Common Stock..............................................39

   Interest of Management in Certain Transactions.........................41

CONFLICTS OF INTEREST.....................................................41

   Acquisition of Properties and Drilling Operations......................41

   Participation in UNIT's Drilling or Income Programs....................42

   Transfer of Properties.................................................43

   Partnership Assets.....................................................44

   Transactions with the General Partner or Affiliates....................44

   Right of Presentment Price Determination...............................44

   Receipt of Compensation Regardless of Profitability....................44

   Legal Counsel..........................................................45

 

                                       vi

<PAGE>

 

FIDUCIARY RESPONSIBILITY..................................................45

   General................................................................45

   Liability and Indemnification..........................................46

PRIOR ACTIVITIES..........................................................46

   Prior Employee Programs................................................49

   Results of the Prior Oil and Gas Programs..............................50

FEDERAL INCOME TAX CONSIDERATIONS.........................................58

   Summary of Conclusions.................................................59

   General Tax Effects of Partnership Structure...........................61

   Ownership of Partnership Properties....................................62

   Intangible Drilling and Development Costs Deductions...................63

   Depletion Deductions...................................................63

   Depreciation Deductions................................................64

   Transaction Fees.......................................................64

   Basis and At Risk Limitations..........................................65

   Passive Loss Limitations...............................................65

   Gain or Loss on Sale of Property or Units..............................66

   Partnership Distributions..............................................66

   Partnership Allocations................................................67

   Administrative Matters.................................................67

   Accounting Methods and Periods.........................................68

   State and Local Taxes..................................................68

   Individual Tax Advice Should Be Sought.................................68

COMPETITION, MARKETS AND REGULATION.......................................69

   Marketing of Production................................................69

   Regulation of Partnership Operations...................................70

   Natural Gas Price Regulation...........................................70

   Oil Price Regulation...................................................74

   State Regulation of Oil and Gas Production.............................74

   Legislative and Regulatory Production and Pricing Proposals............74

   Production and Environmental Regulation................................75

SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT..............................76

   Partnership Distributions..............................................76

   Deposit and Use of Funds...............................................76

   Power and Authority....................................................77

   Rollup or Consolidation of the Partnership.............................77

   Limited Liability......................................................77

   Records, Reports and Returns...........................................78

   Transferability of Interests...........................................79

   Amendments.............................................................80

   Voting Rights..........................................................81

   Exculpation and Indemnification of the General Partner.................81

   Termination............................................................82

   Insurance..............................................................82

COUNSEL...................................................................82

GLOSSARY..................................................................83

FINANCIAL STATEMENTS......................................................86

 

EXHIBIT A     - AGREEMENT OF LIMITED PARTNERSHIP

EXHIBIT B     - LEGAL OPINION

 

 

 

                                      vii

 

<PAGE>

 

 

 

                               SUMMARY OF PROGRAM

 

     This summary is not a complete description of the terms and consequences of

an investment in the Partnership and is qualified in its entirety by the more

detailed information appearing throughout this Private Offering Memorandum (this

"Memorandum"). For definitions of certain terms used in this Memorandum, see

"GLOSSARY."

 

Terms of the Offering

 

     Limited Partnership Interests. Unit 2004 Employee Oil and Gas Limited

Partnership, a proposed Oklahoma limited partnership (the "Partnership"), offers

600 preformation units of limited partnership interest ("Units") in the

Partnership. The offer is made only to certain employees of Unit Corporation

("UNIT") and its subsidiaries and directors of UNIT (see "TERMS OF THE OFFERING

-- Subscription Rights"). Unless the context otherwise requires, all references

in this Memorandum to UNIT shall include all or any of its subsidiaries. Unit

Petroleum Company ("UPC" or the "General Partner"), a wholly owned subsidiary of

UNIT, will serve as General Partner of the Partnership.

 

     To invest in the Units, the Limited Partner Subscription Agreement and

Suitability Statement (the "Subscription Agreement") (see Attachment I to

Exhibit A hereto) must be executed and forwarded to the offices of the General

Partner at its address listed on the cover of this Memorandum. The Subscription

Agreement must be received by the General Partner not later than 5:00 P.M.

Central Standard Time on January 30, 2004 (extendable by the General Partner for

up to 30 days). Subscription Agreements may be delivered to the office of the

General Partner. No payment is required upon delivery of the Subscription

Agreement. Payment for the Units will be made either (i) in four equal

Installments, the first of such Installments being due on March 15, 2004 and the

remaining three of such Installments being due on June 15, September 15, and

December 15, 2004, respectively, or (ii) through equal deductions from 2004

salary commencing immediately after formation of the Partnership.

 

     The purchase price of each Unit is $1,000, and the minimum permissible

purchase is two Units ($2,000) for each subscriber. Additional Assessments of up

to $100 per Unit may be required (see "ADDITIONAL FINANCING -- Additional

Assessments"). Maximum purchases by employees (other than directors) will be for

an amount equal to one-half of their base salaries for calendar year 2004. Each

member of the Board of Directors of UNIT may subscribe for up to 250 Units

($250,000). The Partnership must sell at least 50 Units ($50,000) before the

Partnership will be formed. No Units will be offered for sale after the

Effective Date (see "GLOSSARY") except upon compliance with the provisions of

Article XIII of the Agreement. The General Partner may, at its option, purchase

Units as a Limited Partner, including any amount that may be necessary to meet

the minimum number of Units required for formation of the Partnership. The

Partnership will terminate on December 31, 2034, unless it is terminated earlier

pursuant to the provisions of the Agreement or by operation of law. See "TERMS

OF THE OFFERING -- Limited Partnership Interests"; "TERMS OF THE OFFERING --

Subscription Rights"; and "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT --

Termination."

 

     Units will be offered only to those qualified employees of UNIT or any of

its subsidiaries at the date of formation of the Partnership whose annual base

salaries for 2004 have been set at $36,000 or more and directors of UNIT who

meet certain financial requirements which will enable them to bear the economic

risks of an investment in the Partnership and who can demonstrate that they have

sufficient investment experience and expertise to evaluate the risks and merits

of such an investment. The offering will be made privately by the officers and

directors of UPC or UNIT, except that in states which require participation by a

registered broker-dealer in the offer and sale of securities, the Units will be

offered

 

                                       1

<PAGE>

 

through such broker-dealer as may be selected by the General Partner.

Any participating broker-dealer may be reimbursed for actual out-of-pocket

expenses. Such reimbursements will be borne by the General Partner.

 

     Subscription Rights. Only salaried employees of UNIT or any of its

subsidiaries whose annual base salaries for 2004 have been set at $36,000 or

more and directors of UNIT are eligible to subscribe for Units. Employees may

not purchase Units for an amount in excess of one-half of their base salaries

for calendar year 2004. Directors' subscriptions may not be for more than 250

Units ($250,000). Only employees and directors who are U.S. citizens are

eligible to participate in the offering. In addition, employees and directors

must be able to bear the economic risks of an investment in the Partnership and

must have sufficient investment experience and expertise to evaluate the risks

and merits of such an investment. See "TERMS OF THE OFFERING -- Subscription

Rights."

 

     Right of Presentment. After December 31, 2005, the Limited Partners will

have the right to present their Units to the General Partner for purchase. The

General Partner will not be obligated to purchase more than 20% of the then

outstanding Units in any one calendar year. The purchase price to be paid for

the Units will be determined by a specific valuation formula. See "TERMS OF THE

OFFERING -- Right of Presentment" for a description of the valuation formula and

a discussion of the manner in which the right of presentment may be exercised by

the Limited Partners.

 

Risk Factors

 

     An investment in the Partnership has many risks. The "RISK FACTORS" section

of this Memorandum contains a detailed discussion of the most important risks,

organized into Investment Risks (the risks related to the Partnership's

investment in oil and gas properties and drilling activities, to an investment

in the Partnership and to the provisions of the Agreement); Tax Risks (the risks

arising from the tax laws as they apply to the Partnership and its investment in

oil and gas properties and drilling activities); and Operational Risks (the

risks involved in conducting oil and gas operations). The following are certain

of the risks which are more fully described under "RISK FACTORS". Each

prospective investor should review the "RISK FACTORS" section carefully before

deciding to subscribe for Units.

 

     Investment Risks:

 

     o    Future oil and natural gas prices are unpredictable. If oil and

          natural gas prices go down, the Partnership's distributions, if any,

          to the Limited Partners will be adversely affected.

 

     o    The General Partner is authorized under the Agreement to cause, in its

          sole discretion, the sale or transfer of the Partnership's assets to,

          or the merger or consolidation of the Partnership with, another

          partnership, corporation or other business entity. Such action could

          have a material impact on the nature of the investment of all Limited

          Partners.

 

     o    Except for certain transfers to the General Partner and other

          restricted transfers, the Agreement prohibits a Limited Partner from

          transferring Units. Thus, except for the limited right of the Limited

          Partners after December 31, 2005 to present their Units to the General

          Partner for purchase, Limited Partners will not be able to liquidate

          their investments.

 

     o    The Partnership could be formed with as little as $50,000 in Capital

          Contributions (excluding the Capital Contributions of the General

          Partner). As the total amount of Capital Contributions to the

          Partnership will determine the number and diversification of

          Partnership Properties, the ability of the Partnership to pursue its

          investment objectives

 

 

                                       2

<PAGE>

 

          may be restricted in the event that the

          Partnership receives only the minimum amount of Capital Contributions.

 

     o    The drilling and completion operations to be undertaken by the

          Partnership for the development of oil and natural gas reserves

          involve the possibility of a total loss of an investment in the

          Partnership.

 

     o    The General Partner will have the exclusive management and control of

          all aspects of the business of the Partnership. The Limited Partners

          will have no opportunity to participate in the management and control

          of any aspect of the Partnership's activities. Accordingly, the

          Limited Partners will be entirely dependent upon the management skills

          and expertise of the General Partner.

 

     o    Conflicts of interest exist and additional conflicts of interest may

          arise between the General Partner and the Limited Partners, and there

          are no pre-determined procedures for resolving any such conflicts.

          Accordingly the General Partner could cause the Partnership to take

          actions to the benefit of the General Partner but not to the benefit

          of the Limited Partners.

 

     o    Certain provisions in the Agreement modify what would otherwise be the

          applicable Oklahoma law as to the fiduciary standards for a general

          partner in a limited partnership. The fiduciary standards in the

          Agreement could be less advantageous to the Limited Partners and more

          advantageous to the General Partner than corresponding fiduciary

          standards otherwise applicable under Oklahoma law. The purchase of

          Units may be deemed as consent to the fiduciary standards set forth in

          the Agreement.

 

     o    There can be no assurances that the Partnership will have adequate

          funds to provide cash distributions to the Limited Partners. The

          amount and timing of any such distributions will be within the

          complete discretion of the General Partner.

 

     o    The amount of any cash distributions which Limited Partners may

          receive from the Partnership could be insufficient to pay the tax

          liability incurred by such Limited Partners with respect to income or

          gain allocated to such Limited Partners by the Partnership.

 

     Tax  Risks:

 

     o    Tax laws and regulations applicable to partnership investments may

          change at any time and these changes may be applicable retroactively.

 

     o    Certain allocations of income, gain, loss and deduction of the

          Partnership among the Partners may be challenged by the Internal

          Revenue Service (the "Service"). A successful challenge would likely

          result in a Limited Partner having to report additional taxable income

          or being denied a deduction.

 

     o    Investment as a Limited Partner may be less advisable for a person who

          does not have substantial current taxable income from trade or

          business activities in which the Limited Partner does not materially

          participate.

 

     o    Federal income tax payable by a Limited Partner by reason of his or

          her allocated share of Partnership income for any year may exceed the

          Partnership distributions to a Limited Partner for the year.

 

     Operational Risks:

 

                                       3

<PAGE>

 

     o    The search for oil and gas is highly speculative and the drilling

          activities conducted by the Partnership may result in a well that may

          be dry or productive wells that do not produce sufficient oil and gas

          to produce a profit or result in a return of the Limited Partners'

          investment.

 

     o    Certain hazards may be encountered in drilling wells which could lead

          to substantial liabilities to third parties or governmental entities.

          In addition, governmental regulations or new laws relating to

          environmental matters could increase Partnership costs, delay or

          prevent drilling a well, require the Partnership to cease operations

          in certain areas or expose the Partnership to significant liabilities

          for violations of such laws and regulations.

 

Additional Financing

 

     Additional Assessments. After the Aggregate Subscription received from the

Limited Partners has been fully expended or committed and the General Partner's

Minimum Capital Contribution has been fully expended, the General Partner may

make one or more calls for Additional Assessments from the Limited Partners if

additional funds are required to pay the Limited Partners' share of Drilling

Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs.

The maximum amount of total Additional Assessments which may be called for by

the General Partner is $100 per Unit. See "ADDITIONAL FINANCING -- Additional

Assessments."

 

     Partnership Borrowings. After the General Partner's Minimum Capital

Contribution has been expended, the General Partner may cause the Partnership to

borrow funds required to pay Drilling Costs, Special Production and Marketing

Costs or Leasehold Acquisition Costs of Productive properties. Additionally, the

General Partner may, but is not required to, advance funds to the Partnership to

pay such costs. See "ADDITIONAL FINANCING -- Partnership Borrowings."

 

Proposed Activities

 

     General. The Partnership is being formed for the purposes of acquiring

producing oil and gas properties and conducting oil and gas drilling and

development operations. The Partnership will, with certain limited exceptions,

participate on a proportionate basis with UPC in each producing oil and gas

lease acquired and in each oil and gas well commenced by UPC for its own account

or by UNIT during the period from January 1, 2004, if the Partnership is formed

prior to such date or from the date of the formation of the Partnership if

subsequent to January 1, 2004, until December 31, 2004, and will, with certain

limited exceptions, serve as a co-general partner with UNIT in any drilling or

income programs which may be formed by the General Partner or UNIT in 2004. See

"PROPOSED ACTIVITIES."

 

     Partnership Objectives. The Partnership is being formed to provide eligible

employees and directors the opportunity to participate in the oil and gas

exploration and producing property acquisition activities of UNIT during 2004.

UNIT hopes that participation in the Partnership will provide the participants

with greater proprietary interests in UNIT's operations and the potential for

realizing a more direct benefit in the event these operations prove to be

profitable. The Partnership has been structured to achieve the objective of

providing the Limited Partners with essentially the same economic returns that

UNIT realizes from the wells drilled or acquired during 2004.

 

Application of Proceeds

 

     The offering proceeds will be used to pay the Leasehold Acquisition Costs

incurred by the Partnership to acquire those producing oil and gas leases in

which the Partnership participates and the Leasehold Acquisition Costs,

exploration, drilling and development costs incurred by the Partnership

 

                                       4

<PAGE>

 

pursuant to drilling activities in which the Partnership participates. The

General Partner estimates (based on historical operating experience) that such

costs may be expended as shown below based on the assumption of a maximum number

of subscriptions in the first column and a minimum number of subscriptions in

the second column:

 

                                               $600,000                $50,000

                                               Program                 Program

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

 

Leasehold Acquisition Costs

   of Properties to Be Drilled..........       $30,000                  $2,500

 

Drilling Costs of Exploratory

   Wells(1).............................        30,000                   2,500

 

Drilling Costs of Development

   Wells(1).............................       420,000                  35,000

 

Leasehold Acquisition Costs of

   Productive Properties................       120,000                  10,000

 

Reimbursement of General

   Partner's Overhead Costs(2).........           --                      --

                                              ========                 =======

 

Total...................................      $600,000                 $50,000

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

 

     (1) See "GLOSSARY."

 

     (2) The Agreement provides that the General Partner shall be reimbursed by

the Partnership for that portion of its general and administrative overhead

expense attributable to its conduct of Partnership business and affairs but such

reimbursement will be made only out of Partnership Revenue. See "COMPENSATION."

 

Participation in Costs and Revenues

 

     Partnership costs, expenses and revenues will be allocated among the

Partners in the following percentages:

 

 

 

                                       5

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                                      General                     Limited

COSTS AND EXPENSES                    Partner                     Partners

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

 

     Organizational and

        offering costs of the

        Partnership and any

        drilling or income

        programs in which the

        Partnership

        participates as a

        co-general

        partner................         100%                         0%

       

 

     All other Partnership

        costs and expenses

 

        Prior to time Limited

           Partner Capital

           Contributions are

           entirely

           expended............          1%                         99%

          

 

        After expenditure of

           Limited Partner

           Capital

           Contributions and

           until expenditure of

           General Partner's

           Minimum Capital

           Contribution.........       100%                          0%

          

 

        After expenditure of

           General Partner's

           Minimum Capital        General Partner's           Limited Partners'

           Contribution.........    Percentage(1)               Percentage(1)

 

REVENUES........................  General Partner's           Limited Partners'

                                    Percentage(1)               Percentage(1)

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

 

     (1) See "GLOSSARY."

 

Compensation

 

     The General Partner will not receive any management fees in connection with

the operation of the Partnership. The Partnership will reimburse the General

Partner for that portion of its general and administrative overhead expense

attributable to its conduct of Partnership business and affairs. See

"COMPENSATION."

 

Federal Income Tax Considerations; Opinion of Counsel

 

     The General Partner has received an opinion from its tax counsel, Conner &

Winters, P.C. ("Conner & Winters"), concerning all material federal income tax

issues applicable to an investment in the Partnership. To be fully understood,

the complete discussion of these matters set forth in the full tax opinion in

Exhibit B should be read by each prospective investor. Based upon current laws,

regulations, interpretations, and court decisions, Conner & Winters has rendered

its opinion that (i) the material federal income tax benefits in the aggregate

from an investment in the Partnership will be realized; (ii) the Partnership

will be treated as a partnership for federal income tax purposes and not as a

corporation and not as an association taxable as a corporation; (iii) to the

extent the Partnership's wells are timely drilled and its drilling costs are

timely paid, then subject to the limitations on deductions discussed in such

opinion, the Partners will be entitled to claim as deductions their pro rata

shares of the Partnership's intangible drilling and development costs ("IDC")

paid in 2004; (iv) for most Limited Partners, the Partnership's operations will

be considered a passive activity within the meaning of Section 469 of the

Internal Revenue Code of 1986, as amended (the "Code"), and losses generated

therefrom will be limited by the passive activity provisions of the Code; (v) to

the extent provided herein, the Partners'

 

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distributive shares of Partnership tax items will be determined and allocated

substantially in accordance with the terms of the Partnership Agreement; and

(vi) the Partnership will not be required to register with the Service as a tax

shelter.

 

     Due to the lack of authority regarding, or the essentially factual nature

of certain issues, Conner & Winters expresses no opinion on the following: (i)

the impact of an investment in the Partnership on an investor's alternative

minimum tax liability; (ii) whether, under Code Section 183, the losses of the

Partnership will be treated as derived from "activities not engaged in for

profit," and therefore nondeductible from other gross income (due to the

inherently factual nature of a Partner's interest and motive in investing in the

Partnership); (iii) whether any of the Partnership's properties will be

considered "proven" for purposes of depletion deductions; (iv) whether any

interest incurred by a Partner with respect to any borrowings incurred to

purchase Units will be deductible or subject to limitations on deductibility;

and (v) whether the Partnership will be treated as the tax owner of Partnership

Properties acquired by the General Partner as nominee for the Partnership.

 

     THIS MEMORANDUM CONTAINS AN EXPLANATION OF THE MORE SIGNIFICANT TERMS AND

PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP WHICH IS ATTACHED AS EXHIBIT

A. THE SUMMARY OF THE AGREEMENT CONTAINED IN THIS MEMORANDUM IS QUALIFIED IN ITS

ENTIRETY BY SUCH REFERENCE AND ACCORDINGLY THE AGREEMENT SHOULD BE CAREFULLY

REVIEWED AND CONSIDERED.

 

 

                                  RISK FACTORS

 

     Prospective purchasers of Units should carefully study the information

contained in this Memorandum and should make their own evaluations of the

probability for the discovery of oil and natural gas through exploration.

 

INVESTMENT RISKS

 

Financial Risks of Drilling Operations

 

     The Partnership will participate with the General Partner (including, with

certain limited exceptions, other drilling programs sponsored by it, or UNIT)

and, in some cases, other parties ("joint interest parties") in connection with

drilling operations conducted on properties in which the Partnership has an

interest. It is not anticipated that all such drilling operations will be

conducted under turnkey drilling contracts and, thus, all of the parties

participating in the drilling operations on a particular property, including the

Partnership, may be fully liable for their proportionate share of all costs of

such operations even if the actual costs significantly exceed the original cost

estimates. Further, if any joint interest party defaults in its obligation to

pay its share of the costs, the other joint interest parties may be required to

fund the deficiency until, if ever, it can be collected from the defaulting

party. As a result of forced pooling or similar proceedings (see "COMPETITION,

MARKETS AND REGULATION"), the Partnership may acquire larger fractional

interests in Partnership Properties than originally anticipated and, thus, be

required to bear a greater share of the costs of operations. As a result of the

foregoing, the Partnership could become liable for amounts significantly in

excess of the amounts originally anticipated to be expended in connection with

the operations and, in such event, would have only limited means for providing

needed additional funds (see "ADDITIONAL FINANCING"). Also, if a well is

operated by a company which does not or cannot pay the costs and expenses of

drilling or operating a Partnership Well, the Partnership's interest in such

well may become subject to liens and claims of creditors who supplied services

or materials in connection with such operations even though

 

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the Partnership may have previously paid its share of such costs and expenses to

the operator. If the operator is unable or unwilling to pay the amount due, the

Partnership might have to pay its share of the amounts owing to such creditors

in order to preserve its interest in the well which would mean that it would, in

effect, be paying for certain of such costs and expenses twice.

 

Dependence Upon General Partner

 

     The Limited Partners will acquire interests in the Partnership, not in the

General Partner or UNIT. They will not participate in either increases or

decreases in the General Partner's or UNIT's net worth or the value of its

common stock. Nevertheless, because the General Partner is primarily responsible

for the proper conduct of the Partnership's business and affairs and is

obligated to provide certain funds that will be required in connection with its

operations, a significant financial reversal for the General Partner or UNIT

could have an adverse effect on the Partnership and the Limited Partners'

interests therein.

 

     Under the Partnership Agreement, UPC is designated as the General Partner

of the Partnership and is given the exclusive authority to manage and operate

the Partnership's business. See "SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT --

Power and Authority". Accordingly, Limited Partners must rely solely on the

General Partner to make all decisions on behalf of the Partnership, as the

Limited Partners will have no role in the management of the business of the

Partnership.

 

     The Partnership's success will depend, in part, upon the management

provided by the General Partner, the ability of the General Partner to select

and acquire oil and gas properties on which Partnership Wells capable of

producing oil and natural gas in commercial quantities may be drilled, to fund

the acquisition of revenue producing properties, and to market oil and natural

gas produced from Partnership Wells.

 

Conflicts of Interest

 

     UNIT and its subsidiaries have engaged in oil and gas exploration and

development and in the acquisition of producing properties for their own account

and as the sponsors of drilling and income programs formed with third party

investors. It is anticipated that UNIT and its subsidiaries will continue to

engage in such activities. However, with certain exceptions, it is likely that

the Partnership will participate as a working interest owner in all producing

oil and gas leases acquired and in all oil and gas wells commenced by the

General Partner or UNIT for its own account during the period from January 1,

2004, if the Partnership is formed prior to such date, or from the date of the

formation of the Partnership, if subsequent to January 1, 2004, through December

31, 2004 and, with certain limited exceptions, will be a co-general partner of

any drilling or income programs, or both, formed by the General Partner or UNIT

in 2004. The General Partner will determine which prospects will be acquired or

drilled. With respect to prospects to be drilled, certain of the wells which are

drilled for the separate account of the Partnership and the General Partner may

be drilled on prospects on which initial drilling operations were conducted by

UNIT or the General Partner prior to the formation of the Partnership. Further,

certain of the Partnership Wells will be drilled on prospects on which the

General Partner and possibly future employee programs may conduct additional

drilling operations in years subsequent to 2004. Except with respect to its

participation as a co-general partner of any drilling or income program

sponsored by the General Partner or UNIT, the Partnership will have an interest

only in those wells begun in 2004 and will have no rights in production from

wells commenced in years other than 2004. Likewise, if additional interests are

acquired in wells participated in by the Partnership after 2004, the Partnership

will generally not be entitled to participate in the acquisition of such

additional interests. See "CONFLICTS OF INTEREST -- Acquisition of Properties

and Drilling Operations."

 

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     The Partnership may enter into contracts for the drilling of some or all of

the Partnership Wells wit