UNIT 2006 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP AGREEMENT

Exhibit 10.2.46

CONFIDENTIAL

For Private Placement Purposes Only

UNIT 2006 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP

7130 South Lewis Avenue, 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 December 27, 2005

800 Preformation

Units of Limited Partnership Interest

in the

UNIT 2006 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 800 (minimum of 50) units of limited partnership interest (“Units”) in the UNIT 2006 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 Avenue, 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:

 

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Drilling to establish productive oil and natural gas properties is inherently speculative.

 

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Participants will rely solely on the management capability and expertise of the General Partner.

 

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Limited Partners must assume the risks of an illiquid investment.

 

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Investment in the Units is suitable only for investors having sufficient financial resources and who desire a long-term investment.

 

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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.

 

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Significant tax considerations to be considered by an investor include:

 

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possible audit of income tax returns of the Partnership and/or the Limited Partners and adjustment to their reported tax liabilities; and

 

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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.

 

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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.

 

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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.

 

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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.

 

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.

 

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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 Avenue, Suite 1000

Tulsa, Oklahoma 74136

(918) 493-7700

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 2005, the annual report to shareholders and all quarterly reports to shareholders submitted by UNIT to its shareholders during calendar year 2005.

 

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.

 

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SUMMARY OF CONTENTS

 

 

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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 2006 Employee Oil and Gas Limited Partnership, a proposed Oklahoma limited partnership (the “Partnership” ), offers 800 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 signed 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 25, 2006 (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, 2006 and the remaining three of such Installments being due on June 15, September 15, and December 15, 2006, respectively, or (ii) through equal deductions from 2006 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 2005; provided, however, that the General Partner may, at its discretion, accept subscriptions for greater amounts. Each member of the Board of Directors of UNIT may subscribe for up to 300 Units ($300,000). 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, 2036, 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 2005 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 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 2005 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 2005; provided, however, that the General Partner may, at its discretion, accept a subscription for a greater amount. Directors’ subscriptions may not be for more than 300 Units ($300,000). Only employees and directors who are U.S.

 

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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, 2007, 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:

 

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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.

 

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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.

 

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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, 2007 to present their Units to the General Partner for purchase, Limited Partners will not be able to liquidate their investments.

 

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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 may be restricted in the event that the Partnership receives only the minimum amount of Capital Contributions.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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:

 

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Tax laws and regulations applicable to partnership investments may change at any time and these changes may be applicable retroactively.

 

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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.

 

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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.

 

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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:

 

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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.

 

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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,

 

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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, 2006, if the Partnership is formed prior to such date or from the date of the formation of the Partnership if subsequent to January 1, 2006, until December 31, 2006, 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 2006. 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 2006. 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 2006.

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 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:

 

(1)	See “GLOSSARY.”

 

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(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:

 

(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, LLP (“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 2006; (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’ distributive shares of Partnership

 

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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.

The opinion of Conner & Winters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed by the Service. The opinion of Conner & Winters was written to support the promotion or marketing of Units in the Partnership. Prospective investors should seek advice based on their particular circumstances from an independent tax advisor.

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 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.

 

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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, 2006, if the Partnership is formed prior to such date, or from the date of the formation of the Partnership, if subsequent to January 1, 2006, through December 31, 2006 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 2006. 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 2006. 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 2006 and will have no rights in production from wells commenced in years other than 2006. Likewise, if additional interests are acquired in wells participated in by the Partnership after 2006, 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.”

The Partnership may enter into contracts for the drilling of some or all of the Partnership Wells with affiliates of the General Partner. Likewise the Partnership may sell or market some or all of its natural gas production to an affiliate of the General Partner. These contracts may not necessarily be negotiated on an arm’s—length basis. The General Partner is subject to a conflict of interest in selecting an affiliate of the General Partner to drill the Partnership Wells and/or market the natural gas therefrom. The compensation under these contracts will be determined at the time of entering into each such contract, and the costs to be paid thereunder or the sale price to be received will be one which is competitive with the costs charged or the prices paid by unaffiliated parties in the same geographic region. The General Partner will make the determination of what are competitive rates or prices in the area. No provision has been made for an independent review of the fairness and reasonableness of such compensation. See “CONFLICTS OF INTERESTS — Transactions with the General Partner or Affiliates.”

Prohibition on Transferability; Lack of Liquidity

Except for certain transfers (i) to the General Partner, (ii) to or for the benefit of the transferor Limited Partner or members of his or her immediate family sharing the same residence, and (iii) by reason of death or operation of

 

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law, a Limited Partner may not transfer or assign Units. The General Partner has agreed, however, that it will, if requested at any time after December 31, 2007, buy Units for prices determined either by an independent petroleum engineering firm or the General Partner pursuant to a formula described under “TERMS OF THE OFFERING — Right of Presentment.” This obligation of the General Partner to purchase Units when requested is limited and does not assure the liquidity of a Limited Partner’s investment, and the price received may be less than if the Limited Partner continued to hold his or her Units. In addition, similar commitments have been made and may hereafter be made to investors in other oil and gas drilling, income and employee programs sponsored by the General Partner or UNIT. There can be no assurance that the General Partner will have the financial resources to honor its repurchase commitments. See “TERMS OF THE OFFERING — Right of Presentment.”

Delay of Cash Distributions

For income tax purposes, a Limited Partner must report his or her distributive (allocated) share of the income, gains, losses and deductions of the Partnership whether or not cash distributions are made. No cash distributions are expected to be made earlier than the first quarter of 2007. In addition, to the extent that the Partnership uses its revenues to repay borrowings or to finance its activities (see “ADDITIONAL FINANCING”), the funds available for cash distributions by the Partnership will be reduced or may be unavailable. It is possible that the amount of tax payable by a Limited Partner on his or her distributive share of the income of the Partnership will exceed his or her cash distributions from the Partnership. See “FEDERAL INCOME TAX CONSIDERATIONS.”

If and the date any distributions commence and their subsequent timing or amount cannot be accurately predicted. The decision as to whether or not the Partnership will make a cash distribution at any particular time will be made solely by the General Partner.

Limitations on Voting and Other Rights of Limited Partners

The Agreement, as permitted under the Oklahoma Revised Uniform Limited Partnership Act (the “Act” ), eliminates or limits the rights of the Limited Partners to take certain actions, such as:

 

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withdrawing from the Partnership,

 

•

transferring Units without restrictions, or

 

•

consenting to or voting upon certain matters such as:

 

(i)

admitting a new General Partner,

 

(ii)

admitting Substituted Limited Partners, and

 

(iii)

dissolving the Partnership.

Furthermore, the Agreement imposes restrictions on the exercise of voting rights granted to Limited Partners. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Voting Rights.” Without the provisions to the contrary which are contained in the Agreement, the Act provides that certain actions can be taken only with the consent of all Limited Partners. Those provisions of the Agreement which provide for or require the vote of the Limited Partners, generally permit the approval of a proposal by the vote of Limited Partners holding a majority of the outstanding Units. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Voting Rights.” Thus, Limited Partners who do not agree with or do not wish to be subject to the proposed action may nevertheless become subject to the action if the required majority approval is obtained. Notwithstanding the rights granted to Limited Partners under the Agreement and the Act, the General Partner retains substantial discretion as to the operation of the Partnership.

Rollup or Consolidation of Partnership

Under the terms of the Agreement, at any time two years or more after the Partnership has completed substantially all of its property acquisition, drilling and development operations, the General Partner is authorized to cause the Partnership to transfer its assets to, or to merge or consolidate with, another partnership or a corporation or other entity for the purpose of combining the oil and gas properties and other assets of the Partnership with those of

 

8

other partnerships formed for investment or participation by the employees, directors and/or consultants of UNIT or any of its subsidiaries. Such transfer or combination may be effected without the vote, approval or consent of the Limited Partners. In such event, the Limited Partners will receive interests in the transferee or resulting entity which will mean that they will most likely participate in the results of a larger number of properties but will have proportionately smaller allocable interests therein. Any such transaction is required to be effected in a manner which UNIT and the General Partner believe is fair and equitable to the Limited Partners but there can be no assurance that such transaction will in fact be in the best interests of the Limited Partners. Limited Partners have no dissenters’ or appraisal rights under the terms of the Agreement or the Act. Such a transaction would result in the termination and dissolution of the Partnership. While there can be no assurance that the Partnership will participate in such a transaction, the General Partner currently anticipates that the Partnership will, at the appropriate time, be involved in such a transaction. See “TERMS OF OFFERING,” and “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT.”

Partnership Borrowings

The General Partner has the authority to cause the Partnership to borrow funds to pay certain costs of the Partnership. While the use of financing to preserve the Partnership’s equity in oil and gas properties will be intended to increase the Partnership’s profits, such financing could have the effect of increasing the Partnership’s losses if the Partnership is unsuccessful. In addition, the Partnership may have to mortgage its oil and gas properties and other assets in order to obtain additional financing. If the Partnership defaults on such indebtedness, the lender may foreclose and the Partnership could lose its investment in such oil and gas properties and other assets. See “ADDITIONAL FINANCING — Partnership Borrowings.”

Limited Liability

Under the Act a Limited Partner’s liability for the obligations of the Partnership is limited to such Limited Partner’s Capital Contribution and such Limited Partner’s share of Partnership assets. In addition, if a Limited Partner receives a return of any part of his or her Capital Contribution, such Limited Partner is generally liable to the Partnership for a period of one year thereafter (or six years in the event such return is in violation of the Agreement) for the amount of the returned contribution. A Limited Partner will not otherwise be liable for the obligations of the Partnership unless, in addition to the exercise of his or her rights and powers as a Limited Partner, such Limited Partner participates in the control of the business of the Partnership.

The Agreement provides that by a vote of a majority in interest, the Limited Partners may effect certain changes in the Partnership such as termination and dissolution of the Partnership and amendment of the Agreement. The exercise of any of these and certain other rights is conditioned upon receipt of an opinion by Conner & Winters for the Limited Partners or an order or judgment of a court of competent jurisdiction to the effect that the exercise of such rights will not result in the loss of the limited liability of the Limited Partners or cause the Partnership to be classified as an association taxable as a corporation (see “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Amendments” and “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Termination”). As a result of certain judicial opinions it is not clear that these rights will ever be available to the Limited Partners. Nevertheless, in spite of the receipt of any such opinion or judicial order, it is still possible that the exercise of any such rights by the Limited Partners may result in the loss of the Limited Partners’ limited liability. The Partnership will be governed by the Act. The Act expressly permits limited partners to vote on certain specified partnership matters without being deemed to be participating in the control of the Partnership’s business and, thus, should result in greater certainty and more easily obtainable opinions of Conner & Winters regarding the exercise of most of the Limited Partners’ rights.

If the Partnership is dissolved and its business is not to be continued, the Partnership will be wound up. In connection with the winding up of the Partnership, all of its properties may be sold and the proceeds thereof credited to the accounts of the Partners. Properties not sold will, upon termination of the Partnership, be distributed to the Partners. The distribution of Partnership Properties to the Limited Partners would result in their having unlimited liability with respect to such properties. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Limited Liability.”

 

9

Partnership Acting as Co-General Partner

It is anticipated that the Partnership will serve as a co-general partner in any drilling or income programs formed by the General Partner or UNIT during 2006. See “PROPOSED ACTIVITIES.” Accordingly, the Partnership generally will be liable for the obligation and recourse liabilities of any such drilling or income program formed. While a Limited Partner’s liability for such claims will be limited to such Limited Partners Capital Contribution and share of Partnership assets, such claims if satisfied from the Partnership’s assets could adversely affect the operations of the Partnership.

Past-Due Installments; Acceleration; Additional Assessments

Installments and Additional Assessments (see “ADDITIONAL FINANCING”) are legally binding obligations and past-due amounts will bear interest at the rate set forth in the Agreement; provided, however, that if the General Partner determines that the total Aggregate Subscription is not required to fund the Partnership’s business and operations, then the General Partner may, at its sole option, elect to release the Limited Partners from their obligation to pay one or more Installments and amend any relevant Partnership documents accordingly. It is anticipated that the total Aggregate Subscription will be required to fund the Partnership’s business and operations. In the event an Installment is not paid when due and the General Partner has not released the Limited Partners from their obligation to pay such Installment, then the General Partner may, at its sole option, purchase all Units of the director or employee who fails to pay such Installment, at a price equal to the amount of the prior Installments paid by such person. The General Partner may also bring legal proceedings to collect any unpaid Installments not waived by it or Additional Assessments. In addition, as indicated under “TERMS OF THE OFFERING — Payment for Units; Delinquent Installment,” if an employee’s employment with or position as a director of the General Partner, UNIT or any affiliate thereof is terminated other than by reason of Normal Retirement (see “GLOSSARY”), death or disability prior to the time the full amount of the subscription price for his or her Units has been paid, all unpaid Installments not waived by the General Partner as described above will become due and payable upon such termination.

Partnership Funds

Except for Capital Contributions, Partnership funds are expected to be commingled with funds of the General Partner or UNIT. Thus, Partnership funds could become subject to the claims of creditors of the General Partner or UNIT. The General Partner believes that its assets and net worth are such that the risk of loss to the Partnership by virtue of such fact is minimal but there can be no assurance that the Partnership will not suffer losses of its funds to creditors of the General Partner or UNIT. !

Compliance with Federal and State Securities Laws

This offering has not been registered under the Securities Act of 1933, as amended, in reliance upon exemptive provisions of said act. Further, these interests are being sold pursuant to exemptions from registration in the various states in which they are being offered and may be subject to additional restrictions in such jurisdictions on transfer. There is no assurance that the offering presently qualifies or will continue to qualify under such exemptive provisions due to, among other things, the adequacy of disclosure and the manner of distribution of the offering, the existence of similar offerings conducted by the General Partner or UNIT or its affiliates in the past or in the future, a failure or delay in providing notices or other required filings, the conduct of other oil and gas activities by the General Partner or UNIT and its affiliates or the change of any securities laws or regulations.

If and to the extent suits for rescission are brought and successfully concluded for failure to register this offering or other offerings under the Securities Act of 1933, as amended, or state securities acts, or for acts or omissions constituting certain prohibited practices under any of said acts, both the capital and assets of the General Partner and the Partnership could be adversely affected, thus jeopardizing the ability of the Partnership to operate successfully. Further, the time and capital of the General Partner could be expended in defending an action by investors or by state or federal authorities even where the Partnership and the General Partner are ultimately exonerated.

 

10

Title to Properties

The Partnership Agreement empowers the General Partner, UNIT or any of their affiliates, to hold title to the Partnership Properties for the benefit of the Partnership. As such it is possible that the Partnership Properties could be subject to the claims of creditors of the General Partner. The General Partner is of the opinion that the likelihood of the occurrence of such claims is remote. However, the Partnership Property could be subject to claims and litigation in the event that the General Partner failed to pay its debts or became subject to the claims of creditors.

Use of Partnership Funds to Exculpate and Indemnify the General Partner

The Agreement contains certain provisions which are intended to limit the liability of the General Partner and its affiliates for certain acts or omissions within the scope of the authority conferred upon them by the Agreement. In addition, under the Agreement, the General Partner will be indemnified by the Partnership against losses, judgments, liabilities, expenses and amounts paid in settlement sustained by it in connection with the Partnership so long as the losses, judgments, liabilities, expenses or amounts were not the result of gross negligence or willful misconduct on the part of the General Partner. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Exculpation and Indemnification of the General Partner.”

The Partnership Agreement May Limit the Fiduciary Obligation of the General Partner to the Partnership and the Limited Partners

The Agreement contains certain provisions which modify what would otherwise be the applicable Oklahoma law relating to the fiduciary standards of the General Partner to the Limited Partners. The fiduciary standards in the Agreement could be less advantageous to the Limited Partners and more advantageous to the General Partner than the corresponding fiduciary standards otherwise applicable under Oklahoma law (although there are very few legal precedents clarifying exactly what fiduciary standards would otherwise be applicable under Oklahoma law). The purchase of Units may be deemed as consent to the fiduciary standards set forth in the Agreement. See “FIDUCIARY RESPONSIBILITY.” As a result of these provisions in the Agreement, the Limited Partners may find it more difficult to hold the General Partner responsible for acting in the best interest of the Partnership and the Limited Partners than if the fiduciary standards of the otherwise applicable Oklahoma law governed the situation.

TAX STATUS AND TAX RISKS

It is possible that the tax treatment currently available with respect to oil and gas exploration and production will be modified or eliminated on a retroactive or prospective basis by legislative, judicial, or administrative actions. The limited tax benefits associated with oil and gas exploration do not eliminate the inherent economic risks. See “Federal Income Tax Considerations.”

Partnership Classification

Conner & Winters has rendered its opinion that the Partnership will be classified for federal income tax purposes as a partnership and not as a corporation, an association taxable as a corporation or a “publicly traded partnership.” Such opinion is not binding on the Service or the courts. If the Partnership were classified as a corporation, association taxable as a corporation or publicly traded partnership, any income, gain, loss, deduction, or credit of the Partnership would remain at the entity level, and not flow through to the Partners, the income of the Partnership would be subject to corporate tax rates at the entity level and distributions to the Partners could be considered dividend distributions. See “Federal Income Tax Considerations—General Tax Effects of Partnership Structure.”

Limited Partner Interests

An investment as a Limited Partner may not be advisable for a person who does not anticipate having substantial current taxable income from passive trade or business activities (not counting dividend or interest income). Most Limited Partners will be subject to the “passive activity loss” rules and will be unable to use passive losses generated by the Partnership until and unless he or she has realized “passive income”.

 

11

Tax Liabilities in Excess of Cash Distributions

A Partner must include in his or her own income tax return his or her share of the items of the Partnership’s income, gain, profit, loss, and deductions whether or not cash proceeds are actually distributed to the Partner to pay any tax resulting from the Partnership’s activities. For example, income from the Partnership’s sale of oil and gas production will be taxable to Partners as ordinary income subject to depletion and other deductions whether or not the proceeds from such sale are actually distributed (for example, where Partnership income is used to repay Partnership indebtedness).

Items Not Covered by the Tax Opinion

Due to the lack of authority regarding, or the essentially factual nature of certain issues, Conner & Winters has expressed no opinion as to the following: (i) the impact of an investment in the Partnership on an investor’s alternative minimum tax liability; (ii) whether any of the Partnership’s properties will be considered “proven” for purposes of depletion deductions; and (iii) whether the Partnership will be treated as the tax owner of Partnership Properties acquired by the General Partner as nominee for the Partnership.

The determination of the proper treatment as to the above-referenced issues is dependent on facts not currently available. Therefore, Conner & Winters is unable to render an opinion at this time with respect to such issues. Also, the unknown facts with respect to the various issues referred to above will vary from Partner to Partner and will result in different tax consequences and burdens for individual Partners.

Tax Opinion Not Binding on Service

Prospective investors should recognize that an opinion of legal counsel merely represents such counsel’s best legal judgment under existing statutes, judicial decisions, and administrative regulations and interpretations. There can be no assurance that deductions claimed by the Partnership in reliance upon the opinion of Conner & Winters will not be challenged successfully by the Service.

The opinion of Conner & Winters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed by the Service. The opinion of Conner & Winters was written to support the promotion or marketing of Units in the Partnership. Prospective investors should seek advice based on their particular circumstances from an independent tax advisor.

OPERATIONAL RISKS

Risks Inherent in Oil and Gas Operations

The Partnership will be participating with the General Partner in acquiring producing oil and gas leases and in the drilling of those oil and gas wells commenced by the General Partner from the later of January 1, 2006 or the time the Partnership is formed through December 31, 2006 and, with certain limited exceptions, serving as a co-general partner of any oil and gas drilling or income programs, or both, formed by the General Partner or UNIT during 2006.

All drilling to establish productive oil and natural gas properties is inherently speculative. The techniques presently available to identify the existence and location of pools of oil and natural gas are indirect, and, therefore, a considerable amount of personal judgment is involved in the selection of any prospect for drilling. The economics of oil and natural gas drilling and production are affected or may be affected in the future by a number of factors which are beyond the control of the General Partner, including (i) the general demand in the economy for energy fuels, (ii) the worldwide supply of oil and natural gas, (iii) the price of, as well as governmental policies with respect to, oil imports, (iv) potential competition from competing alternative fuels, (v) governmental regulation of prices for oil and natural gas production, gathering and transportation, (vi) state regulations affecting allowable rates of production, well spacing and other factors, and (vii) availability of drilling rigs, casing and other necessary goods and services. See “COMPETITION, MARKETS AND REGULATION.” The revenues, if any, generated from Partnership operations will be highly dependent upon the future prices and demand for oil and natural gas. The factors enumerated above affect, and will continue to affect, oil and natural gas prices. Recently, prices for oil and natural gas have fluctuated over a wide range.

 

12

Operating and Environmental Hazards

Operating hazards such as fires, explosions, blowouts, unusual formations, formations with abnormal pressures and other unforeseen conditions are sometimes encountered in drilling wells. On occasion, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce the funds available for exploration and development or result in loss of Partnership Properties. The Partnership will attempt to maintain customary insurance coverage, but the Partnership may be subject to liability for pollution and other damages or may lose substantial portions of its properties due to hazards against which it cannot insure or against which it may elect not to insure due to unreasonably high or prohibitive premium costs or for other reasons. The activities of the Partnership may expose it to potential liability for pollution or other damages under laws and regulations relating to environmental matters (see “Government Regulation and Environmental Risks” below).

Competition

The oil and gas industry is highly competitive. The Partnership will be involved in intense competition for the acquisition of quality undeveloped leases and producing oil and gas properties. There can be no assurance that a sufficient number of suitable oil and gas properties will be available for acquisition or development by the Partnership. The Partnership will be competing with numerous major and independent companies which possess financial resources and staffs larger than those available to it. The Partnership, therefore, may be unable in certain instances to acquire desirable leases or supplies or may encounter delays in commencing or completing Partnership operations.

Markets for Oil and Natural Gas Production

Historically (prior to the early 1980s), world oil prices were established and maintained largely as a result of the actions of members of OPEC to limit, and maintain a base price for, their oil production. Until recently, however, members of OPEC were unable to agree to and maintain price and production controls, which resulted in significant downward pressure on oil prices. Commencing in early 2001, OPEC members were able to reach agreement on oil production levels which has contributed to a rise in oil prices. Although future levels of production by the members of OPEC or the degree to which oil prices will be affected thereby cannot be predicted, it is possible that prices for oil produced in the future will be higher or lower than those currently available. There can be no assurance that the oil that the Partnership produces can be marketed on favorable price and other contractual terms. See “COMPETITION, MARKETS AND REGULATION — Marketing of Production.”

The natural gas market is also unsettled due to a number of factors. In the past, production from natural gas wells in some geographic areas of the United States was curtailed for considerable periods of time due to a lack of market demand. Over the past several years demand for natural gas has increased greatly limiting the number of wells being shut in for lack of demand. It is possible, however, that Partnership Wells may in the future be shut-in or that natural gas will be sold on terms less favorable than might otherwise be obtained should demand for gas lessen in the future. Competition for available markets has been vigorous and there remains great uncertainty about prices that purchasers will pay. In recent years, significant court decisions and regulatory changes have affected the natural gas markets. As a result of such court decisions, regulatory changes and unsettled market conditions, natural gas regulations may be modified in the future and may be subject to further judicial review or invalidation. The combination of these factors, among others, makes it particularly difficult to estimate accurately future prices of natural gas, and any assumptions concerning future prices may prove incorrect. Natural gas surpluses could result in the Partnership’s inability to market natural gas profitably, causing Partnership Wells to curtail production and/or receive lower prices for its natural gas, situations which would adversely affect the Partnership’s ability to make cash distributions to its participants. See “COMPETITION, MARKETS AND REGULATION.”

In the event that the Partnership discovers or acquires natural gas reserves, there may be delays in commencing or continuing production due to the need for gathering and pipeline facilities, contract negotiation with the available market, pipeline capacities, seasonal takes by the gas purchaser or a surplus of available gas reserves in a particular area.

 

13

Government Regulation and Environmental Risks

The oil and gas business is subject to pervasive government regulation under which, among other things, rates of production from producing properties may be fixed and the prices for gas produced from such producing properties may be impacted. It is possible that these regulations pertaining to rates of production could become more pervasive and stringent in the future. The activities of the Partnership may expose it to potential liability under laws and regulations relating to environmental matters which could adversely affect the Partnership. Compliance with these laws and regulations may increase Partnership costs, delay or prevent the drilling of wells, delay or prevent the acquisition of otherwise desirable producing oil and gas properties, require the Partnership to cease operations in certain areas, and cause delays in the production of oil and gas. See “COMPETITION, MARKETING AND REGULATION.”

Leasehold Defects

In certain instances, the Partnership may not be able to obtain a title opinion or report with respect to a producing property that is acquired. Consequently, the Partnership’s title to any such property may be uncertain. Furthermore, even if certain technical defects do appear in title opinions or reports with respect to a particular property, the General Partner, in its sole discretion, may determine that it is in the best interest of the Partnership to acquire such property without taking any curative action.

TERMS OF THE OFFERING

General

 

•

800 Maximum Units; 50 Minimum Units

 

•

$1,000 Units; Minimum subscription: $2,000

 

•

Minimum Partnership: $50,000 in subscriptions

 

•

Maximum Partnership: $800,000 in subscriptions

Limited Partnership Interests

The Partnership hereby offers to certain employees (described under “Subscription Rights” below) and directors of UNIT and its subsidiaries an aggregate of 800 Units. The purchase price of each Unit is $1,000, and the minimum permissible purchase by any eligible subscriber is two Units ($2,000). See “Subscription Rights” below for the maximum number of Units that may be acquired by subscribers.

The Partnership will be formed as an Oklahoma limited partnership upon the closing of the offering of Units made by this Memorandum. The General Partner will be Unit Petroleum Company (the “General Partner” , or “UPC” ), an Oklahoma corporation. Partnership operations will be conducted from the General Partner’s offices, the address of which is 7130 South Lewis Avenue, Suite 1000, Tulsa, Oklahoma 74136, telephone (918) 493-7700.

The offering of Units will be closed on January 25, 2006 unless extended by the General Partner for up to 30 days, and all Units subscribed will be issued on the Effective Date. The offering may be withdrawn by the General Partner at any time prior to such date if it believes it to be in the best interests of the eligible employees and Directors or the General Partner not to proceed with the offering.

If at least 50 Units ($50,000) are not subscribed prior to the termination of the offering, the Partnership will not commence business. The General Partner may, on its own accord, purchase Units and, in such capacity, will enjoy the same rights and obligations as other Limited Partners, except the General Partner will have unlimited liability. The General Partner may, in its discretion, purchase Units sufficient to reach the minimum Aggregate Subscription ($50,000). Because the General Partner or its affiliates might benefit from the successful completion of this offering (see “PARTICIPATION IN COSTS, AND REVENUES” and “COMPENSATION”), investors should not expect that sales of the minimum Aggregate Subscription indicate that such sales have been made to

 

14

investors that have no financial or other interest in the offering or that have otherwise exercised independent investment discretion. Further, the sale of the minimum Aggregate Subscription is not designed as a protection to investors to indicate that their interest is shared by other unaffiliated investors and no investor should place any reliance on the sale of the minimum Aggregate Subscription as an indication of the merits of this offering. Units acquired by the General Partner will be for investment purposes only without a present intent for resale and there is no limit on the number of Units that may be acquired by it.

Subscription Rights

Units are offered only to persons who are salaried employees of UNIT or its subsidiaries at the date of formation of the Partnership and whose annual base salaries for 2005 (excluding bonuses) have been set at $36,000 or more and to directors of UNIT. 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 “PLAN OF DISTRIBUTION — Suitability of Investors.”

Eligible employees and directors are restricted as to the number of Units they may purchase in the offering. The maximum number of Units which can be acquired by any employee is that number of whole Units which can be purchased with an amount which does not exceed one-half of the employee’s base salary for 2005; provided, however, that the General Partner may, at its discretion, accept a subscription for a greater amount. Each director of UNIT may subscribe for a maximum of 300 Units (maximum investment of $300,000). At December 27, 2005 there were approximately 494 people eligible to purchase Units.

Eligible employees and directors may acquire Units through a corporation or other entity in which all of the beneficial interests are owned by them or permitted assignees (see “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Transferability of Interests”); provided that such employees or Directors will be jointly and severally liable with such entity for payment of the Capital Subscription.

If all eligible employees and directors subscribed for the maximum number of Units, the Units would be oversubscribed. In that event, Units would be allocated among the respective subscribers in the proportion that each subscription amount bears to total subscriptions obtained.

No employee is obligated to purchase Units in order to remain in the employ of UNIT, and the purchase of Units by any employee will not obligate UNIT to continue the employment of such employee. Units may be subscribed for by the spouse or a trust for the minor children of eligible employees and directors.

Payment for Units; Delinquent Installment

The Capital Subscriptions of the Limited Partners will be payable either (i) in four equal Installments, the first of such Installments being due on March 15, 2006 and the remaining three of such Installments being due on June 15, September 15, and December 15, 2006, respectively, or (ii) by employees so electing in the space provided on the Subscription Agreement, through equal deductions from 2006 salary paid to the employee by the General Partner, UNIT or its subsidiaries commencing immediately after formation of the Partnership. If an employee or director who has subscribed for Units (either directly or through a corporation or other entity) ceases to be employed by or serve as a director of the General Partner, UNIT or any of its subsidiaries for any reason other than death, disability or Normal Retirement prior to the time the full amount of all Installments not waived by the General Partner as described below are due, then the due date for any such unpaid Installments shall be accelerated so that the full amount of his or her unpaid Capital Subscription will be due and payable on the effective date of such termination.

Each Installment will be a legally binding obligation of the Limited Partner and any past due amounts will bear interest at an annual rate equal to two percentage points in excess of the prime rate of interest of Bank of Oklahoma, N.A., Tulsa, Oklahoma; provided, however, that if the General Partner determines that the total Aggregate Subscription is not required to fund the Partnership’s business and operations, then the General Partner may, at its sole option, elect to release the Limited Partners from their obligation to pay one or more Installments. If the General Partner elects to waive the payment of an Installment, it will notify all Limited Partners promptly in writing of its decision and will, to the extent required, amend the certificate of limited partnership and any other

 

15

relevant Partnership documents accordingly. It is currently anticipated that the total Aggregate Subscription will be required, however, to fund the Partnership’s business and operations.

In the event a Limited Partner fails to pay any Installment when due and the General Partner has not released the Limited Partners from their obligation to pay such Installment, then the General Partner, at its sole option and discretion, may elect to purchase the Units of such defaulting Limited Partner at a price equal to the total amount of the Capital Contributions actually paid into the Partnership by such defaulting Limited Partner, less the amount of any Partnership distributions that may have been received by him or her. Such option may be exercised by the General Partner by written notice to the Limited Partner at any time after the date that the unpaid Installment was due and will be deemed exercised when the amount of the purchase price is first tendered to the defaulting Limited Partner. The General Partner may, in its discretion, accept payments of delinquent Installments not waived by it but will not be required to do so.

In the event that the General Partner elects to purchase the Units of a defaulting Limited Partner, it must pay into the Partnership the amount of the delinquent Installment (excluding any interest that may have accrued thereon) and pay each additional Installment, if any, payable with respect to such Units as it becomes due. By virtue of such purchase, the General Partner will be allocated all Partnership Revenues, be charged with all Partnership costs and expenses attributable to such Units and will enjoy the same rights and obligations as other Limited Partners, except the General Partner will have unlimited liability.

Right of Presentment

After December 31, 2007, and annually thereafter, 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 of any Limited Partner presenting them for purchase will be based on the net asset value of the Partnership which shall be equal to:

 

(1)

The value of the proved reserves attributable to the Partnership Properties, determined as set forth below; plus

 

(2)

The estimated salvage value of tangible equipment installed on Partnership Wells less the costs of plugging and abandoning the wells, both discounted at the rate utilized to determine the value of the Partnership’s reserves as set forth below; plus

 

(3)

The lower of cost or fair market value of all Partnership Properties to which proved reserves have not been attributed but which have not been condemned, as determined by an independent petroleum engineering firm or the General Partner, as the case may be; plus

 

(4)

Cash on hand; plus

 

(5)

Prepaid expenses and accounts receivable (less a reasonable reserve for doubtful accounts); plus

 

(6)

The estimated market value of all other Partnership assets not included in (1) through (5) above, determined by the General Partner; MINUS

 

(7)

An amount equal to all debts, obligations and other liabilities of the Partnership.

The price to be paid for each Limited Partner’s interest of the net asset value will be his or her proportionate share of such net asset value less 75% of the amount of any distributions received by him or her which are attributable to the sales of the Partnership production since the date as of which the Partnership’s proved reserves are estimated.

The value of the proved reserves attributable to Partnership Properties will be determined as follows:

 

(i)

First, the future net revenues from the production and sale of the proved reserves will be estimated as of the end of the calendar year in which presentment is made based on an independent engineering firm’s report and its determinations of the prices to be used as well as the

 

16

escalations, if any, of such prices and cost or, if no report was made, as determined by the General Partner;

 

(ii)

Next, the future net revenues from the production and sale of proved reserves as determined above will be discounted at an annual rate which is one percentage point higher than the prime rate of interest being charged by the Bank of Oklahoma, N.A., Tulsa, Oklahoma, or any successor bank, as of the date such reserves are estimated; and

 

(iii)

Finally, the total discounted value of the future net revenues from the production and sale of proved reserves will be reduced by an additional 25% to take into account the risks and uncertainties associated with the production and sale of the reserves and other unforeseen uncertainties.

A Limited Partner who elects to have his or her Units purchased by the General Partner should be aware that estimates of future net recoverable reserves of oil and gas and estimates of future net revenues to be received therefrom are based on a great many factors, some of which, particularly future prices of production, are usually variable and uncertain and are always determined by predictions of future events. Accordingly, it is common for the actual production and revenues received to vary from earlier estimates. Estimates made in the first few years of production from a property will be based on relatively little production history and will not be as reliable as later estimates based on longer production history. As a result of all the foregoing, reserve estimates and estimates of future net revenues from production may vary from year to year.

This right of presentment may be exercised by written notice from a Limited Partner to the General Partner. The sale will be effective as of the close of business on the last day of the calendar year in which such notice is given or, at the General Partner’s election, at 7:00 A.M. on the following day. Within 120 days after the end of the calendar year, the General Partner will furnish each Limited Partner who gave such notice during the calendar year a statement showing the cash purchase price which would be paid for the Limited Partner’s interest as of December 31 of the preceding year, which statement will include a summary of estimated reserves and future net revenues and sufficient material to reveal how the purchase price was determined. The Limited Partner must, within 30 days after receipt of such statement, reaffirm his or her election to sell to the General Partner.

As noted above, the General Partner will not be obligated to purchase in any one calendar year more than 20% of the Units in the Partnership then outstanding. Moreover, the General Partner will not be obligated to purchase any Units pursuant to such right if such purchase, when added to the total of all other sales, exchanges, transfers or assignments of Units within the preceding 12 months, would result in the Partnership being considered to have terminated within the meaning of Section 708 of the Code or would cause the Partnership to lose its status as a partnership for federal income tax purposes. If more than the number of Units which may be purchased are tendered in any one year, the Limited Partners from whom the Units are to be purchased will be determined by lot. Any Units presented but not purchased with respect to one year will have priority for such purchase the following year.

The General Partner does not intend to establish a cash reserve to fund its obligation to purchase Units, but will use funds provided by its operations or borrowed funds (if available), using its assets (including such Units purchased or to be purchased from Limited Partners) as collateral to fund such obligations. However, there is no assurance that the General Partner will have sufficient financial resources to discharge its obligations.

Rollup or Consolidation of Partnership

The Agreement provides that two years or more after the Partnership has completed substantially all of its property acquisition, drilling and development operations, the General Partner may, without the vote, consent or approval of the Limited Partners, cause all or substantially all of the oil and gas properties and other assets of the Partnership to be sold, assigned or transferred to, or the Partnership merged or consolidated with, another partnership or a corporation, trust or other entity for the purpose of combining the assets of two or more of the oil and gas partnerships formed for investment or participation by employees, directors and/or consultants of UNIT or any of its subsidiaries; provided, however, that the valuation of the oil and gas properties and other assets of all such participating partnerships for purposes of such transfer or combination shall be made on a consistent basis and in a manner which the General Partner and UNIT believe is fair and equitable to the Limited Partners. As a

 

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consequence of any such transfer or combination, the Partnership shall be dissolved and terminated and the Limited Partners shall receive partnership interests, stock or other equity interests in the transferee or resulting entity. Any such action will cause the Limited Partners’ attributable interest in the Partnership Properties to be diluted but it will also provide them with attributable interests in the properties and other assets of the other partnerships participating in the consolidation. It also may reduce somewhat the amount of their attributable shares of the direct and indirect costs of administering the Partnership. See “RISK FACTORS — Investment Risks - Roll-Up or Consolidation of Partnership.”

ADDITIONAL FINANCING

The General Partner will use its best efforts, consistent with Partnership objectives, to acquire Productive properties and complete the Partnership’s drilling and development operations before the Aggregate Subscription has been fully expended or committed. However, funds in addition to the Aggregate Subscription may be required to pay costs and expenses which are chargeable to the Limited Partners. In those instances described below, the General Partner may call for Additional Assessments or may apply Partnership Revenue allocable to the Limited Partners in payment and satisfaction of such costs or the General Partner may, but shall not be required to, fund the deficiency with Partnership borrowings to be repaid with Partnership Revenue.

Additional Assessments

When the Aggregate Subscription has been fully expended or committed, the General Partner may make one or more calls for any portion or all of the maximum Additional Assessments of $100 per Unit. However, no Additional Assessments may be required before the General Partner’s Minimum Capital Contribution has been fully expended. Such assessments may be used to pay the Limited Partners’ share of the Drilling Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs of Productive properties which are chargeable to the Limited Partners. The amount of the Additional Assessment so called shall be due and payable on or before such date as the General Partner may set in such call, which in no event will be earlier than thirty (30) days after the date of mailing of the call. The notice of the call for Additional Assessments will specify the amount of the assessment being required, the intended use of such funds, the date on which the contributions are payable and describe the consequences of nonpayment. Although the Limited Partners who do not respond will participate in production, if any, obtained from operations conducted with the proceeds from the aggregate Additional Assessments paid into the Partnership, the amount of the unpaid Additional Assessment shall bear interest at the annual rate equal to two (2) percentage points in excess of the prime rate of interest of Bank of Oklahoma, N.A., Tulsa, Oklahoma, or successor bank, as announced and in effect from time to time, until paid. The Partnership will have a lien on the defaulting Limited Partner’s interest in the Partnership and the General Partner may retain Partnership Revenue otherwise available for distribution to the defaulting Limited Partner until an amount equal to the unpaid Additional Assessment and interest is received. Furthermore, the General Partner may satisfy such lien by proceeding with legal action to enforce the lien and the defaulting Limited Partner shall pay all expenses of collection, including interest, court costs and a reasonable attorney’s fee.

Prior Programs

In the prior employee programs conducted by UNIT or the General Partner in each of the years 1984 through 2005, Additional Assessments could be called for as provided herein. At September 30, 2005, there had been no calls for Additional Assessments in such programs. There can be no assurance, however, that Additional Assessments will not be required to pay Partnership costs.

Partnership Borrowings

At any time after the General Partner’s Minimum Capital Contribution has been fully expended, the General Partner may cause the Partnership to borrow funds for the purpose of paying Drilling Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs of Productive properties, which borrowings may be secured by interests in the Partnership Properties and will be repaid, including interest accruing thereon, out of Partnership Revenue. The General Partner may, but is not required to, advance funds to the Partnership for the same purposes for which Partnership borrowings are authorized. With respect to any such advances, the General Partner will

 

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receive interest in an amount equal to the lesser of the interest which would be charged to the Partnership by unrelated banks on comparable loans for the same purpose or the General Partner’s interest cost with respect to such loan, where it borrows the same. No financing charges will be levied by the General Partner in connection with any such loan. If Partnership borrowings secured by interests in the Partnership Wells and repayable out of Partnership Revenue cannot be arranged on a basis which, in the opinion of the General Partner, is fair and reasonable, and the entire sum required to pay such costs is not available from Partnership Revenue, the General Partner may dispose of some or all of the Partnership Properties upon which such operations were to be conducted by sale, farm-out or abandonment.

If the Partnership requires funds to conduct Partnership operations during the period between any of the Installments due from the Limited Partners, then, notwithstanding the foregoing, the General Partner shall advance funds to the Partnership in an amount equal to the funds then required to conduct such operations but in no event more than the total amount of the Aggregate Subscription remaining unpaid. With respect to any such advances, the General Partner shall receive no interest thereon and no financing charges will be levied by the General Partner in connection therewith. The General Partner shall be repaid out of the Installments thereafter paid into the capital of the Partnership when due.

The Partnership may attempt to finance any expenses in excess of the Partners’ Capital Subscriptions by the foregoing means and any other means which the General Partner deems in the best interests of the Partnership, but the Partnership’s inability to meet such costs could result in the deferral of drilling operations or in the inability to participate in future drilling or in non-consent penalties pursuant to which co-owners of particular working interests recover several times the amount which would have been funded by the Partnership in accordance with its ownership interest before the Partnership would participate in revenues.

The use of Partnership Revenue allocable to the Limited Partners to pay Partnership costs and expenses and to repay any Partnership borrowings will mean that such revenue will not be available for distribution to the Limited Partners. Nonetheless, the Limited Partners may incur income tax liability by virtue of that revenue and, thus, may not receive distributions from the Partnership in amounts necessary to pay such income tax. However, the use of such revenue to pay Partnership costs and expenses may generate additional deductions for the Limited Partners.

PLAN OF DISTRIBUTION

Units will be offered privately only to select persons who can demonstrate to the General Partner that they have both the economic means and investment expertise to qualify as suitable investors. The Units will be offered and sold by the officers and directors of UPC or UNIT.

Suitability of Investors

Subscriptions should be made only by appropriate persons who can reasonably benefit from an investment in the Partnership. In this regard, a subscription will generally be accepted only from a person who can represent that such person has (or in the case of a husband and wife, acting as joint tenants, tenants in common or tenants in the entirety, that they have) a net worth, including home, furnishings and automobiles, of at least five times the amount of his or her Capital Subscription, and estimates that such person will have during the current year adjusted gross income in an amount which will enable him or her to bear the economic risks of his or her investment in the Partnership. Such person must also demonstrate that he or she has sufficient investment experience and expertise to evaluate the risks and merits of an investment in the Partnership.

Participation in the Partnership is intended only for those persons willing to assume the risk of a speculative, illiquid, long-term investment. Entitlement to and maintenance of the exemptions from registration provided by Sections 3(b) and/or 4(2) of the Securities Act of 1933, as amended, require the imposition of certain limitations on the persons to whom offers may be made, and from whom subscriptions may be accepted. Therefore, this offering is limited to persons who, by virtue of investment acumen or financial resources, satisfy the General Partner that they meet suitability standards consistent with the maintenance and preservation of the exemptions provided by Sections 3(b) and/or 4(2) and by the applicable rules and regulations of the Securities and Exchange Commission, as well as those contained herein and in the Subscription Agreement. Persons offering interests

 

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shall sufficiently inquire of a prospective investor to be reasonably assured that such investor meets such acceptable standards. Suitability standards may also be imposed by the regulatory authorities of the various states in which interests may be offered.

RELATIONSHIP OF THE PARTNERSHIP,

THE GENERAL PARTNER AND AFFILIATES

The following diagram depicts the primary relationships among the Partnership, the General Partner and certain of its affiliates.