axas8k082610.htm

Exhibit 2.1

Execution Version

SUBSCRIPTION AND CONTRIBUTION AGREEMENT

by and among

BLUE EAGLE ENERGY, LLC,

as the Company,

ABRAXAS OPERATING, LLC,

ABRAXAS PETROLEUM CORPORATION

and

BLUE STONE OIL & GAS, LLC,

as the Purchasers

August 18, 2010

TABLE OF CONTENTS

		Page
ARTICLE I PURCHASE AND SALE OF THE SECURITIES			1
	SECTION 1.1. Purchase and Sale		1
	SECTION 1.2. Closing.		1
	SECTION 1.3. Purchase Price; Closing Payments.		2
	SECTION 1.4. Closing Deliveries.		2
	SECTION 1.5. Use of Proceeds		3

ARTICLE II CONTRIBUTION			4
	SECTION 2.1. Contribution of Properties.		4
	SECTION 2.2. Assumption of Liabilities.		7
	SECTION 2.3. Retained Liabilities		7
	SECTION 2.4. Filing and Recording		8
	SECTION 2.5. Further Assurances		8
	SECTION 2.6. Title.		9
	SECTION 2.7. Adjustment or Refund as to Title Issues.		9
	SECTION 2.8. Proration of Taxes.		10
	SECTION 2.9. Information About the Contributed Assets.		10

ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY			12
	SECTION 3.1. Organization.		12
	SECTION 3.2. Authority; Binding Effect.		12
	SECTION 3.3. Absence of Conflicts.		12
	SECTION 3.4. Capitalization; Securities.		13
	SECTION 3.5. Issuance of Securities		13
	SECTION 3.6. Subsidiaries and Investments.		13
	SECTION 3.7. Litigation		13
	SECTION 3.8. Compliance with Laws.		13
	SECTION 3.9. No Operations.		14
	SECTION 3.10. Disclosure		14
	SECTION 3.11. Brokers, Finders, etc.		14
	SECTION 3.12. Investigation.		14

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ABRAXAS			14
	SECTION 4.1. Organization		14
	SECTION 4.2. Authority; Binding Effect.		14
	SECTION 4.3. Absence of Conflicts		14
	SECTION 4.4. Proper Use and Maintenance of Tangible Personal Property		15
	SECTION 4.5. Litigation		15
	SECTION 4.6. Leases and Contracts		15
	SECTION 4.7. Licenses and Permits.		16
	SECTION 4.8. Taxes		16
	SECTION 4.9. Environmental Compliance.		16
	SECTION 4.10. Solvency.		17
	SECTION 4.11. Books and Records.		17
	SECTION 4.12. Investment Intent; Status of Investor.		17

	SECTION 4.13. Disclosure.	18
	SECTION 4.14. Brokers, Finders, etc.	18

ARTICLE V REPRESENTATIONS AND WARRANTIES OF BLUE STONE		19
	SECTION 5.1. Organization	19
	SECTION 5.2. Authority; Binding Effect	19
	SECTION 5.3. Absence of Conflicts.	19
	SECTION 5.4. Litigation.	20
	SECTION 5.5. Investment Intent; Status of Investor.	20
	SECTION 5.6. Brokers, Finders, etc.	20
	SECTION 5.7. Investigation.	20

ARTICLE VI SURVIVAL; INDEMNIFICATION		21
	SECTION 6.1. Survival of Representations, Warranties, Covenants andAgreements.	21
	SECTION 6.2. Indemnification by the Company.	21
	SECTION 6.3. Indemnification by Abraxas.	21
	SECTION 6.4. Indemnification Procedures for Third Party Claims.	21
	SECTION 6.5. Limitation of Losses.	22
	SECTION 6.6. Exclusive Remedy.	22

ARTICLE VII DEFINITIONS		23
	SECTION 7.1. Certain Definitions.	23
	SECTION 7.2. Other Defined Terms.	29

ARTICLE VIII MISCELLANEOUS		29
	SECTION 8.1. Publicity.	29
	SECTION 8.2. Fees and Expenses	30
	SECTION 8.3. Notices.	30
	SECTION 8.4. Amendment; Waivers.	31
	SECTION 8.5. Parties in Interest; Assignment.	31
	SECTION 8.6. No Third Party Beneficiaries	32
	SECTION 8.7. Severability.	32
	SECTION 8.8. Rules of Construction.	32
	SECTION 8.9. Entire Agreement.	32
	SECTION 8.10. Governing Law.	32
	SECTION 8.11. Counterparts	33

EXHIBITS AND SCHEDULES

Exhibit A

Form of Assignment, Bills of Sale and Conveyance

Exhibit B-1

Initial Contributed Assets

Exhibit B-2

Potential Leases and Other Assets

Exhibit B-3

Joint Operating, Area of Mutual Interest, Farmin

Agreements and Other Contracts and Agreements

Exhibit B-4

Excluded Assets

Exhibit C

Master Services Agreement

Exhibit D

Operating Agreement

Schedule 2.1(a)

Subject Area

Schedule 4.3

Conflicts and Consents

Schedule 4.6

Leases and Contracts

Schedule 7.1

Permitted Encumbrances

III

SUBSCRIPTION AND CONTRIBUTION AGREEMENT

This SUBSCRIPTION AND CONTRIBUTION AGREEMENT (this “Agreement”) is made and entered into as of August 18, 2010 by and among BLUE EAGLE ENERGY, LLC, a Delaware limited liability company (the “Company”), ABRAXAS PETROLEUM CORPORATION, a Nevada Corporation (“Abraxas Petroleum”), ABRAXAS OPERATING, LLC, a Texas limited liability company (“Abraxas Operating” and, together with Abraxas Petroleum, “Abraxas”) and BLUE STONE OIL & GAS, LLC, a Delaware limited liability company (“Blue Stone”). Abraxas Petroleum and Blue Stone are sometimes referred to individually as a “Purchaser” and collectively as the “Purchasers.”

W I T N E S S E T H:

WHEREAS, the Company has been formed as a Delaware limited liability company through the filing of its certificate of formation in the office of the Secretary of State of the State of Delaware;

WHEREAS, the Purchasers desire to be admitted as Members of the Company and, in connection therewith, (i) Abraxas is willing to contribute the Contributed Assets to the Company and (ii) Blue Stone is willing to contribute and commit to contribute up to certain amounts in cash to the Company;

WHEREAS, the Company is willing (i) to acquire and accept the Contributed Assets from Abraxas and assume certain obligations of Abraxas relating thereto and (ii) to accept the contribution of certain amounts in cash from Blue Stone;

WHEREAS, in consideration of the contributions to be made by Abraxas and Blue Stone as described above, the Company is willing to issue to the Purchasers certain limited liability company interests in the Company and cause the Purchasers to be admitted as Members of the Company, upon the terms and subject to the conditions set forth herein and in the Limited Liability Company Agreement of Blue Eagle Energy, LLC, entered into as of the date hereof by and between the Purchasers (the “Company Agreement”); and

WHEREAS, capitalized terms used herein without definition have the respective meanings assigned to such terms in Article VII or the Company Agreement;

NOW, THEREFORE, in consideration of the premises, the terms and conditions contained herein, the mutual benefits to be gained from the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE I

PURCHASE AND SALE OF THE SECURITIES

SECTION 1.1. Purchase and Sale. In accordance with and subject to the terms and conditions set forth herein, at the Closing, the Company shall issue and sell to the Purchasers, and the Purchasers shall severally purchase from the Company, the Securities.

SECTION 1.2. Closing.

(a) The closing (the “Closing”) of the purchase and sale of the Securities and the other transactions contemplated by this Agreement shall be held at 9:00 a.m., Dallas, Texas time, on the date hereof (or such later time and date as the parties shall mutually agree ) (the “Closing Date”), at such location or locations as the parties shall mutually agree.

(b) At the Closing, (i) the Company shall issue and sell to each Purchaser, in consideration of the purchase price described in Section 1.3, the Securities set forth opposite the name of such Purchaser in Exhibit A to the Company Agreement; (ii) the Purchasers shall execute and deliver the Company Agreement; (iii) the Company and Blue Stone shall execute and deliver the Master Services Agreement; and (iv) the Company and Abraxas Petroleum shall execute and deliver the Operating Agreement.

SECTION 1.3. Purchase Price; Closing Payments. The purchase price for the Securities to be paid by the Purchasers at the Closing shall be as follows:

(a) At the Closing, Abraxas shall contribute the Initial Contributed Assets to the Company in accordance with Article II (which Initial Contributed Assets, when combined with the Additional Contributed Assets, have an agreed upon value of $25,000,000); and

(b) At the Closing, Blue Stone shall (i) pay to the Company $25,000,001 in cash by wire transfer of immediately available funds (to such account as shall have been designated by the Company at least 24 hours prior to the Closing Date) and (ii) commit to pay to the Company under the terms of the Company Agreement an amount in cash of up to $75,000,000 (less the amount specified in clause (i) above), which payments shall be treated as Capital Contributions to the Company pursuant to the Company Agreement.

(c) At or promptly after the Closing (as applicable in accordance with Section 8.2), the Company shall pay or reimburse the Purchasers for (i) the Transaction Expenses in accordance with Section 8.2(a) and (ii) certain out-of-pocket costs and expenses incurred by Abraxas for title opinions (and landman services related to such opinions) with respect to the Initial Contributed Assets in Atascosa County in accordance with Section 8.2(b). In addition, after the Closing, the Company shall pay when due (x) certain out-of-pocket costs and expenses incurred by Abraxas for title opinions (and landman services related to such opinions) with respect to the Additional Contributed Assets in accordance with Section 8.2(b), (y) certain out-of-pocket costs and expenses incurred by Abraxas to acquire the Other Assets, if any, in accordance with Section 8.2(b) and (z) certain fees owing to Rivington in accordance with Section 8.2(c).

SECTION 1.4. Closing Deliveries.

(a) At the Closing, Abraxas shall deliver to the Company each of the following documents:

(i) duly executed counterparts of the Assignments from each of Abraxas Petroleum and Abraxas Operating for each county in which it owns Initial Contributed Assets, and such other assignments, general conveyances, endorsements, bills of sale and other good and sufficient instruments of conveyance, transfer, assignment or contribution and such other documents, certificates, filings or other agreements necessary to transfer all of Abraxas’ title to the Initial Contributed Assets to the Company;

(ii) such other documents as may be called for under this Agreement or as the Company shall reasonably request in connection with the consummation of the transactions contemplated by Article II, including copies of any Consents obtained by Abraxas in connection with the performance of its obligations under Article II; and

(iii) a counterpart of the Operating Agreement duly executed by Abraxas Petroleum.

(b) At the Closing, the Company shall deliver to Abraxas each of the following documents:

(i) duly executed counterparts of the Assignments referred to in subparagraph (a)(i) above, which evidence the assumption of the Assumed Liabilities;

(ii) such other documents, certificates, filings or other agreements as may be called for under this Agreement or as Abraxas shall reasonably request in connection with the consummation of the transactions contemplated by Article II;

(iii) a counterpart of the Operating Agreement duly executed by the Company; and

(iv) the Closing Budget.

(c) At the Closing, each of the Company and Blue Stone shall deliver to the other party a duly executed counterpart of the Master Services Agreement.

(d) At the Closing, each Purchaser shall deliver to the other Purchaser a duly executed counterpart of the Company Agreement.

SECTION 1.5. Use of Proceeds.

The Company shall use the cash proceeds received by it from the issuance and sale of the Securities as set forth in this Article I for general corporate purposes and in accordance with the Closing Budget and any other applicable Budgets, including the payment of Transaction Expenses and other fees and costs to be paid pursuant to Section 8.2 and for purposes of funding its operations relating to the evaluation, acquisition, exploration, drilling, development and production of or for oil, gas and other hydrocarbons, all in accordance with and subject to the applicable provisions hereof and of the Company Agreement. Except as expressly permitted under the terms of the Company Agreement, the Operating Agreement or the Master Services Agreement, in no event shall any of the cash proceeds received from the issuance and sale of the S ecurities be used to make any distributions or other payments to the Members or any other holders of the Equity Securities of the Company or their Affiliates.

ARTICLE II

CONTRIBUTION

SECTION 2.1. Contribution of Properties. At the Closing, Abraxas shall contribute, transfer and deliver to the Company, and the Company shall acquire and accept from Abraxas, the Initial Contributed Assets as described below. From and after the Closing Date, but no later than December 31, 2010, Abraxas shall contribute, transfer and deliver to the Company, and the Company shall acquire and accept from Abraxas, the Additional Contributed Assets and, if any, the Other Assets as described below. The Initial Contributed Assets specified in Exhibit B-1 and the Additional Contributed Assets to be specified in Exhibit B-1 after the Closing as provided in paragraph (c) below are together referred to as the “Initial Assets,” and the Initial Assets and the Other Assets (as determined after the Closing) are collectively referred to herein as the “Contributed Assets.”

(a) The “Initial Contributed Assets” shall include all of the following properties, assets, rights, interests and entitlements owned or held by Abraxas as of the Closing Date related to or used or available for use in connection with the operations conducted or proposed to be conducted by Abraxas in the geographic area (the “Subject Area”) specified in Schedule 2.1(a) attached hereto:

(i) all Oil and Gas Interests owned or held by Abraxas as of the Closing Date in the Subject Area (together with all Records and Related Property and Records associated therewith), including:

(A) the Leases identified in Exhibit B-1 (which exhibit sets forth, for each Lease, the identifying number of such Lease, the date such Lease was entered into, the scheduled expiration date of such Lease, the recording information for such Lease, the number of Net Acres covered by such Lease, the specific depths being conveyed, the minimum Net Revenue Interest and the maximum Working Interest of Abraxas and the agreed value of such Lease for purposes of this Agreement and the Company Agreement);

(B) the rights and interests under the joint operating agreements, area of mutual interest agreements, farmin agreements, and other Contracts identified in Exhibit B-3; and

(C) any subsurface easements through any formation included in the Excluded Assets that are necessary to explore, develop, store and produce reserves from the formations included in the Contributed Assets.

(b) The Additional Contributed Assets and, if any, the Other Assets shall consist of Leases acquired by Abraxas from the list of potential Leases identified in Exhibit B-2 (which exhibit sets forth, for each potential Lease, the name of the mineral owner, the survey and county in which the real property comprising such Lease is located, the approximate number of net acres to be covered by such Lease, the approximate minimum Net Revenue Interest and the approximate maximum Working Interest to be acquired, the agreed value of such Lease to be acquired for purposes of this Agreement and the Company Agreement, in the event such Lease is determined to be Additional Contributed Assets, and the costs incurred by Abra xas to acquire such Leases, in the event such Leases are determined to be Other Assets), together with all other Oil and Gas Interests, Records and Related Property and Records associated therewith.

(c) The Company and Abraxas agree that the Leases acquired by Abraxas after the Closing Date from the list of potential Leases identified in Exhibit B-2 that have the earliest Lease date, which, when added to the Initial Contributed Leases, total 8,333 Net Acres, shall be considered “Additional Contributed Assets,” and any other Leases (or partial Leases) in excess of 8,333 Net Acres, will be considered “Other Assets.” After the Additional Contributed Assets and the Other Assets are contributed, transferred and delivered to the Company, but no later than December 31, 2010, Exhibit B-1 shall be revised to include all of the Initial Assets (8,333 Net Acres) and Exhibit B-2 shall be revised to include only the Other Assets, if any, and both Exhibits shall be supplemented to include, for each Lease contributed after the Closing Date, the identifying number of such Lease, the date such Lease was entered into, the scheduled expiration date of such Lease, the recording information for such Lease, the number of Net Acres covered by such Lease, the specific depths conveyed to the Company, and the minimum Net Revenue Interest and the maximum Working Interest of Abraxas. The Company and Abraxas agree that Exhibit B-2 lists all of the potential Leases which may be acquired by Abraxas after the Closing; provided, however, that Abraxas shall not be required to acquire and contribute any particular potential Lease specified on such Exh ibit (but shall be subject to the remedy set forth in Section 2.7(a) if it fails to acquire and contribute to the Company, no later than December 31, 2010, Additional Contributed Assets which, when added to the Initial Contributed Leases, total 8,333 Net Acres).

(d) The Company and Abraxas agree that (i) the Oil and Gas Interests to be acquired from the list of potential Leases identified in Exhibit B-2, to the extent such Leases are considered Additional Contributed Assets, shall be contributed by Abraxas to the Company at the agreed value as set forth in such exhibit, and Abraxas shall be entitled to receive from the Company at the time of such contribution reimbursement, by wire transfer of immediately available funds, in an amount equal to the actual out-of-pocket costs incurred by Abraxas to obtain title opinions (and landman services related to such opinions) on such Additional Contributed Assets (as evidenced by reasonable supporting documentation provided to a nd reviewed and approved by the Blue Stone Designees), and (ii) the Oil and Gas Interests contributed by Abraxas to the Company listed in Exhibit B-2, to the extent such Oil and Gas Interests are considered Other Assets, shall be contributed at an agreed value equal to zero, but Abraxas shall be entitled to receive from the Company at the time of such contribution reimbursement, by wire transfer of immediately available funds, in an amount equal to the actual out-of-pocket costs incurred by Abraxas to acquire such Oil and Gas Interests (as evidenced by reasonable supporting documentation provided to and reviewed and approved by the Blue Stone Designees).

(e) At the time any Additional Contributed Assets and/or Other Assets are contributed by Abraxas to the Company (the “Date of Contribution”), Abraxas shall deliver to the Company, and the Company shall deliver to Abraxas, duly executed Assignments for each county in which Abraxas owns Additional Contributed Assets and/or Other Assets, and such other assignments, general conveyances, endorsements, bills of sale and other good and sufficient instruments of conveyance, transfer, assignment or contribution and such other documents, certificates, filings or other agreements necessary to transfer all of Abraxas’ title to the Additional Contributed Assets and, if any, the Other Assets to the Company at the time of such contribution and for the Company to assume t he Assumed Liabilities with respect to the Additional Contributed Assets and, if any, the Other Assets. As a condition of the Company’s acceptance of such contribution, Abraxas will have Defensible Title to any Additional Contributed Assets or Other Assets.

(f) The Contributed Assets shall not include:

(i) those specifically enumerated wells and formations described in Exhibit B-4 (the “Excluded Well Bores”), including the reserves currently being produced therefrom, reserves that may be produced therefrom in the future and the proceeds of production from the Excluded Well Bores;

(ii) any and all subsurface easements through any formation included in the Contributed Assets and necessary to explore, develop, store and produce reserves from the Excluded Well Bores;

(iii) all Oil and Gas Interests, Records and Related Property and Records associated with the Excluded Well Bores and such other assets as set forth in Exhibit B-4 (together with the Excluded Well Bores, the “Excluded Property”);

(iv) with respect to the Excluded Property for all periods, or to the Contributed Assets for any period prior to the Closing Date or Date of Contribution, as applicable:

(A) all trade credits and all accounts, instruments and general intangibles (as such terms are defined in the Uniform Commercial Code as adopted in the affected jurisdiction);

(B) any claims or causes of action of Abraxas arising (1) from acts, omissions or events, or damage to or destruction of property, or (2) under or with respect to any Contracts (including claims for adjustments or refunds);

(C) all rights and interests of Abraxas (1) under any policy or agreement of insurance or indemnity, (2) under any bond or (3) to any insurance or condemnation proceeds or awards arising in each case from acts, omissions or events, or damage to or destruction of property (except that, in the case of any such policy, agreement, bond, proceeds or awards are intended to compensate Abraxas for or hold it harmless from any Assumed Liabilities or any loss or damage in respect of any Contributed Assets, Abraxas shall apply any amounts received by it after the date in respect thereof to or for the benefit of the Company);

(D) all rights and interests of Abraxas to receive amounts due or payable to Abraxas as adjustments to insurance premiums;

(E) all Hydrocarbons produced therefrom, together with all proceeds from the sale of such Hydrocarbons, and all tax credits attributable thereto;

(F) all claims of Abraxas for refunds or loss carry forwards with respect to ad valorem, severance, production or any other taxes;

(G) all proceeds, income or revenue (and any security or other deposits made); and

(H) all audit rights arising under any Contract;

(v) the documents and information of Abraxas that are related to the Contributed Assets and protected by an attorney-client or other privilege to the extent that any such privilege would be waived by transferring such documents and information to the Company; provided, however, that, in the case of any factual information that may be required by the Company in connection with the ownership or management of the Contributed Assets or the assumption, payment and discharge of the Assumed Liabilities, Abraxas shall make alternative arrangements to ensure that the Company is provided with all such information as the Company may request from time to time; and

(vi) all corporate, income tax and financial records of Abraxas not included in the Records.

All of the Assets described in this Section 2.1(f) are collectively referred as the “Excluded Assets”; provided, however, that all rights and interests in Clause (iv) above that relate to the Contributed Assets shall be included in the Contributed Assets on and after the Title Claim Date for all purposes.

SECTION 2.2. Assumption of Liabilities. At the Closing or Date of Contribution, as applicable, the Company shall assume and agree to pay, satisfy or otherwise discharge, all rights, duties, obligations and liabilities caused by, arising out of or resulting from the ownership, use or operation of the Contributed Assets, to the extent such rights, duties, obligations and liabilities are caused, arise or result on or after the Closing Date or Date of Contribution, as applicable, including (i) all of Abraxas’ express and implied obligations under Contracts and Leases included in the Contributed Assets, including contractual obligations to make delay rental payments, to pay costs and expenses or to drill future wells under a joint operating agreement, area of mutual interest agreement or farmin agreement; (ii) responsibility for all royalties, overriding royalties, production payments, net profits obligations, rentals, shut-in payments and other Encumbrances to which the Contributed Assets are subject; (iii) responsibility for compliance with all applicable Laws pertaining to the Contributed Assets, and the procurement and maintenance of all permits required by public authorities in connection with the Contributed Assets; (iv) any Taxes (including applicable penalties and interest) for which the Company has agreed to be responsible hereunder; (v) the condition of the Contributed Assets (including all obligations to properly plug and abandon, or replug and re-abandon, wells to restore the surface of any real property, and to comply with, or to bring the Contributed Assets into compliance with, Environmental Laws, rul es, regulations and orders, including conducting any remediation activities, investigations, feasibility studies, and other clean-up activities which may be required on or otherwise in connection with activities on the Contributed Assets); and (vi) from and after the Title Claim Date, the Additional Assumed Liabilities. The liabilities assumed by the Company pursuant to this Section 2.2 shall be referred to as the “Assumed Liabilities.”

SECTION 2.3. Retained Liabilities. Notwithstanding the foregoing, the Company shall not assume or have any liability or responsibility for or in respect of any of the following liabilities or obligations of Abraxas (the “Retained Liabilities”):

(a) any liabilities or obligations relating to the Excluded Assets and any other liabilities and obligations of Abraxas that do not relate to the Contributed Assets;

(b) any liabilities or obligations relating to the Contributed Assets other than the Assumed Liabilities, except to the extent that, from and after the Title Claim Date, such liabilities or obligations are Additional Assumed Liabilities; and

(c) any liabilities or obligations relating to the Contributed Assets arising from (i) any violation by Abraxas of any Law or other legal requirement or authority of any Governmental Authority and (ii) any breach by Abraxas of, or default on its part under, the terms of any Lease, Contract or other documents to which Abraxas is a party or by which it is bound, in any case which arose prior to the Closing Date or Date of Contribution, as applicable, except to the extent that, from and after the Title Claim Date, such liabilities or obligations are Additional Assumed Liabilities.

SECTION 2.4. Filing and Recording. At the Company’s cost, within ten Business Days after the Closing Date or the Date of Contribution, as applicable, the Company shall file or record conveyancing documents with respect to any Leases or other interests in real property included in the Contributed Assets in the appropriate governmental records.

SECTION 2.5. Further Assurances.

(a) Abraxas agrees that from time to time after the Closing Date it shall (i) execute, deliver, acknowledge, file and record, or cause to be executed, delivered, acknowledged, filed and recorded, such further deeds, assignments, general conveyances, endorsements, bills of sale and other good and sufficient instruments of conveyance, transfer, assignment or contribution and such further consents, certifications, affidavits and assurances as the Company may reasonably request in order to vest in the Company all right, title and interest in the Contributed Assets or otherwise to consummate and make effective the transactions contemplated by this Agreement upon the terms and conditions set forth herein and (ii) take, or cause to be taken, all actions and do, or cause to be done , all such things as the Company may reasonably request in order to put the Company in actual possession of the Contributed Assets or otherwise to accomplish the purposes of this Agreement. Without limiting the generality of the foregoing, in the event that on or after the Closing Date Abraxas receives any amount in cash in respect of any Contributed Assets or any other properties or assets of the Company and related to a period of time on or after the Closing Date, such amount shall be held in trust for the benefit of the Company, shall be segregated from the other property or funds of Abraxas, and shall be forthwith delivered to the Company.

(b) Each of the parties hereby agrees that, from time to time after the Closing Date, each of them shall execute, deliver, acknowledge, file and record, or cause to be executed, delivered, acknowledged, filed and recorded, such further agreements, instruments, certificates and other documents as may be required in order to consummate and make effective the Transactions.

SECTION 2.6. Title. Abraxas represents but does not warrant to the Company and Blue Stone, that Abraxas (i) has Defensible Title to the Oil and Gas Interests and the Leases specified in Exhibit B-1, and (ii) will have Defensible Title to the Oil and Gas Interests and the Leases it acquires from the list of potential Leases and Oil and Gas Interests specified in Exhibit B-2. In addition, Abraxas (A) has good title to all properties, assets, rights, interests and entitlements included in the Initial Contributed Assets (except for the Leases and the Oil and Gas Inte rests so specified in Exhibit B-1), and (B) will have good title to all properties, assets, rights, interests and entitlements included in the Additional Contributed Assets and Other Assets (except for the Leases and Oil and Gas Interests so specified in Exhibit

B-2), in each case free and clear of all Encumbrances, claims, obligations or defects, other than Permitted Encumbrances and Encumbrances, claims, obligations or defects which do not, individually or in the aggregate, materially detract from the value of or materially interfere with the use or ownership of the properties, assets, rights, interests or entitlements subject thereto or affected thereby (as currently used or owned by Abraxas).

SECTION 2.7. Adjustment or Refund as to Title Issues.

(a) If, (i) as of the Closing Date, Abraxas does not have, or does not transfer and deliver to the Company at the Closing, Defensible Title with respect to the Initial Contributed Assets identified in Exhibit B-1 or, as of the Date of Contribution (which shall be no later than December 31, 2010), Abraxas does not have, or does not transfer and deliver to the Company, Defensible Title with respect to the Additional Contributed Assets to be acquired from the list of potential Leases identified in Exhibit B-2 (whether as a result of the fact that Abraxas is not able to acquire or contribute to the Company Leases on such list representing a sufficien t number of Net Acres so that, when added to the Initial Contributed Assets, a total of 8,333 Net Acres has been contributed by December 31, 2010 or due to any other Title Failure with respect to such Leases) and (ii) the Company delivers a notice to Abraxas to such effect by the Title Claim Date (except that no such notice shall be required if Abraxas is not able to acquire or contribute to the Company Leases on such list representing a sufficient number of Net Acres so that, when added to the Initial Contributed Assets, a total of 8,333 Net Acres has been contributed by December 31, 2010), then Abraxas shall, at its option, (A) relinquish and return to the Company (by executing an appropriate instrument of assignment reasonably acceptable to the Company) Interests in the Company with an agreed value equal to the Diminished Value of any such Initial Assets, (B) pay in cash to the Company the Diminished Value of any such Initial Assets or (C) if such Title Failure can be cured or removed by Abraxas within a reasonable period of time, cure or remove such Title Failure at Abraxas’ sole cost and expense.

(b) If, (i) as of the Date of Contribution, Abraxas does not have, or does not transfer and deliver to the Company, Defensible Title with respect to the Other Assets, if any, acquired from the list of potential Leases identified in Exhibit B-2 and (ii) the Company delivers a notice to Abraxas to such effect by the Title Claim Date, then Abraxas shall (A) pay in cash to the Company the Diminished Value of any such Other Assets or (B) if such Title Failure can be cured or removed by Abraxas within a reasonable period of time, cure or remove such Title Failure at Abraxas’ sole cost and expense.

(c) At any time prior to the Title Claim Date, if Abraxas becomes aware of any Title Failure with respect to any of the Contributed Assets identified in Exhibit B-1 or Exhibit B-2 (as applicable) or any allegation by a third party that, if true, would result in any such Title Failure, Abraxas shall promptly notify the Company in writing of such Title Failure or allegation with respect thereto.

(d) The provisions of this Section 2.7 shall be the sole and exclusive remedy available to the Company under this Agreement in respect of a failure of Abraxas to have (or the Company to acquire) Defensible Title to any of the Contributed Assets as identified in Exhibit B-1 or Exhibit B-2 (as applicable), and the terms of this Section 2.7 shall survive until the Title Claim Date (provided, however, that if Abraxas becomes obligated prior to the Title Claim Date to make the Company whole in respect of any Title Failure in accordance with this Section 2.7, but has not yet satisfied its obligat ions as of such date, the obligations of Abraxas arising hereunder with respect to such Title Failure shall continue in effect until they are fully performed and discharged).

SECTION 2.8. Proration of Taxes. Any Taxes relating to the Contributed Assets assessed for the 2010 tax year, other than any Taxes calculated with reference to the amount of Hydrocarbons produced during 2010 including ad valorem, production, severance and similar Taxes, shall be prorated based on the number of days in the applicable period falling before, and at or after, the Closing Date. The Company shall be responsible for the portion allocated to the period at and after the Closing Date and Abraxas shall be responsible for the portion allocated to the period before the Closing Date. All Taxes calculated with reference to, based upon or related in any manner to the amount of Hydrocarbons prod uced during 2010 from the Contributed Assets including ad valorem, production, severance and similar Taxes shall be paid by the Company.

SECTION 2.9. Information About the Contributed Assets. THE COMPANY AND BLUE STONE ACKNOWLEDGE THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, ABRAXAS HAS NOT MADE, AND THE COMPANY AND BLUE STONE HEREBY EXPRESSLY DISCLAIM AND NEGATE, AND THE COMPANY AND BLUE STONE HEREBY EXPRESSLY WAIVE, ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (i) PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, SECONDARY OR TERTIARY RECOVERY OPPORTUNITIES, DECLINE RATES, OR THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES OF HYDROCARBONS, IF ANY, ATTRIBUTABLE TO THE CONTRIBUTED ASSETS, (ii) THE ACCURACY, COMPLETENESS OR MATERIALITY OR SIGNIFICANCE OF ANY INFORMATIO N, DATA, GEOLOGICAL OR GEOPHYSICAL DATA (INCLUDING ANY INTERPRETATIONS OR DERIVATIVES BASED THEREON) OR OTHER MATERIALS (WRITTEN OR ORAL) CONSTITUTING PART OF THE CONTRIBUTED ASSETS, NOW, HERETOFORE OR HEREAFTER FURNISHED TO THE COMPANY AND BLUE STONE BY OR ON BEHALF OF ABRAXAS, (iii) THE CONDITION, INCLUDING, THE ENVIRONMENTAL CONDITION OF THE CONTRIBUTED ASSETS AND (iv) THE COMPLIANCE OF ABRAXAS’ PAST OR FUTURE PRACTICES WITH THE TERMS AND PROVISIONS OF ANY LEASE OR CONTRACT, OR ANY SURFACE AGREEMENT OR PERMIT OR APPLICABLE LAWS, INCLUDING ENVIRONMENTAL LAWS AND LAWS NOW OR HEREAFTER IN EFFECT, RELATING TO THE PROTECTION OF NATURAL RESOURCES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, ABRAXAS EXPRESSLY DISCLAIMS AND NEGATES AND THE COMPANY AND BLUE STONE HEREBY WAIVE, AS TO PERSONAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES, BUILDINGS, AND GEOLOGICAL AND GEOPHYSICAL DATA (INCLUDING ANY INTERPRETATIONS OR DERIVATIVES BASED THEREON) CONSTITUTING A PART OF THE CONTR IBUTED ASSETS (i) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (ii) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (iii) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (iv) ANY IMPLIED OR EXPRESS WARRANTY THAT ANY DATA TRANSFERRED PURSUANT HERETO IS NONINFRINGING, (v) ANY RIGHTS OF PURCHASERS UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE, (vi) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM DEFECTS, WHETHER KNOWN OR UNKNOWN, (vii) ANY AND ALL

IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAWS, AND (viii) ANY IMPLIED OR EXPRESS WARRANTY REGARDING ENVIRONMENTAL LAWS, OR LAWS RELATING TO THE PROTECTION OF THE ENVIRONMENT, HEALTH, SAFETY OR NATURAL RESOURCES OF RELATING TO THE RELEASE OF MATERIALS INTO THE ENVIRONMENT, INCLUDING ASBESTOS CONTAINING MATERIAL, LEAD BASED PAINT OR MERCURY AND ANY OTHER HAZARDOUS SUBSTANCES OR WASTES, IT BEING THE EXPRESS INTENTION OF ABRAXAS AND THE COMPANY AND BLUE STONE THAT THE CONTRIBUTED ASSETS, INCLUDING ALL PERSONAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND BUILDINGS INCLUDED IN THE CONTRIBUTED ASSETS, SHALL BE CONVEYED TO THE COMPANY, AND THE COMPANY SHALL ACCEPT THE SAME, AS IS, WHERE IS, WITH ALL FAULTS AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR. THE COMPANY AND BLUE STONE REPRESENT AND WARRANT TO ABRAXAS THAT THE COMPANY AND/OR BLUE STONE HAVE MADE OR CAUSED TO BE MADE SUCH INSPECTIONS WITH RESPECT TO THE CONTRIBUTED ASSETS AS THE COMPANY AND BLUE STONE DEEM APPROPRIATE. ABRAXAS AND THE COMPANY AND BLUE STONE AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAWS (INCLUDING ENVIRONMENTAL LAWS AND LAWS RELATING TO THE PROTECTION OF NATURAL RESOURCES, HEALTH, SAFETY OR THE ENVIRONMENT) TO BE EFFECTIVE, THE DISCLAIMERS OF THE WARRANTIES CONTAINED IN THIS SECTION ARE “CONSPICUOUS” DISCLAIMERS FOR ALL PURPOSES. THE COMPANY AND BLUE STONE ACKNOWLEDGE THAT THEY HAVE BEEN INFORMED THAT OIL AND GAS PRODUCING FORMATIONS CAN CONTAIN NATURALLY OCCURRING RADIOACTIVE MATERIAL (“NORM”). SCALE FORMATION OR SLUDGE DEPOSITS CAN CONCENTRATE LOW LEVELS OF NORM ON EQUIPMENT AND OTHER CONTRIBUTED ASSETS. THE CONTRIBUTED ASSETS MAY HAVE LEVELS OF NORM ABOVE BACKGROUND LEVELS, AND A HEALTH HAZARD MAY EXIST IN CONNECTION WITH THE CONTRIBUTED A SSETS BY REASON THEREOF, THEREFORE, THE COMPANY AND BLUE STONE MAY NEED TO AND SHALL FOLLOW SAFETY PROCEDURES WHEN HANDLING THE CONTRIBUTED ASSETS.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to the Purchasers as of the date hereof and the Closing Date as follows:

SECTION 3.1. Organization. The Company is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware, and has all requisite limited liability company power and authority to own and operate the assets and properties owned and held by it or proposed to be owned and held by it and to conduct its business and operations as presently being conducted and as proposed to be conducted pursuant to the Company Agreement. The Company is duly qualified to do business as a foreign entity and is in good standing under the laws of the S tate of Texas.

SECTION 3.2. Authority; Binding Effect. The Company has all requisite power and authority to enter into this Agreement and the other Applicable Transaction Agreements, to perform its obligations hereunder and thereunder and to consummate the Transactions in accordance with the terms hereof and thereof. The execution and delivery by the Company of this Agreement and the other Applicable Transaction Agreements, the performance by the Company of its obligations hereunder and thereunder and the consummation by the Company of the Transactions have been duly and validly

authorized by all necessary action on the part of the Company, and no further action is necessary on the part of or with respect to the Company in order for the Company to execute and deliver this Agreement and the other Applicable Transactions Agreements and perform its obligations hereunder and thereunder. This Agreement and the other Applicable Transaction Agreements have been duly executed and delivered by the Company, and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether enforceability is considered in a Proceeding at law or in equity.

SECTION 3.3. Absence of Conflicts. The execution and delivery by the Company of this Agreement and the other Applicable Transaction Agreements, the performance by the Company of its obligations hereunder and thereunder and the consummation of the Transactions will not (a) conflict with, or result in any violation or breach of, any provision of the Certificate of Formation of the Company or the Company Agreement, (b) conflict with, or result in any violation or breach of, constitute a default under, give rise to any right of termination or acceleration (with or without notice or the lapse of time or both) pursuant to, or result in being declared void, voidable or without further effect, any term or provision of any note, bond, mortgage, indenture, lease, franchise, permit, license, Contract or other document to which the Company is a party or by which it or any of its properties or assets, are or may be bound, (c) require the Company to obtain any consent, approval, permit, notice, action, authorization or waiver (each a “Consent”) from, make any filing or effect any registration with, or give notice to, any Governmental Authority or any other Person, (d) conflict with, or result in any violation of, any Law or any order, writ, injunction, judgment or decree of any court, arbitrator or Governmental Authority that is applicable to the business, properties, assets or operations of the Company or (e) result in the creation of, or impose on the Company the obligation to create, any Lien upon the property or assets of the Company.

SECTION 3.4. Capitalization; Securities. On the Closing Date, after giving effect to the Transactions, the Securities will constitute the only outstanding Equity Securities of the Company and will be owned by the Purchasers as described in the Company Agreement. None of the issued and outstanding Equity Securities of the Company has been or will be issued in violation of, or subject to, any preemptive rights or similar rights of subscription (except that the Members have certain rights to increase their Capital Commitments t o the Company under the terms of the Company Agreement). There are no outstanding options, warrants, calls, rights, convertible securities or other agreements or commitments of any character pursuant to which the Company is or may be obligated to issue or sell any issued or unissued Equity Securities or to purchase or redeem any Equity Securities or make any other payments in respect thereof, and there are no Equity Securities reserved for issuance for any purpose. The Company has not agreed to register any Equity Securities under the Securities Act.

SECTION 3.5. Issuance of Securities. The Securities have been duly and validly authorized for issuance by the Company pursuant to this Agreement and the Company Agreement. Upon the issuance of the Securities to the Purchasers pursuant to this Agreement, the Securities will be validly issued and, except as provided in the Company Agreement, fully paid and not subject to any capital call obligations. All offers by the Company with respect to, and the issuance and sale by the Company of, the Securities have been and will be made in compliance with the requirements of the S ecurities Act and all other applicable federal and state securities Laws. The offer, issuance and sale by the Company of the Securities is not required to be registered under the Securities Act.

SECTION 3.6. Subsidiaries and Investments. The Company does not have any Subsidiaries. The Company does not own beneficially or of record or have any interest in any Equity Securities of any Person or any options, warrants, calls, rights, convertible securities or other agreements or commitments of any character pursuant to which the holder is entitled to purchase any such Equity Securities. The Company has not made any Investment of any kind in any Person.

SECTION 3.7. Litigation. There is no Proceeding pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its properties or assets, at law or in equity, or in any court or before any arbitrator or any foreign or United States federal, state or local Governmental Authority (i) in which an adverse decision could, either in any single case or in the aggregate, have a material adverse effect on the business, operations, prospects, financial condition or results of operations of the Company or (ii) which in any manner draws into question the validity of or otherwise affects the Transactions.

SECTION 3.8. Compliance with Laws. The Company is not in violation of, and has not received any written notice from any Governmental Authority asserting any violation of, any applicable Law or order of any Governmental Authority. The Company possesses, or on the Closing Date will possess, all licenses, permits, franchises or other governmental authorizations necessary to the ownership of its properties or the conduct of its business.

SECTION 3.9. No Operations. Prior to the consummation of the Closing, the Company has not acquired any properties or assets, engaged in any business or operations or incurred any obligations or liabilities (other than its contractual obligations under this Agreement).

SECTION 3.10. Disclosure. Neither this Agreement nor any certificate, instrument or written statement furnished to the Purchasers by or on behalf of the Company in connection with the Transactions contains an untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

SECTION 3.11. Brokers, Finders, etc. Except for the commission to be paid to Rivington pursuant to Section 8.2(b), all negotiations relating to the Transaction Agreements and the Transactions have been carried on without the intervention of any Person acting on behalf of the Company in such manner as to give rise to a valid Claim against any of the parties hereto for any broker’s or finder’s commission.

SECTION 3.12. Investigation. The Company acknowledges that it is an experienced and knowledgeable investor in the oil and gas business, and the business of purchasing, owning, developing and operating oil and gas properties such as the Contributed Assets. The Company represents, warrants and acknowledges to Abraxas that it has had full access to the Contributed Assets, the officers, and employees of Abraxas, and to the Records of Abraxas relating to the Contributed Assets. In making the decision to enter into this Agreement and the Applicable Transaction Agreements and to consummate the Transactions, the Company has relied solely upon the representations, warranties, covena nts and agreements of Abraxas and Blue Stone set forth in this Agreement and the Applicable

Transaction Agreements and the Company’s own independent due diligence and investigation of the Contributed Assets, and has been advised by and has relied solely on its own expertise and its own legal, tax, operations, environmental, reservoir engineering and other professional counsel and advisors concerning this transaction, the Contributed Assets and the value thereof. In addition, the Company acknowledges and agrees that it will be or has been advised by and relies solely on its own expertise, and its legal counsel and any advisors or experts concerning matters relating to title and to Environmental Laws.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

OF ABRAXAS

Abraxas represents and warrants to the Company and Blue Stone as follows:

SECTION 4.1. Organization. Abraxas Petroleum is a corporation duly incorporated and validly existing under the laws of the State of Nevada and has all requisite corporate power and authority to own and operate the assets and properties owned and held by it and conduct its business and operations as presently being conducted. Abraxas Petroleum is duly qualified to do business as a foreign corporation and is in good standing under the laws of the State of Texas. Abraxas Operating is a wholly-owned subsidiary of Abraxas Petroleum and is a limited liability company du ly formed, validly existing and in good standing under the laws of the State of Texas and has all requisite power and authority to own and operate the assets and properties owned and held by it and conduct its business and operations as presently being conducted.

SECTION 4.2. Authority; Binding Effect. Abraxas Petroleum and Abraxas Operating have the requisite power and authority to enter into this Agreement and the other Applicable Transaction Agreements, to perform their respective obligations hereunder and thereunder and to consummate the Transactions in accordance with the terms hereof and thereof. The execution and delivery by Abraxas of this Agreement and the other Applicable Transaction Agreements, the performance by Abraxas of its obligations hereunder and thereunder and the consummation by Abraxas of the Transactions have be en duly and validly authorized by all necessary action on the part of Abraxas, and no further action is necessary on the part of or with respect to Abraxas in order for Abraxas to execute and deliver this Agreement and the other Applicable Transactions Agreements and perform its obligations hereunder and thereunder. This Agreement and the other Applicable Transaction Agreements have been duly executed and delivered by Abraxas and constitute legal, valid and binding agreements of Abraxas, enforceable against Abraxas in accordance with their respective terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether enforceability is considered in a Proceeding at law or in equity.

SECTION 4.3. Absence of Conflicts. The execution and delivery by Abraxas of this Agreement and the other Applicable Transaction Agreements, the performance by Abraxas of its obligations hereunder and thereunder and the consummation of the Transactions will not (a) conflict with, or result in any violation or breach of, any provision of the Articles of Incorporation or Bylaws of Abraxas Petroleum or the Certificate of Formation or Limited Liability Company Agreement of Abraxas Operating, (b) except as set forth in Schedule 4.3, conflict with, or result in any violation or breach of,

constitute a default under, give rise to any right of termination or acceleration (with or without notice or the lapse of time or both) pursuant to, be subject to or violate any preferential rights to purchase, rights of first offer, tag-along rights, drag-along rights, any similar rights under, or result in being declared void, voidable or without further effect, any term or provision of any note, bond, mortgage, indenture, lease, franchise, material permit, license, contract or other agreement, instrument or document to which Abraxas is a party or by which it or any of its properties or assets, including the Contributed Assets, are or may be bound (including, any Lease or other Contract included in the Contributed Assets), (c) except as set forth in Schedule 4.3, require Abraxas to obtain any Consent from, make any filing or effect any registration with, or give noti ce to, any Governmental Authority or any other Person, (d) conflict with, or result in any violation of, any Law or any order, writ, injunction, judgment or decree of any court, arbitrator or Governmental Authority that is applicable to the business, properties, assets or operations of Abraxas or (e) result in the creation of, or impose on Abraxas the obligation to create, any Encumbrance (other than Permitted Encumbrances) upon its property or assets, including the Contributed Assets.

SECTION 4.4. Proper Use and Maintenance of Tangible Personal Property. Abraxas has at all relevant times operated the tangible personal property included in the Initial Contributed Assets in a good and workmanlike manner (as determined by reference to operating standards for companies engaged in similar lines of business in the geographic areas in which the Initial Contributed Assets are located) and subject to prudent and customary maintenance programs (of the type employed by companies engaged in similar lines of business in the geographic areas in which the Initial Contributed Asset s are located).

SECTION 4.5. Litigation. There is no Proceeding pending or, to the knowledge of Abraxas, threatened against or affecting Abraxas or its property or assets, including the Initial Contributed Assets, at law or in equity, or in any court or before any arbitrator or any foreign or United States federal, state or local Governmental Authority (i) in which an adverse decision could, either in any single case or in the aggregate, reasonably be expected to have a material adverse effect on the Initial Contributed Assets or (ii) which in any manner draws into question the validity of or otherwis e affects the Transactions.

SECTION 4.6. Leases and Contracts. Schedule 4.6 (together with Exhibit B-1 and Exhibit B-2) lists all Leases included in the Initial Contributed Assets and all other material Contracts relating to the Initial Contributed Assets or any operations conducted or to be conducted by Abraxas in connection therewith including any Contracts that (i) give rise to any call upon or option to purchase produ ction from or attributable to the Initial Contributed Assets, (ii) create, evidence or give rise to any right to acquire any of the Initial Contributed Assets or (iii) otherwise relate to the purchase, sale, treating, gathering, processing, storage, exchange and/or transportation of oil, gas or other hydrocarbons that would be binding on the Company by virtue of its ownership of the Initial Contributed Assets after the Closing. Abraxas has paid its share of all costs payable by it under any such Leases and Contracts (including all royalties, rentals and delay rentals due and payable under the Leases), except those being contested in good faith. All such Leases and Contracts are valid and in full force and effect, and the rights, benefits and privileges of Abraxas thereunder are enforceable by Abraxas (and, after the Closing, will be enforceable by the Company) against the other parties thereto in accordance with their terms, except as the same may be limited by applicable bankruptcy, insolvency, r eorganization, moratorium or similar Laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether enforceability is considered in a Proceeding at law or in equity. Neither Abraxas nor, to the knowledge of Abraxas, any other party to any such Leases or Contracts is in material default under any such Lease or Contract (or with the giving of notice or lapse of time or both, would be in material breach or default), and no other party to any such Lease or Contract has given Abraxas written notice of any actual or alleged default or action to alter, terminate or rescind or procure a judicial reformation of any such Lease or Contract.

SECTION 4.7. Licenses and Permits. Abraxas is in possession of and in material compliance with all material licenses, permits, consents, approvals and other authorizations that are required by any Governmental Authority in connection with its business and operations relating to the Initial Contributed Assets as currently conducted. No Claim has been made by any Governmental Authority that any other license, permit or Consent is required in connection with such business and operations and Abraxas does not know of any basis for such a Claim.

SECTION 4.8. Taxes.

(a) Abraxas has filed or will file in a timely manner with the appropriate taxing authorities all tax returns required to be filed on or prior to the Closing Date with respect to the Initial Contributed Assets and each such tax return has been prepared in all material respects in compliance with all current applicable Laws and is true, accurate and complete in all material respects.

(b) Abraxas has paid or will pay in a timely manner (i) all taxes that are shown to be due on any tax returns required to be filed on or prior to the Closing Date with respect to the Initial Contributed Assets, (ii) all taxes imposed on or connected with the ownership or operation of the Initial Contributed Assets pursuant to any assessment received from any taxing authority for any period preceding the Closing Date and (iii) all other taxes due on or before the Closing Date (whether or not shown on a tax return) the underpayment of which could result in an Encumbrance upon the Initial Contributed Assets or in a claim against the Company as the transferee or acquiror of, or successor to, the Initial Contributed Assets.

(c) No claims for taxes, assessments of taxes, or tax deficiencies have been asserted or proposed in writing to Abraxas or, to the knowledge of Abraxas, have been asserted or proposed orally, against Abraxas for which the Initial Contributed Assets contributed by Abraxas could be liable, or for which the Company could be liable as a transferee or purchaser of, or successor to, the Initial Contributed Assets contributed by Abraxas, and Abraxas knows of no reasonable basis for such claims.

(d) There are no outstanding agreements or waivers that would extend the statutory period in which a taxing authority may assess or collect a tax against Abraxas and for which there is a reasonable possibility that the Initial Contributed Assets contributed by Abraxas could be subject, or the Company could be subject as a transferee or purchaser of, or successor to, the Initial Contributed Assets contributed by Abraxas.

SECTION 4.9. Environmental Compliance.

(a) To the knowledge of Abraxas, the Initial Contributed Assets are not, and upon the consummation of the Transactions will not be, subject to any existing, pending or threatened inquiry or Proceeding by any Governmental Authority under or in connection with any applicable Environmental Law.

(b) To the knowledge of Abraxas, the Initial Contributed Assets are not in material violation of, or subject to any material remedial obligation under, any applicable Environmental Law.

(c) To the knowledge of Abraxas, all material environmental notices, permits, licenses or similar authorizations, if any, required to be obtained or filed in connection with the consummation of the Transactions and the conduct of Abraxas’ business operations relating to the Initial Contributed Assets have been obtained or filed as required pursuant to all applicable Environmental Laws.

(d) To the knowledge of Abraxas, no Harmful Substances have been disposed of or released on, to or from any of the Initial Contributed Assets, except in material compliance with all applicable Environmental Laws.

(e) To the knowledge of Abraxas, no Harmful Substances have been generated, managed, treated or transported to or from any of the Initial Contributed Assets, except in material compliance with all applicable Environmental Laws.

(f) Abraxas is not a party, whether as a direct signatory or as successor, assignee or third party beneficiary, or otherwise bound, to any Lease or other Contract relating to the Initial Contributed Assets under which, except for Assumed Liabilities, the Company will be obligated by or entitled to the benefits of, directly or indirectly, any representation, warranty, indemnification, covenant, restriction or other undertaking concerning a release of Harmful Substances or non-compliance with applicable Environmental Laws.

SECTION 4.10. Solvency. Abraxas is able to pay its debts as they become due, has capital sufficient to carry on its business as presently conducted and owns property which has both a fair value and a fair market value in excess of the amount required to pay its respective debts as they become due. Abraxas has not been or will not be rendered insolvent by the consummation of the Transactions, and immediately following the consummation of such Transactions, Abraxas will be able to pay its debts as they become due, will have capital sufficient to carry on its business as then conducted and proposed to be conducted, and will own property which has a fair value and a fair market value in excess of the amount required to pay its respective debts as they become due.

SECTION 4.11. Books and Records. The Records of Abraxas relating to the Initial Contributed Assets fairly reflect in all material respects the transactions to which Abraxas is a party or by which it is bound in connection with such assets or to which the Company will be a party or will be bound after giving effect to the Transactions. Such Records are and have been properly kept and maintained, with the revenues, expenses, assets and liabilities of Abraxas accurately recorded in all material respects therein on the accrual basis of accounting prepared in accordance with GAAP.

SECTION 4.12. Investment Intent; Status of Investor. Abraxas is acquiring the Securities for its own account, for investment purposes, and not with a view to any distribution thereof in violation of the Securities Act or any applicable state securities Laws. Abraxas qualifies as an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act.

SECTION 4.13. Disclosure. Neither this Agreement nor any certificate, instrument or written statement furnished to the Company by or on behalf of Abraxas in connection with the Transactions contains an untrue statement of material fact.

SECTION 4.14. Brokers, Finders, etc. All negotiations relating to the Applicable Transaction Agreements and the Transactions have been carried on without the intervention of any Person acting on behalf of Abraxas in such manner as to give rise to a valid Claim against the Company or Blue Stone for any broker’s or finder’s commission.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

OF BLUE STONE

Blue Stone represents and warrants to the Company and Abraxas as follows:

SECTION 5.1. Organization. Blue Stone is a limited liability company duly formed and validly existing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate the assets and properties owned by it and conduct its business and operations as presently being conducted.

SECTION 5.2. Authority; Binding Effect. Blue Stone has the requisite power and authority to enter into this Agreement and the other Applicable Transaction Agreements, to perform its obligations hereunder and thereunder and to consummate the Transactions in accordance with the terms hereof and thereof. The execution and delivery by Blue Stone of this Agreement and the other Applicable Transaction Agreements, the performance by Blue Stone of its obligations hereunder and thereunder and the consummation by Blue Stone of the Transactions have been duly and validly au thorized by all necessary action on the part of Blue Stone, and no further action is necessary on the part of or with respect to Blue Stone in order for Blue Stone to execute and deliver this Agreement and the other Applicable Transactions Agreements and perform its obligations hereunder and thereunder. This Agreement and the other Applicable Transaction Agreements have been duly executed and delivered by Blue Stone and constitute legal, valid and binding agreements of Blue Stone, enforceable against Blue Stone in accordance with their respective terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether enforceability is considered in a Proceeding at law or in equity.

SECTION 5.3. Absence of Conflicts. The execution and delivery by Blue Stone of this Agreement and the other Applicable Transaction Agreements, the performance by Blue Stone of its obligations hereunder and thereunder and the consummation of the Transactions will not (a) conflict with, or result in any violation or breach of, any provision of the certificate of formation and limited liability company agreement of Blue Stone, (b) conflict with, or result in any violation or breach of, constitute a default under, give rise to any right of termination or acceleration (with or w ithout notice or the lapse of time or both) pursuant to, or result in being declared void, voidable or without further effect, any term or provision of any note, bond, mortgage, indenture, lease, franchise, material permit, license, contract or other agreement, instrument or document to which Blue Stone is a party or by which it or any of its properties or assets are or may be bound, (c) require Blue Stone to obtain any Consent from, make

any filing or effect any registration with, or give notice to, any Governmental Authority or any other Person, or (d) conflict with, or result in any violation of, any Law or any order, writ, injunction, judgment or decree of any court, arbitrator or Governmental Authority that is applicable to the business, properties, assets or operations of Blue Stone.

SECTION 5.4. Litigation. There is no Proceeding pending or, to the knowledge of Blue Stone, threatened against or affecting Blue Stone or its property or assets at law or in equity, or in any court or before any arbitrator or any foreign or United States federal, state or local Governmental Authority (i) in which an adverse decision could, either in any single case or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, prospects, financial condition or results of operations of the Company or (ii) which in any manner draws into question the validity of or otherwise affects the Transactions.

SECTION 5.5. Investment Intent; Status of Investor. Blue Stone is acquiring the Securities for its own account, for investment purposes, and not with a view to any distribution thereof in violation of the Securities Act or any applicable state securities Laws. Blue Stone qualifies as an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act.

SECTION 5.6. Brokers, Finders, etc. All negotiations relating to the Applicable Transaction Agreements and the Transactions have been carried on without the intervention of any Person acting on behalf of Blue Stone in such manner as to give rise to a valid Claim against the Company or Blue Stone for any broker’s or finder’s commission.

SECTION 5.7. Investigation. Blue Stone acknowledges that it is an experienced and knowledgeable investor in the oil and gas business, and the business of purchasing, owning, developing and operating oil and gas properties such as the Contributed Assets. Blue Stone represents, warrants and acknowledges to Abraxas that it has had full access to the Contributed Assets, the officers, and employees of Abraxas, and to the Records of Abraxas relating to the Contributed Assets. In making the decision to enter into this Agreement and the Applicable Transaction Agreements and to consummate the Transactions, Blue Stone has relied solely upon th e representations, warranties, covenants and agreements of Abraxas and the Company set forth in this Agreement and the Applicable Transaction Agreements and Blue Stone’s own independent due diligence and investigation of the Contributed Assets, and has been advised by and has relied solely on its own expertise and its own legal, tax, operations, environmental, reservoir engineering and other professional counsel and advisors concerning this transaction, the Contributed Assets and the value thereof. In addition, Blue Stone acknowledges and agrees that it will be or has been advised by and relies solely on its own expertise, and its legal counsel and any advisors or experts concerning matters relating to title and to Environmental Laws.

ARTICLE VI

SURVIVAL; INDEMNIFICATION

SECTION 6.1. Survival of Representations, Warranties, Covenants and Agreements. The representations and warranties contained in any of the Transaction Agreements or in any agreement, instrument, certificate or other document delivered pursuant to such agreements shall not survive the Closing and the consummation of the Transactions. The covenants and agreements set forth in any of the Transaction Agreements shall survive the Closing until fully performed in accordance with their terms.

SECTION 6.2. Indemnification by the Company. From and after the Closing, the Company shall indemnify and hold each Purchaser and its officers, partners, employees, agents and affiliates, harmless against any and all damages, losses, deficiencies, reductions in value, liabilities, obligations, commitments, costs or expenses, including legal and other expenses reasonably incurred in investigating and defending against the same (collectively, “Losses” and each a “Loss”) incurred by or imposed upon such Person resulting from (i) any breach of any agreement or covenant of the Company contained in this Agreement, (ii) the Company’s failure to satisfy or discharge the Assumed Liabilities (including, from and after the Title Claim Date, the Additional Assumed Liabilities), and (iii) to the fullest extent permitted by Law, any third party Claims asserted against any such Person which arise with respect to the business, assets or operations of the Company (other than any Claims asserted by any party against any Purchaser or its Affiliates under the terms of any of the Transaction Agreements), in each case, regardless of the sole or concurrent negligence or other fault of the Person entitled to indemnification hereunder.

SECTION 6.3. Indemnification by Abraxas. From and after the Closing Date, Abraxas shall indemnify and hold the Company and Blue Stone and their respective officers, employees, agents and affiliates harmless against any and all Losses incurred by them resulting from Abraxas’ failure to satisfy or discharge the Retained Liabilities. The rights to indemnification provided in this Section 6.3 shall apply regardless of the sole or concurrent negligence or other fault of the Person entitled to indemnificati on hereunder.

SECTION 6.4. Indemnification Procedures for Third Party Claims. The following procedures shall be applicable with respect to the indemnification obligations of a party hereunder in respect of any Claims asserted or brought by any third parties, including any present or former employees of any party:

(a) Promptly after receipt by the party seeking indemnification hereunder (the “Indemnitee”) of written notice of the assertion or the commencement of any Claim, whether by legal process or otherwise, with respect to any matter within the scope of Sections 6.2 or 6.3, the Indemnitee shall give written notice thereof to the party from whom indemnification is to be sought hereunder (the “Indemnitor”); provided, however, that the failure of the Indemnitee to give the Indemnitor prompt notice as provided herein shall not relieve the Indemnitor of its indemnification obligations hereunder, unless such failure results in (i) a default judgment, (ii) the expiration of the time to answer a complaint or (iii) material prejudice to the Indemnitor’s defense of such Claim. In the case of any such Claim brought against any Indemnitee, the Indemnitor shall be entitled to assume the defense thereof at its own cost and expense, with counsel reasonably satisfactory to the Indemnitee, by giving the Indemnitee written notice of its election to do so within 30 days after receipt of the notice provided for in this paragraph (a); provided, however, that the Indemnitor shall not be entitled to assume the defense if the Indemnitee shall have been advised by its counsel that there is one or more legal defenses available to it that are in addition to or in conflict with those available to the Indemnitor. If the Indemnitor assumes the defense of any such Claim, it shall not settle such Claim without the prior written consent of the Indemnitee, unless such settlement does not require any payment or other action on the part of the Indemnitee and includes an unconditional release of the Indemnitee from all liability arising out of such Claim. Notwithstanding the assumption by the Indemnitor of the defense of any Claim as provided in this Section 6.4, the Indemnitee shall be permitted to participate in the defense of such Claim, but the costs and expenses incurred in so participating (including fees and disbursements of counsel to the Indemnitee) shall be for the account of the Indemnitee.

(b) If the Indemnitor shall fail to notify the Indemnitee of its election to assume the defense of any such Claim within the prescribed period of time, or shall not be entitled to assume the defense of any such Claim, then the Indemnitee shall control and conduct the defense of any such Claim, at the cost and expense of the Indemnitor, in which event it may do so in such manner as it may deem appropriate; provided, however, that it shall not settle any Claim which would give rise to liability on the part of the Indemnitor under this Article VI without the prior written consent of the Indemnitor, which shall not be unreasonably withheld. The Indemnitor shall be permitted to participate in the defense of such Claim, but the costs and expenses incurred in so participating (including fees and disbursements of counsel to the Indemnitor) shall be for the account of the Indemnitor.

SECTION 6.5. Limitation of Losses. Losses, for purposes of this Article VI, shall mean the amount of any actual liability, loss, cost, expense, claim, award or judgment incurred or suffered by any Indemnitee arising out of or resulting from the indemnified matter, including reasonable fees and expenses of attorneys, consultants, accountants or other agents and experts reasonably incident to matters indemnified against, and the costs of investigation and/or monitoring of such matters, and the costs of enforcement of the indemnity; provided, however, that the Purchasers and the Company shall not be entitled to i ndemnification under this Article VI for, and “Losses” shall not include, loss of profits or other indirect or consequential damages suffered by the Party claiming indemnification, or any special or punitive damages other than indirect, consequential, special or punitive damages suffered by third Persons and actually paid by an Indemnitee pursuant to a Claim.

SECTION 6.6. Exclusive Remedy. OTHER THAN WITH RESPECT TO CLAIMS FOR TITLE FAILURE (WHICH SHALL BE GOVERNED BY THE PROVISIONS OF SECTION 2.7) AND FRAUD, (A) THE PROVISIONS SET FORTH IN THIS ARTICLE VI SHALL BE THE SOLE AND EXCLUSIVE RIGHTS, OBLIGATIONS AND REMEDIES OF THE PARTIES WITH RESPECT TO THIS AGREEMENT, THE EVENTS GIVING RISE THERETO, AND THE TRANSACTIONS PROVIDED FOR HEREIN OR CONTEMPLATED HEREBY AND (B) NO PARTY OR ANY OF ITS SUCCESSORS OR ASSIGNS SHALL HAVE ANY RIGHTS AGAINST ANY OTHER PARTY OR ITS AFFILIATES OTHER THAN AS IS EXPRESSLY PROVIDED IN THIS ARTICLE VI.

ARTICLE VII

DEFINITIONS

SECTION 7.1. Certain Definitions. For purposes of this Agreement, the terms set forth below shall have the following respective meanings:

“Additional Assumed Liabilities” means any Retained Liabilities of the type described in Section 2.3(b) or (c) to the extent that such Retained Liabilities (i) were either (x) disclosed by Abraxas to the Company pursuant to the Schedules to this Agreement (in sufficient detail to give the Company and the Purchasers a reasonable understanding of the nature and scope of such liabilities) or as a result of the investigation of the Contributed Assets conducted by the Parties or (y) were not actually known to the senior management of Abraxas (including Robert L. G. Watson, Chris E. Williford, Lee T. Billingsley, Stephen T. Wendel, William H. Wallace, Barbara M. Stuckey and David Frazier) as of the Closing Date or Date of Contribution, as applicable (it being understood that this defi nition shall not be construed to impose any duty on the part of Abraxas to conduct any investigation with respect to the existence or absence of liabilities other than that actually conducted by it prior to the Closing

Date or Date of Contribution, as applicable), and (ii) are not required to be paid, satisfied or discharged until after the Title Claim Date.

“Applicable Transaction Agreements” means, with reference to a party to this Agreement, all Transaction Agreements to which such party is or is proposed to become a party (as contemplated by such Transaction Agreement).

“Assignment” means an Assignment, Bill of Sale and Conveyance in the form attached as Exhibit A hereto, which such form contains (i) a special warranty of title by, through and under Abraxas, but not otherwise, subject to Permitted Encumbrances, and (ii) an assumption of the Assumed Liabilities.

“Blue Stone Designees” means the members of the Board of the Company designated by Blue Stone in accordance with the Company Agreement.

“Closing Budget” means the budget, for the period from and after the Closing Date until and including December 31, 2010, of capital expenditures proposed to be made, and other costs, expenses and cash outlays proposed to be made in connection with the business activities of the Company during such period.

“Contract” means any written contract, agreement, arrangement, understanding or other instrument or obligation.

“Defensible Title” means such title of Abraxas (or the Company, as the case may be) to any of the Contributed Assets identified in Exhibit B-1 or Exhibit B-2 (as applicable) which:

(a) subject to Permitted Encumbrances, entitles Abraxas (or the Company) to an undivided interest in all oil, gas and/or other minerals produced from the Net Acres shown in Exhibit B-1 or Exhibit B-2 (as applicable);

(b) subject to Permitted Encumbrances, entitles Abraxas (or the Company) to receive in the aggregate a Net Revenue Interest in respect of such Contributed Asset equal to or greater than the Net Revenue Interest shown in Exhibit B-1 or Exhibit B-2 (as applicable) of all oil, gas and/or other minerals produced, saved and marketed from such Contributed Asset, except decreases in connection with those operations in which Abraxas (or the Company) may be a nonconsenting co-owner or as otherwise stated in Exhibit B-1 or Exhibit B-2< /font> (as applicable);

(c) subject to Permitted Encumbrances, obligates Abraxas (or the Company) to bear a percentage of the costs and expenses for the maintenance and development of, and operations relating to, such Contributed Asset not greater than the Working Interest shown in Exhibit B-1 or Exhibit B-2 (as applicable), except for increases (i) resulting from contribution requirements with respect to defaulting or non-consenting co-owners under applicable operating agreements and (ii) that are accompanied by at least a proportionate increase in Abraxas’ (or the Company’s) Net Revenue Interest; and

(d) is free and clear of all Encumbrances, claims, obligations and defects, other than Permitted Encumbrances.

“Diminished Value” means, with respect to any of the Contributed Assets identified in Exhibit B-1 or Exhibit B-2 (as applicable):

(a) in the case of a complete Title Failure to any such Contributed Asset, the agreed value of such Contributed Asset (or, in the case of any Other Asset, the amount reimbursed to Abraxas by the Company for such asset) as determined in accordance with Section 2.1(d);

(b) in the event of a partial Title Failure to any such Contributed Asset that reduces the Net Revenue Interest of the Company with respect thereto, (x) the agreed value of the affected Contributed Asset (or, in the case of any Other Asset, the amount reimbursed to Abraxas by the Company for such asset) as determined in accordance with Section 2.1(d), multiplied by (y) a fraction, the numerator of which is the difference between (1) the Net Revenue Interest for such Contributed Asset set forth on Exhibit B-1 or Exhibit B-2 (as applicable), and (2) the actual Net Revenue Interest for such Contributed Asset (after adjusting for such Title Failure), and the denominator of which is the Net Revenue Interest for such Contributed Asset set forth on Exhibit B-1 or Exhibit B-2 (as applicable);

(c) in the event of a partial Title Failure to any such Contributed Asset that reduces the Net Acres of the Company with respect thereto (to the extent not already adjusted under paragraph (a) above), (x) the agreed value of the affected Contributed Asset (or, in the case of any Other Asset, the amount reimbursed to Abraxas by the Company for such asset) as determined in accordance with Section 2.1(d), multiplied by (y) a fraction, the numerator of which is the difference between (1) the Net Acres for such Contributed Asset set forth on Exhibit B-1 or Exhibit B-2 (as applicable), and (2) the actual Net Acres for such Contributed Asset (after adjusting for such Title Failure), and the denominator of which is the Net Acres for such Contributed Asset set forth on Exhibit B-1 or Exhibit B-2 (as applicable);

(d) in the event of a Title Failure that is an obligation, Encumbrance, burden or charge upon such Contributed Asset that is undisputed and liquidated in amount, the amount necessary to be paid to remove such Title Failure from the affected Contributed Asset; or

(e) in the event of a Title Failure that is an obligation, Encumbrance, burden or charge upon or other Title Failure to the affected Contributed Asset of a type not described in paragraphs (a), (b), (c) or (d) above, an amount to be determined on an equitable basis and after taking into account the agreed value of such Contributed Asset (or, in the case of any Other Asset, the amount reimbursed to Abraxas by the Company for such asset) as determined in accordance with Section 2.1(d), the legal effect of the Title Failure, the potential economic effect of the Title Failure and such other factors as are necessary to make a proper evaluation thereof.

“Encumbrance” means any Lien of any kind or character affecting title.

“Environmental Law” means any applicable United States federal, state or local Law relating to pollution, contamination of soils or groundwater, protection of the environment or protection of biological or cultural resources as in effect as of the date of this Agreement, including, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Hazardous Materials Transportation

Act, 49 U.S.C. § 1471 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 through 2629; the Oil Pollution Act, 33 U.S.C. § 2701 et seq.; the Emergency Planning and Community Right to Know Act, 42 U.S.C. § 11001 et seq.; and the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j.

“Equity Securities” means (i) with respect to any corporation, all shares, interests, participations or other equivalents of capital stock of such corporation, however designated, and any warrants, options or other rights to purchase or acquire any such capital stock and any securities convertible into or exchangeable or exercisable for any such capital stock, (ii) with respect to any partnership, all partnership interests, participations or other equivalents of partnership interests of such partnership, however designated, and any warrants, options or other rights to purchase or acquire any such partnership interests and any securities convertible into or exchangeable or exercisable for any such partnership interests, and (iii) with respect to any limited liability company, all units, interests, participations or other equivalents of membership interests of such limited liability company, however designated, and any warrants, options or other rights to purchase or acquire any such membership interests and any securities convertible into or exchangeable or exercisable for any such membership interests.

“Harmful Substances” means any toxic or hazardous pollutant, contaminant, chemical, waste, material or substance defined by any Environmental Law, that causes injury to the environment and subjects the Company to costs or liability under any applicable Environmental Law, and specifically includes: (i) petroleum and petroleum products, including crude oil and any fractions thereof; (ii) natural gas, synthetic gas and any mixtures thereof; (iii) PCBs; and (iv) asbestos or asbestos-containing materials.

“Hydrocarbons” means oil and gas and other hydrocarbons produced or processed in association therewith (whether or not such item is in liquid or gaseous form), or any combination thereof, and any minerals produced in association therewith.

“Investment” means, with respect to any Person, any payment, loan, advance or contribution of any amount to any other Person or any agreement or commitment to do any of the foregoing, and in any event shall include (i) any direct or indirect purchase or other acquisition of any notes, obligations, instruments, Equity Securities or other securities or ownership interests (including joint venture interests) and (ii) any capital contribution to any other Person.

“Leases” means oil, gas and mineral leases or, if the context requires, the oil, gas and mineral leases included in the Contributed Assets.

“Lien” means, with respect to any properties or assets, any mortgage, pledge, hypothecation, assignment, security interest, lien or encumbrance or security agreement or arrangement of any kind or character whatsoever in respect of such properties or assets.

“Master Services Agreement” means the Master Services Agreement attached hereto as Exhibit C, entered into as of the date hereof by and between the Company and Blue Stone, pursuant to which Blue Stone will provide certain administrative and other services to the Company, and the Company will bear the costs and expenses incurred by Blue Stone in providing such services to the Company.

“Net Acres” means, as computed separately with respect to each Lease, (i) the number of gross acres in the lands covered by such Lease, multiplied by (ii) the undivided percentage interest in oil, gas and other minerals covered by such Lease in such lands, multiplied by (iii) the Company’s Working Interest in such Lease.

“Net Revenue Interest” means the percentage interest in and to all production of oil, gas and other minerals saved, produced and sold from any well or lease after giving effect to all valid lessors’ royalties, overriding royalties, nonparticipating royalties, production payments and/or other similar burdens on or measured by the production of oil and gas.

“Operating Agreement” means the Operating Agreement attached hereto as Exhibit D, entered into as of the date hereof by and between the Company and Abraxas Petroleum, pursuant to which Abraxas Petroleum will be designated as the operator of the Company’s oil and gas properties.

“Permitted Encumbrances” means any of the following:

(a) lessors’ royalties, overriding royalties, reversionary interests and other burdens to the extent that they do not, individually or in the aggregate, reduce Abraxas’ (or the Company’s) Net Revenue Interest below that shown in Exhibit B-1 or Exhibit B-2 (as applicable) or increase Abraxas’ (or the Company’s) Working Interest above that shown in Exhibit B-1 or Exhibit B-2 (as applicable) without a corresponding increase in the Net Revenue Interest;

(b) all leases, unit agreements, pooling agreements, operating agreements, production sales contracts, division orders and other contracts, agreements and instruments applicable to the Leases, including provisions for penalties, suspensions or forfeitures contained therein, to the extent that they do not, individually or in the aggregate, reduce Abraxas’ (or the Company’s) Net Revenue Interest below that shown in Exhibit B-1 or Exhibit B-2 (as applicable) or increase Abraxas’ (or the Company’s) Working Interest above that shown in Exhibit B-1 or Exhibit B-2 (as applicable) without a corresponding increase in the Net Revenue Interest;

(c) preferential purchase rights which have been waived or with respect to which the appropriate time periods for asserting the rights have expired;

(d) third-party Consent requirements and similar restrictions with respect to which waivers or Consents are obtained from the appropriate parties prior to the Closing Date or for which the appropriate time period for asserting the right has expired;

(e) Liens for taxes or assessments that are not yet due or not yet delinquent or, if delinquent, are not material and are being contested in good faith by appropriate Proceedings;

(f) materialman’s, mechanic’s, repairman’s, employee’s, contractor’s, operator’s and other similar Liens or charges arising in the ordinary course of business for amounts not yet delinquent (including any amounts being withheld as provided by Law), or if delinquent, are not material and are being contested in good faith by appropriate Proceedings;

(g) all requirements that Consents be obtained, by required notices to, filings with, or other actions by Governmental Authorities in connection with the contribution, transfer and conveyance of the Leases, if such consents are customarily obtained subsequent to the transfer and conveyance;

(h) rights of reassignment arising upon final intention to abandon or release the properties covered by the Leases, or any of them;

(i) easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations;

(j) all rights reserved to or vested in any Governmental Authority to control or regulate any of the properties covered by the Leases in any manner and all obligations and duties under all applicable Laws of any such Governmental Authority or under any franchise, grant, license or permit issued by any Governmental Authority;

(k) any Encumbrances, claims, obligations or defects identified in Schedule 7.1 (which Schedule states whether or not any items listed thereon are intended to be Permitted Encumbrances for purposes of determining whether a Title Failure has occurred and for purposes of the rights and remedies of the Company under Section 2.7); or

(l) any other Encumbrances, claims, obligations or defects which do not, individually or in the aggregate, materially detract from the value of or materially interfere with the use or ownership of the Lease subject thereto or affected thereby (as currently used or owned) and which would be accepted by a reasonably prudent purchaser engaged in the business of owning and operating similar Leases.

“Person” means any individual, corporation, limited liability company, partnership, association, trust or any other entity or organization of any kind or character, including any Governmental Authority.

“Rivington” means Rivington Capital Advisors, LLC, or if provided in a written notice to the Members by Rivington Capital Advisors, LLC, its wholly owned subsidiary, Rivington Securities, LLC.

“Securities” means the Interests to be acquired by the Purchasers from the Company pursuant to this Agreement.

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

“Subsidiary” means, with respect to any Person, any corporation, partnership or other entity (i) of which Equity Securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other similar managing body of such corporation, partnership or other entity or having the right to receive more than 50% of the distributions to be made by such corporation, partnership or other entity (either generally or upon liquidation of such corporation, partnership or other entity) are at the time owned by such Person or (ii) the management of which is otherwise Controlled, directly or indirectly, through one or more intermediaries by such Person.

“Taxes” means all taxes, including income tax, surtax, margin tax, remittance tax, presumptive tax, net worth tax, special contribution, production tax, pipeline transportation tax, value added tax, withholding tax, gross receipts tax, windfall profits tax, profits tax, severance tax, personal property tax, ad valorem tax, real property tax, sales tax, service tax, transfer tax, use tax, excise tax, premium tax, customs duties, stamp tax, motor vehicle tax, entertainment tax, insurance tax, capital stock tax, franchise tax, occupation tax, payroll tax, employment tax, social security, unemployment tax, disability tax,

alternative or add-on minimum tax, estimated tax, and any other assessments, duties, fees, levies or other charges imposed by a Governmental Authority, together with any interest, fine or penalty thereon, or addition thereto.

“Title Claim Date” means February 18, 2012.

“Title Failure” means the failure of the representation set forth in Section 2.6 to be true and correct on the Closing Date or the Date of Contribution, as applicable; provided, however, that if Abraxas is not able to acquire and contribute to the Company, no later than December 31, 2010, Additional Contributed Assets which, when added to the Initial Contributed Leases, total 8,333 Net Acres, there shall be deemed to have occurred, for purposes of Section 2.7 (and the related definition of the term Diminished Value), Title Failure with respect to the resulting shortfall as of December 31, 2010 in the number of Net Acres included in the Initial Assets.

“Transaction Agreements” means this Agreement, the Company Agreement, the Operating Agreement, the Master Services Agreement and any other documents to be executed and delivered in connection with the consummation of the transactions contemplated hereby (including the Assignments and Bills of Sale and other instruments to be executed pursuant to Article II).

“Transactions” means the transactions contemplated by the Transaction Agreements or, to the extent such term is used with reference to a specific party, the transactions to be consummated by such party pursuant to the Applicable Transaction Agreements.

“Working Interest” means the percentage interest in the full and entire fee and leasehold estate in any property and all rights and obligations of every kind and character pertinent thereto or arising therefrom, without regard to any valid lessor royalties, overriding royalties, nonparticipating royalties, production payments and/or other burdens against production insofar as said interest in said leasehold is burdened with the obligation to bear and pay the cost of exploration, development and operation.

SECTION 7.2. Other Defined Terms.

Each of the terms in the table below has the meaning set forth in the provision of this Agreement identified opposite such term in such table. All other capitalized terms used herein without definition have the respective meanings assigned to them in the Company Agreement.

Term Provision

Abraxas Introductory paragraph

Abraxas Operating Introductory paragraph

Abraxas Petroleum Introductory paragraph

Additional Contributed Assets Section 2.1(c)

Agreement Introductory paragraph

Assumed Liabilities Section 2.2

Blue Stone Introductory paragraph

Closing Section 1.2(a)

Closing Date Section 1.2(a)

Company Introductory paragraph

Company Agreement Recitals

Consent Section 3.3

Contributed Assets Section 2.1(a)

Date of Contribution Section 2.1(c)

Excluded Assets Section 2.1(f)

Excluded Property Section 2.1(f)(iii)

Excluded Well Bores Section 2.1(f)(i)

Indemnitee Section 6.4(a)

Indemnitor Section 6.4(a)

Initial Assets Section 2.1(a)

Initial Contributed Assets Section 2.1(a)(i)

Losses Section 6.2

NORM Section 2.9

Other Assets Section 2.1(c)

Purchasers Introductory paragraph

Retained Liabilities Section 2.3

Subject Area Section 2.1(a)

Subject Capital Contribution Section 8.2(c)

ARTICLE VIII

MISCELLANEOUS

SECTION 8.1. Publicity. Except as permitted by this Section 8.1, each party agrees to keep the terms of this Agreement confidential. Each party agrees that it will not make any press release or other form of public announcement with respect to the Transactions without the approval of the other parties except as required by Law or the rules and regulations of any self regulating organization. The parties shall promptly advise and cooperate with each other prior to issuing, or permitting any of its officers, directors, partners, managers, members, employees or agent s to issue, any press release or other form of public announcement with respect to the Transactions. The parties acknowledge and agree that Abraxas Petroleum has determined that it is required to file a Current Report on Form 8-K with the Securities and Exchange Commission relating to the Transactions and that, at the time of or after the filing of such report, Abraxas Petroleum may be obligated and (if it determines in its sole discretion that it is so obligated) shall be permitted to file the Company Agreement and this Agreement as exhibits to one or more periodic reports to be filed by it with the Securities and Exchange Commission. Abraxas shall give Blue Stone a reasonable opportunity to review and comment on such Current Report on Form 8-K prior to the time it is filed with the Securities and Exchange Commission.

SECTION 8.2. Fees and Expenses.

(a) The Company shall promptly pay or reimburse the Purchasers for all Transaction Expenses in accordance with Section 12.3 of the Company Agreement.

(b) In addition to any Transaction Expenses to be paid or reimbursed to Abraxas pursuant to Section 12.3 of the Company Agreement, the Company shall reimburse Abraxas for all actual out-of-pocket costs and expenses incurred by Abraxas with respect to (i) title opinions (and landman services related to such opinions) relating to the Initial Contributed Assets located in Atascosa County, (ii) title opinions (and landman services related to such opinions) relating to the Additional Contributed Assets (in each case, as evidenced by reasonable supporting documentation provided to and approved by the Blue Stone Designees), and (iii) the acquisition by Abraxas of any Other Assets. Out-of-pocket costs and expenses incurred by Abraxas with respect to title opinions (and l andman services related to such opinions) shall only be reimburseable to the extent provided in this Agreement, and shall not be considered Transaction Expenses reimbursable pursuant to paragraph (a) above or Section 12.3 of the Company Agreement.

(c) On each date upon which Blue Stone makes a Capital Contribution to the Company in respect of its initial Capital Commitment in the amount of $75,000,000 as set forth in the Company Agreement as of the date hereof and without giving effect to any increase in such Capital Commitment at any time in the future or to the extent such Capital Contribution (each, a “Subject Capital Contribution”), or as soon thereafter as reasonably practicable, the Company shall pay a financial advisory fee to Rivington in an amount equal to 4% of such Subject Capital Contribution, by wire transfer of immediately available funds (to such account as shall be designated in advance by Rivington). From and after the date hereof, the Company shall notify Rivington of any Capi tal Call that would result in any Subject Capital Contribution so that Rivington may provide the Company with an invoice and appropriate payment instructions with respect to any financial advisory fee payable pursuant to this paragraph (c).

SECTION 8.3. Notices. All notices and other communications under this Agreement or in connection herewith shall be in writing and shall be given by delivery in person or by overnight courier, by registered or certified mail (return receipt requested and with postage prepaid thereon) or by Electronic Transmission. All notices and other communications that are addressed as provided in or pursuant to this Section 8.3 shall be deemed duly and validly given (a) if delivered in person or by overnight courier, upon delivery, (b) if delivered by registered or certified mail (return receipt requested and with postage paid thereon), 72 hours after being placed in a depository of the United States mails and (c) if delivered by Electronic Transmission, upon receipt thereof. Notices shall be delivered to the parties at the addresses set forth below:

if to the Company:

Blue Eagle Energy, LLC

475 Seventeenth Street

Suite 1200

Denver, Colorado 80202

Attention: Kyle R. Miller and Board of Managers

Phone: (303) 292-0949

Facs: (303) 898-6505

if to Abraxas:

Abraxas Petroleum Corporation

18803 Meisner Drive

San Antonio, Texas 78258

Attention: Robert L. G. Watson

Phone: (210) 490-4788

Facs: (210) 918-6675

if to Blue Stone:

Blue Stone Oil & Gas, LLC

475 Seventeenth Street

Suite 1200

Denver, Colorado 80202

Attention: Kyle R. Miller and Executive Committee

Phone: (303) 292-0949

Facs: (303) 898-6505

Any party may from time to time change its address or designee for notification purposes by giving the other parties prior notice in the manner specified above of the new address or the new designee and the subsequent date upon which the change shall be effective.

SECTION 8.4. Amendment; Waivers. This Agreement may be amended only by a written instrument duly executed and delivered by or on behalf of each of the parties. Compliance with any term or provision hereof may be waived only by a written instrument executed by each party entitled to the benefits of the same. No failure to exercise any right, power or privilege granted hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege granted hereund er.

SECTION 8.5. Parties in Interest; Assignment. This Agreement shall be binding upon the parties and their respective successors and assigns and shall inure to the benefit of the parties and the other Persons entitled to indemnification under the terms of Article VI and their respective successors, assigns and legal representatives. Neither this Agreement nor any rights or obligations hereunder may be assigned by any party, without the prior written consent of each of the other parties hereto.

SECTION 8.6. No Third Party Beneficiaries. Nothing in this Agreement is intended or shall be construed to give any Person, other than the parties hereto and the other Persons who are entitled to indemnification under the terms of Article VI, any legal or equitable right, remedy or Claim under or in respect of this Agreement or any provision contained herein.

SECTION 8.7. Severability. In the event that any one or more of the terms or provisions contained in this Agreement shall be held to be invalid, illegal or unenforceable for any reason, the validity, legality or enforceability of all other terms and provisions of this Agreement shall not be affected.

SECTION 8.8. Rules of Construction. The Article and Section headings in this Agreement are for convenience of reference only, do not constitute a part of this Agreement and shall limit, extend or otherwise affect the meaning or interpretation of the terms and provisions of this Agreement. In this Agreement, unless the context otherwise requires, words in the singular number or in the plural number shall each include the singular number and the plural number, as the context may require. All references herein to dollar amounts are in United States dollars. 0;The terms “herein,” “hereunder,” “hereto” and similar terms refer to this Agreement generally and not to any one Article or Section of this Agreement, unless the context otherwise requires and the terms “include” or “including” or similar derivations are without limitation. Each of the parties acknowledges that it has been represented by independent counsel of its choice throughout all negotiations that have preceded the execution of this Agreement and that it has had the benefit of the advice of said independent counsel. Each party and its counsel cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any and all drafts relating thereto shall be deemed the work product of all of the parties and may not be construed against any party by reason of its preparation by such party. Accordingly, any

rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any party that drafted it is of no application and is hereby expressly waived.

SECTION 8.9. Entire Agreement. This Agreement (including the Exhibits and Schedules hereto), together with the other Transaction Agreements, constitute the entire agreement and understanding between the parties with respect to the Transactions and cancel, merge and supersede all prior and contemporaneous oral or written agreements, representations and warranties, arrangements and understandings relating to the subject matter hereof and thereof.

SECTION 8.10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Texas, without regard to any principles of conflicts of laws that would require the application of the Laws of any other jurisdiction.

SECTION 8.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. In the event that any signature is delivered by Electronic Transmission of a facsimile thereof (including a “.pdf” format data file), such signature shall create a valid and binding obligation of the party executing with the same force and effect as if such facsimile were an original signature.

SECTION 8.12. Existing Joint Operating Agreements. The Parties acknowledge that some of the Initial Contributed Assets are subject to existing joint operating agreements. To the extent that such agreements require the maintenance of uniform interest, Abraxas shall obtain a waiver to such requirement from the relevant parties within 15 days after Closing. To the extent that such agreements pertain to all depths and the corresponding Initial Contributed Assets include only the Eagle Ford Shale, Abraxas shall, with respect to the Eagle Ford Shale, (i) resign as operator thereunder and (ii) obtain amendments to such agreements naming the Company as successor operator within 15 days after Closing.

[Remainder of page intentionally left blank. Signature page follows.]

EX-10.1 3 llcagrmt.htm LIMITED LIABILITY COMPANY AGREEMENT llcagrmt.htm

Exhibit 10.1

Execution Copy

LIMITED LIABILITY COMPANY AGREEMENT

BLUE EAGLE ENERGY, LLC

(A Delaware limited liability company)

Dated as of August 18, 2010

TABLE OF CONTENTS

		Page
ARTICLE I GENERAL		1
	SECTION 1.1. Formation and Organization	1
	SECTION 1.2. Name	1
	SECTION 1.3. Principal Office	2
	SECTION 1.4. Registered Office and Registered Agent	2
	SECTION 1.5. Term	2
	SECTION 1.6. Purposes	2
	SECTION 1.7. Powers	2
	SECTION 1.8. Qualification in Other Jurisdictions	3

ARTICLE II MANAGEMENT		4
	SECTION 2.1. Board of Managers	4
	SECTION 2.2. Authority of Members	7
	SECTION 2.3. Delegation of Authority	7
	SECTION 2.4. Certain Agreements	7
	SECTION 2.5. Officers	8
	SECTION 2.6. Contractual Management Rights	8

ARTICLE III MEMBERS		9
	SECTION 3.1. Admission of Members	9
	SECTION 3.2. No Liability for Company Obligations	9
	SECTION 3.3. Outside Activities	9
	SECTION 3.4. Non-Competition	9
	SECTION 3.5. No Resignation or Withdrawal by Members	10

ARTICLE IV CAPITAL		10
	SECTION 4.1. Capital Commitments	10
	SECTION 4.2. Capital Contributions	11
	SECTION 4.3. Capital Accounts	11
	SECTION 4.4. Member Loans	12
	SECTION 4.5. No Preemptive Rights	12
	SECTION 4.6. Other Payments	12
	SECTION 4.7. Return of Contributions; No Interest on Capital	12

ARTICLE V ALLOCATIONS; DISTRIBUTIONS		12
	SECTION 5.1. Allocations of Net Income and Net Losses.	12
	SECTION 5.2. Regulatory Allocations.	13
	SECTION 5.3. Tax Allocations	14
	SECTION 5.4. Distributions.	15
	SECTION 5.5. Tax Distributions.	15

ARTICLE VI TRANSFER OF INTERESTS; ADMISSION; WITHDRAWAL		16
	SECTION 6.1. Transfers of Interests; General	16
	SECTION 6.2. Sale Rights	16
	SECTION 6.3. Admission	18

	SECTION 6.4. Withdrawal	19
	SECTION 6.5. Involuntary Transfer	19

ARTICLE VII DISSOLUTION; WINDING UP		19
	SECTION 7.1. Dissolution	19
	SECTION 7.2. Winding Up	19
	SECTION 7.3. Application and Distribution of Proceeds of Liquidation	20
	SECTION 7.4. Reasonable Time for Winding Up	20
	SECTION 7.5. Waiver of Partition	20
	SECTION 7.6. Certificate of Cancellation	21

ARTICLE VIII LIABILITY AND INDEMNIFICATION		21
	SECTION 8.1. No Liability for Company Debts	21
	SECTION 8.2. Exculpation	21
	SECTION 8.3. Indemnification	21
	SECTION 8.4. Advance Payment and Appearance as a Witness.	22
	SECTION 8.5. Insurance	22
	SECTION 8.6. Nonexclusivity of Rights	22
	SECTION 8.7. Company is Primary Obligor	22
	SECTION 8.8. Savings Clause	22

ARTICLE IX CERTAIN TAX MATTERS		23
	SECTION 9.1. Company Classification	23
	SECTION 9.2. Tax Returns and Tax Information	23
	SECTION 9.3. Tax Elections	23
	SECTION 9.4. Tax Matters Partner.	24
	SECTION 9.5. Withholding	24

ARTICLE X BOOKS AND RECORDS; REPORTS		24
	SECTION 10.1. Maintenance of and Access to Books and Records	24
	SECTION 10.2. Access to Books and Records	25
	SECTION 10.3. Bank Accounts	25
	SECTION 10.4. Financial and Other Reports.	25
	SECTION 10.5. Annual and Quarterly Budgets	26
	SECTION 10.6. Independent Public Accounting Firm	27
	SECTION 10.7. Engineering Firm	27

ARTICLE XI DEFINITIONS		27
	SECTION 11.1. Definitions	27
	SECTION 11.2. Other Defined Terms	35
	SECTION 11.3. Construction	36

ARTICLE XII MISCELLANEOUS		36
	SECTION 12.1. Notices	36
	SECTION 12.2. Confidentiality	36
	SECTION 12.3. Transaction Expenses	37

	SECTION 12.4. Amendment; Waiver	37
	SECTION 12.5. Entire Agreement	37
	SECTION 12.6. Parties in Interest	37
	SECTION 12.7. Benefit of Agreement	38
	SECTION 12.8. Governing Law	38
	SECTION 12.9. Severability	38
	SECTION 12.10. Headings	38
	SECTION 12.11. Further Assurances	38
	SECTION 12.12. Rules of Construction	38
	SECTION 12.13. Counterparts	38

iii

LIMITED LIABILITY COMPANY AGREEMENT

BLUE EAGLE ENERGY, LLC

This LIMITED LIABILITY COMPANY AGREEMENT OF BLUE EAGLE ENERGY, LLC, dated as of August 18, 2010 (the “Agreement”), is entered into by and between Abraxas Petroleum Corporation, a Nevada corporation (“Abraxas”), and Blue Stone Oil & Gas, LLC, a Delaware limited liability company (“Blue Stone”), as Members of Blue Eagle Energy, LLC, a Delaware limited liability company (the “Company”).

W I T N E S S E T H:

WHEREAS, the Company has been formed as a limited liability company under the laws of the State of Delaware;

WHEREAS, the parties hereto desire to enter into this Agreement in order to evidence the admission of each of the Members to the Company and to set forth their agreement with regard to, among other things, (i) the regulation and management of the business and affairs of the Company, (ii) the making of Capital Contributions by the Members to the Company, (iii) the distribution of funds and other assets and the allocation of Net Income and Net Loss by the Company to or among the Members and (iv) the Transfer of Interests in the Company; and

WHEREAS, capitalized terms used herein without definition shall have the respective meanings assigned to such terms in Article XI;

NOW, THEREFORE, in consideration of the premises, the terms and provisions set forth herein, the mutual benefits to be derived from the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

GENERAL

SECTION 1.1. Formation and Organization. The Company has been formed as a limited liability company under the Act as a result of the filing of the Certificate of Formation of the Company (the “Certificate of Formation”) in the office of the Secretary of State of the State of Delaware. The execution of the Certificate of Formation by K yle R. Miller in his capacity as an authorized person is hereby ratified and confirmed by each of the Members. Upon the execution and delivery of this Agreement, the rights, duties and obligations of the Members in connection with the regulation and management of the Company and the other matters provided for herein shall be as set forth in this Agreement and, except as otherwise expressly provided herein, the Act.

SECTION 1.2. Name. The name of the Company shall be “Blue Eagle Energy, LLC”. The business of the Company shall be conducted under the name “Blue Eagle Energy, LLC” or such other name or names as the Board may determine from time to time.

SECTION 1.3. Principal Office The principal office of the Company shall be located at 475 Seventeenth Street, Suite 1200, Denver, Colorado 80202, or such other place as the Board shall determine from time to time. The Board shall promptly notify the Members of any change in the location of the principal office of the Company.

SECTION 1.4. Registered Office and Registered Agent. The name and address of the registered agent for service of process on the Company in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The registered office or registered agent of the Company may be changed from time to time by the Boar d in the manner provided in the Act. The Board shall promptly notify the Members of any change in the registered office or registered agent of the Company. The Company shall maintain at its registered office such records as may be specified by the Act.

SECTION 1.5. Term. The existence of the Company commenced as of the date upon which the Certificate of Formation was filed in the office of the Secretary of State of the State of Delaware, and the Company shall continue in existence until it is dissolved in accordance with the provisions of this Agreement, and to the extent provided under the Act, until its affairs are wound up and the Company is terminated in accordance with the provisions of this Agreement and the Act.

SECTION 1.6. Purposes. The purposes of the Company are as follows:

(a) to engage in the evaluation, acquisition, exploration, drilling, development and production of or for oil, gas and other hydrocarbons in the Subject Area;

(b) to enter into any partnership, joint venture or other similar arrangement in order to pursue the foregoing purpose;

(d) to engage in such other activities as may lawfully be conducted by a limited liability company organized under the Act.

SECTION 1.7. Powers. The Company shall have all such powers, which will be exercised in accordance with and subject to the provisions of this Agreement, as are necessary or appropriate to carry out the purposes of the Company, including the power:

(a) to conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Act in any state, territory, district or possession of the United States;

(b) to acquire (by purchase, lease, contribution of property or otherwise), own, hold, operate, maintain, improve, lease, sell, convey, mortgage, transfer or dispose of the Initial Assets and any other Oil and Gas Interests, Related Property and Records or other real or personal property in the Subject Area that may be necessary, convenient or incidental to the accomplishment of the purposes of the Company;

(c) to enter into the Transaction Agreements and perform and carry out its obligations thereunder and exercise any rights available to it under or in connection with the same;

(d) to enter into, perform and carry out other contracts and leases necessary, convenient or incidental to the accomplishment of the purposes of the Company and to extend, renew, terminate, modify, amend, waive, execute, acknowledge or take any other action with respect to any such contracts or leases;

(e) to purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in or obligations of corporations, associations, general or limited partnerships, limited liability companies or other legal entities;

(f) to borrow money and issue evidences of Indebtedness, and to secure the same by a mortgage, pledge or other lien on the real and personal property of the Company;

(g) to lend money for any proper purpose, to invest and reinvest the funds of the Company, and to take and hold real and personal property for the payment of funds so loaned or invested;

(h) to sue and be sued, complain and defend, and participate in Proceedings, and to pay, collect, compromise, litigate, arbitrate or otherwise adjust or settle any and all other Claims of or against the Company;

(i) to indemnify any Person in accordance with and subject to applicable law and to obtain any and all types of insurance;

(j) to appoint agents of the Company; and

(k) to take all such other actions and to make, execute, acknowledge and file any and all documents or instruments related to the exercise of any of the foregoing powers or otherwise necessary, convenient or incidental to the accomplishment of the purposes of the Company.

SECTION 1.8. Qualification in Other Jurisdictions. The Company shall take all action required in order to be qualified, formed, registered or recognized under foreign qualification or registration statutes, assumed or fictitious name statutes or similar Laws in any jurisdiction other than the State of Delaware in which the Company transacts business and in which such qualification, formation, registration or recognition is necessary or appropriate. The Board has the authority to cause the Company to execute, deliver and file such certificates and other instruments (and any amendments or restatements thereof) as are necessary for the Company to be qualified, formed, regist ered or recognized under any such foreign qualification statutes, assumed or fictitious name statutes or similar Laws in any such jurisdiction.

ARTICLE II

MANAGEMENT

SECTION 2.1.

Board of Managers.

(a) General. Except as otherwise expressly provided in this Agreement, the business and affairs of the Company shall be managed by or under the direction of a Board of Managers (the “Board”). The Board shall have full power and authority to do all things and on such terms as it determines to be necessary or appropriate to conduct the business of the Company, including to effectuate the purposes of the Company described in Section 1.6 and to exercise all powers of the Company set forth in Section 1.7; provided, however, that an individual member of the Board shall not have the power to act on behalf of or bind the Company, it being understood that members of the Board shall only have the power to act on behalf of the Company through actions and resolutions of the Board in accordance with this Section 2.1. In accordance with and subject to Section 2.3, the Board may delegate all or part of its authority to conduct or oversee the day-to-day business of the Company to Blue Stone pursuant to the terms and conditions of the Master Services Agreement or to another third party selected by the Board.

(b) Board Composition. The Board shall consist of (i) one member appointed by Abraxas (the “Abraxas Designee”), who shall initially be Robert L.G. Watson, and (ii) two members to be appointed by Blue Stone (or any Blue Stone Assignee) (the “Blue Stone Designees”). In general, each member of the Board shall serve until the dissolution of the Company or until the earlier removal, resignation or death or of such member. No Board member may be removed from office without the consent of the Person or Persons (including any Blue Stone Assignee) that designated such member to the Board (as applicable, the & #8220;Designating Party”) in accordance with this paragraph (b). A Board member may be removed or replaced at any time by delivery to the Company of a notice, signed by the Designating Party, stating that such member is removed or replaced (as the case may be) effective as of a date specified therein. A member of the Board may resign from the Board at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the Board. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. When any member of the Board ceases to serve as a member of the Board for any reason, the vacancy resulting thereby shall be filled by another individual to be designated by the Designating Party. Blue Stone shall be permitted to assign its rights to appoint one or more Blue Stone Designees unde r this paragraph (b) to any member of Blue Stone (any such assignee, the “Blue Stone Assignee”).

(c) Quorum. A majority of the total number of members of the Board fixed in this Agreement shall be required to constitute a quorum for the transaction of business at any meeting of the Board so long as proper notice of such meeting has been given in accordance with the applicable provisions of this Agreement.

(d) Required Vote. Each member of the Board shall have one vote on each matter brought before the Board for consideration. Except as otherwise required by this Agreement, any matter presented to the Board for its consideration shall be deemed to have been approved and consented to by the Board if approved at a meeting at which a quorum is present by a majority of the total number of members of the Board; provided, however, that the Company shall not take any of the following actions without the unanimous approval of the members of the Board:

(i) except as provided in Section 6.2, cause the Company to sell, transfer, farm out or otherwise dispose of the Initial Assets, any Oil and Gas Interests or other properties and assets that are material to the business of the Company;

(ii) incur, guarantee or otherwise become liable for any Indebtedness (including any loans to the Company pursuant to Section 4.4), other than Indebtedness under a senior credit facility or line of credit with annual interest expense of not greater than 8% per annum provided by one or more banks or financial institutions experienced in small cap, oil and gas exploration and production business lending transactions with a principal amount not greater than $50 million (“Permitted Indebtedness”);

(iii) issue any additional Interests or other securities of the Company, other than Interests held by or issued to the Members pursuant to the terms of this Agreement as in effect on the date hereof, including (A) Interests deemed to be issued upon the making of Capital Contributions by the Members in accordance with Section 4.2 and (B) Interests issued in accordance with Section 4.1(c);

(iv) make any Capital Calls (A) for any purpose other than as set forth in the most recent Budget for the applicable period Approved by the Board or (B) following the delivery of an Initiation Notice through the earlier to occur of (x) 180 days following the delivery of the Initiation Notice or (y) the affirmative decision by the Company (which shall require the unanimous approval of the members of the Board) to abandon the sales process begun by the delivery of such Initiation Notice;

(v) enter into or become a party to any transaction with any Member or any Affiliate of any Member, other than (A) any transaction contemplated by the terms of this Agreement or the other Transaction Agreements or (B) transactions upon terms no less favorable to the Company than could be obtained in a comparable arm’s-length transaction with a Person that is not a Member or an Affiliate of a Member;

(vi) make any Distributions to the Members, other than Tax Distributions required to be made in accordance with Section 5.5;

(vii) at any time after a Triggering Distribution, increase the Capital Commitments of the Members or make any Capital Calls;

(viii) create, assume, incur or suffer to exist any Lien on the Oil and Gas Interests and other properties or assets of the Company other than Permitted Liens;

(ix) purchase or redeem any Interests, other than in accordance with this Agreement;

(x) waive or amend Section 3.4;

(xi) commence or acquiesce in any Proceeding seeking relief for the Company under any bankruptcy or insolvency law, including a reorganization, arrangement, readjustment of debt, receivership, trusteeship or liquidation;

(xii) settle material Claims or prosecute, defend or settle material lawsuits; and

(xiii) effect (A) any consolidation of the Company with another entity or any merger of the Company with or into another Person; (B) any acquisition of the securities or assets of any other Person which involves the payment (including the assumption of any Indebtedness) of an aggregate value of $15,000,000 or more by the Company; (C) any change (whether by conversion, recapitalization or otherwise) in the legal form of the Company from a limited liability company formed under the Act to any other type of legal entity; or (D) any dissolution of the Company.

(e) Meetings; Notice of Meetings. Regular meetings of the Board shall be held at such times and places, either within or without the State of Delaware, as shall be designated from time to time by resolution of the Board. Special meetings of the Board shall be held at any time, either in-person or telephonically, upon the call of any member of the Board. Notice of any such special meeting shall be made on at least 72 hours by personal, written, facsimile, electronic, telegraphic, cable or wireless notice to each member of the Board, which notice may be waived by any member of the Board. Notices of special meetings of the Boar d shall include a description in reasonable detail of the purposes for such special meeting. In the absence of specific designation, meetings of the Board shall be held at the principal office of the Company. Notice of such regular meetings shall be given not less than seven (7) days prior to the date of such meeting. Attendance at a meeting of the Board shall constitute a waiver of notice of such meeting, except where a member of the Board attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. The business to be transacted at any regular meeting of the Board shall be specified in the notice of such meeting.

(f) Written Consent; Attendance. Any action required or permitted to be taken at a meeting of the Board may be taken without a meeting, without prior notice and without a vote if consents in writing (including by Electronic Transmission), setting forth the action so taken, are provided by all members of the Board. Members of the Board may participate in meetings in person, by duly appointed proxy or by telephone conference, video conference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meetings shall constitute attendance and presence in person at such meetings.

(g) Compensation; Reimbursement. The members of the Board shall not be entitled to receive any compensation for services provided in their capacity as members of such Board. Members of the Board shall be entitled to reimbursement by the Company for all reasonable out-of-pocket expenses, including travel expenses, incurred by them in the course of the performance of their duties, in accordance with and subject to such reasonable expense reimbursement policies and procedures as shall be adopted by the Board from time to time and upon submission of reasonable supporting documentation with respect to all expenses to be reimbursed.

(h) Minutes. All decisions and resolutions of the Board shall be reported in the minutes of its meetings, which shall state the date, time and place of the meeting (or the date of the written consent in the case of a consent executed in lieu of a meeting), the persons present at the meeting, the resolutions put to a vote (or the subject of a written consent) and the results of such voting (or written consent). The minutes of all meetings of the Board shall be kept at the principal office of the Company.

(i) Duties of Board Members. Each Member hereby acknowledges and agrees that, to the fullest extent permitted by Law, the members of the Board will act on behalf and for the benefit of the Designating Party and they shall not owe any fiduciary or similar duty to, or have any liability to, the Company or any other Members of the Company in connection with any action taken by them in their capacities as members of the Board (it being understood that each Member hereby irrevocably waives the right to assert any Claim against any member of the Board not appointed by it arising from or based upon actions taken or omitted to be taken by him, in his capacity as a member of the Board).

SECTION 2.2. Authority of Members. Except as expressly provided herein, the Members in their capacity as such shall not have any right, power or authority to take part in the management, operation or control of the business and affairs of the Company. No Member or other Person (other than Blue Stone pursuant to the terms and conditions of the Master Services Agreement or any officers elected pursuant to Section 2.5) shall be an agent of the Company or be authorized to transact any business in the name of the Company or to act for or on behalf of or to bind the Company. Except as expressly required pursuant to this Agreement or the Act, the vote, approval or consent of the Members shal l not be required in order to authorize any actions by or on behalf of the Company.

SECTION 2.3. Delegation of Authority The Board shall be entitled to delegate all or any part of its authority with respect to the conduct or management of the day-to-day business of the Company to any third party selected by it; provided, however, that in no event shall any such delegation extend to any of the actions or other matters that require a unanimous vote of the members of the Board in accordance with subparagraphs (i) through (xiii) of Section 2.1(d). Without limiting the generality of the foregoing, the Board shall be entitled to engage Blue Stone to conduct the day-to-day business of the Comp any pursuant to the terms and conditions of the Master Services Agreement.

SECTION 2.4. Certain Agreements. (a) The Company is hereby authorized, empowered and directed to enter into the Subscription Agreement, the Master Services Agreement and the Operating Agreement. Notwithstanding anything to the contrary contained in this Article II or elsewhere in this Agreement, (i) Blue Stone shall have sole, absolute and exclusive power, authority and discretion to app rove or direct actions to be taken by or on behalf of the Company with respect to any claims or other remedies that the Company may be entitled to assert against Abraxas pursuant to the Subscription Agreement or the Operating Agreement and (ii) Abraxas shall have sole, absolute and exclusive power, authority and discretion to approve or direct actions to be taken by or on behalf of the Company with respect to any claims or other remedies that the Company may be entitled to assert against Blue Stone pursuant to the Master Services Agreement. Any direction or decisions by Blue Stone or Abraxas (as the case may be) with respect to such matters shall not require the vote of the Board but instead shall be made by Blue Stone or Abraxas (as the case may be) in the best interests of the Company,

as determined in its reasonable discretion. Notwithstanding anything to the contrary set forth in this Agreement, any increase in the fees to be paid to (i) Blue Stone pursuant to the Master Services Agreement shall require the approval of Abraxas (provided, that any increase in Allocated General and Administrative Expenses (as defined in the Master Services Agreement) payable to Blue Stone pursuant to the Master Service Agreement shall be permitted without the approval of Abraxas so long as it complies with Section 3.2 of the Master Services Agreement) or (ii) to Abraxas pursuant to the Operating Agreement, shall require the approval of Blue Stone.

SECTION 2.5. Officers.

(a) The Board shall have the power and authority to elect officers of the Company.

(b) The officers shall include a President and may also include, if the Board so determines, a Secretary, a Chief Operating Officer, a Chief Financial Officer, a Treasurer, one or more Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Any number of offices may be held by the same person. The compensation of officers shall be fixed from time to time by the Board.

(d) Any officer of the Company may resign at any time upon written notice to the Company. Any officer, agent or employee of the Company may be removed by the Board with or without cause at any time. Such removal shall be without prejudice to a person’s contract rights, if any, but the appointment of any person as an officer, agent or employee of the Company shall not of itself create contract rights.

(e) The Board may prescribe from time to the time the power and authority of any officer of the Company. In the absence of a contrary determination by the Board, each officer of the Company shall have the authority customarily exercised by an officer holding the same title with a corporation incorporated under the Delaware General Corporation Law.

(f) The Board may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

SECTION 2.6 Contractual Management Rights.The parties hereto acknowledge that the rights granted to Blue Stone under this Agreement to designate members of the Board and assign such rights to the Blue Stone Assignee have been included herein at the request of Blue Stone in order to provide the Blue Stone Assignee with “contractual management rights” within the meaning of the Plan Assets Regulations. The foregoing acknowledgement is no t intended to modify any of the rights, duties and obligations of the parties as set forth in this Agreement.

ARTICLE III

MEMBERS

SECTION 3.1. Admission of Members.

(a) Each Person identified on Exhibit A shall be admitted to the Company as a Member upon the execution of this Agreement by each of the parties hereto (which shall be deemed to be the date stated in records of the Company as the date each such Person becomes a Member for purposes of Section 18-301 of the Act).

(b) Any Person to which Interests are issued by the Company after the date hereof shall be admitted to the Company as a Member on the date of issuance of such Interests.

(c) Any Person to which Interests are Transferred as permitted by Article VI shall be admitted to the Company as a Member on the date upon which such Transfer has been effected and the requirements set forth in Section 6.1(c) have been satisfied.

SECTION 3.2. No Liability for Company Obligations. Without limiting the generality of Article VIII, a Member is not liable for the debts, obligations and liabilities of the Company, including under a judgment, decree or order of a court.

SECTION 3.3 Outside Activities. (a) Except as provided in Section 3.4, no Member or its present or future Affiliates or any of their respective shareholders, partners, members, directors, managers, officers or employees shall be expressly or impliedly restricted or prohibited by virtue of this Agreement or the relationships created hereby from engaging in other activities or business ventures of any kind or character whatsoever. Subject to Section 3.4, each Member and its present or future Affiliates and their respective shareholders, members , directors, managers, officers and employees shall have the right to conduct, or to possess a direct or indirect ownership interest in, activities and business ventures of every type and description, including activities and business ventures in direct competition with the Company. Subject to any applicable provisions of Section 3.4 to the contrary, no Member or its present or future Affiliates or any of their respective shareholders, partners, members, directors, managers, officers or employees shall be obligated by virtue of this Agreement to present any particular business opportunity to the Company even if such opportunity is of a character that, if presented to the Company, could be taken or pursued by the Company, and each Member and its present or future Affiliates and their respective shareholders, partners, members, directors, managers, officers or employees shall have the right to take or pursue any such opportunity for its own account (individually or as a partner, member, shareholder, fiduciary or otherwise) or to present or recommend it to any third party. Neither the Company nor any Member shall have any rights or Claims by virtue of this Agreement or the relationships created hereby in any activities or business ventures of any other Member or its present or future Affiliates or their respective shareholders, partners, members, directors, managers, officers and employees that are consistent with its obligations under Section 3.4 (it being expressly understood and agreed that any and all such rights and Claims are hereby irrevocably waived by each Member on its behalf and on behalf of the Company). The foregoing provisions of this Section 3.3 shall in no way release or diminish the obligations of any Member under Section 3.4 or 12.2.

SECTION 3.4. Non-Competition. Until the earlier to occur of (i) the consummation of a Sale Transaction or (ii) the dissolution of the Company, no Member shall, directly or indirectly, engage in the exploration, production, development or exploitation of oil, gas, natural liquids or any other hydrocarbons in the Subject Area in the Eagle Ford formation. For the avoidance of doubt, the restrictions

imposed pursuant to this Section 3.4 shall not apply to (x) any member of Blue Stone that is a private equity fund or any general or limited partner or manager of any such fund, (y) any Person acquiring stock of Abraxas in the public markets or (z) any present or future Affiliates (other than any Member), shareholders, partners, members, directors, managers, officers and employees of any Person identified in clause (x) or (y) above.

SECTION 3.5. No Resignation or Withdrawal by Members. Except in connection with a Transfer of all of its Interest as permitted under Article VI, no Member shall be entitled to resign or withdraw from the Company.

ARTICLE IV

CAPITAL

SECTION 4.1.

Capital Commitments.

(a) The capital commitment (“Capital Commitment”) of each Member as of the date hereof is as set forth opposite the name of such Member (under the column “Total Capital Commitments”) on Exhibit A.

(b) Notwithstanding the foregoing but subject to Section 4.1(d), if the Company makes any distributions to the Members, other than Tax Distributions in accordance with Section 5.5 (a “Triggering Distribution”), the Remaining Capital Commitments of all Members shall be eliminated and the Board shall promptly cause Exhibit A to be revised to reflect Remaining Capital Commitments of zero for all Members.

(c) If, prior to a Triggering Distribution, the Board determines that the Company requires additional capital (in excess of the Remaining Capital Commitments of the Members), each Member shall have the option, but not the obligation, to increase its Capital Commitment in an amount equal to the product of (i) the ratio that its Capital Commitment bears to the total Capital Commitments of all Members and (ii) the additional amount of capital sought by the Company. If one or more of the Members elects to increase its Capital Commitment in accordance with the immediately preceding sentence (the “Electing Member”), but the remaining Members do not so elect, the Electing Member shall have the further option, but not the obligation, to increase its Capital C ommitment by the amount that would have been allocated to the other Members in accordance with the immediately preceding sentence (if it had elected to increase its Capital Commitment by the amount specified therein). If the Capital Commitments of any Member or Members are increased in accordance with the provisions of this Section 4.1(c), the Board shall promptly cause Exhibit A to be revised to reflect any such increases in its or their Capital Commitments.

(d) If, following a Triggering Distribution, the Board unanimously determines that the Company requires additional capital in accordance with Section 2.1(d)(vii), each Member’s Capital Commitment shall be increased to an amount equal to the product of (i) its Ownership Percentage and (ii) the additional amount of capital sought by the Company, and each Member’s Remaining Capital Commitment shall equal such Member’s Capital Commitment as determined after giving effect to this Section 4.1(d) minus any Capital Contributions made at or after such time.

SECTION 4.2.

Capital Contributions.

(a) On the date hereof, (i) Blue Stone shall contribute to the Company the amount in cash set forth opposite its name on Exhibit A under the column “Initial Capital Contribution” and (ii) Abraxas shall contribute to the Company the Initial Assets in accordance with the Subscription Agreement, which Initial Assets have an initial Book Basis equal to the amount set forth opposite the name of Abraxas on Exhibit A under the column “Initial Capital Contribution”.

(b) Subject to the terms of Section 2.1, the Board shall be entitled to make capital calls (“Capital Calls”) to the Members from time to time to the extent that it determines in good faith that the Company requires funds to pay amounts set forth in any Budget or to satisfy any obligation or liability of the Company, or to establish any reserve for any such purposes.

(c) From time to time after the date hereof, each Member whose Remaining Capital Commitment exceeds zero at the time of any Capital Call (each, a “Contributing Member”) shall be required to make Capital Contributions to the Company as Capital Calls are made therefor by the Board. The obligations of the Contributing Members to make Capital Contributions in response to a Capital Call are subject to the following provisions:

(i) No Contributing Member shall be required to make aggregate Capital Contributions that exceed its Remaining Capital Commitment.

(ii) Unless otherwise Approved by the Board, Capital Calls shall be made to the Contributing Members in integral multiples of $1,000,000; provided, however, that any Capital Call made pursuant to Section 4.1(d) and the final Capital Call made by the Board may be in an amount equal to the Remaining Capital Commitments (whether or not less than $1,000,000).

(d) Except as set forth in Section 4.1(c), all Capital Calls shall be made among the Contributing Members in proportion to their Remaining Capital Commitments.

(e) With respect to each Capital Call, the Board shall send a written notice to each Contributing Member which shall state (i) the amount of the Capital Contribution required of such Contributing Member, (ii) the payment date for such Capital Contribution and (iii) the purposes for which the Capital Contribution proceeds will be utilized by the Company. Within ten business days of the date of the written notice referred to in the preceding sentence, each Contributing Member shall, subject to the provisions of this Section 4.2, be required to pay the full amount of the Capital Contribution requested pursuant to such Capital Call by wire transfer of funds in United States dollars.

SECTION 4.3. Capital Accounts. A Capital Account will be established for each Member and will be maintained in accordance with Treasury Regulation Sections 1.704-1(b) and 1.704-2. Consistent with such Treasury Regulations:

(a) there will be credited to each Member’s Capital Account (i) the amount of cash and the initial Book Basis of any property contributed by such Member to the Company, (ii) the amount of Net Income allocated to such Member pursuant to Section 5.1 and any items of income or gain specially allocated to such Member pursuant to Section 5.2, and (iii) the amount of any Company

liabilities assumed by such Member or which are secured by any property distributed to such Member; and

(b) there will be debited from each Member’s Capital Account (i) the amount of any cash or the Book Basis (as determined in clause (iii) of the definition thereof) of any property distributed by the Company to such Member, (ii) the amount of Net Losses allocated to such Member pursuant to Section 5.1, and any items of loss or deduction specially allocated to such Member pursuant to Section 5.2, and (iii) the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company.

SECTION 4.4. Member Loans. Any Member may, with the Approval of the Board, loan funds to the Company. Loans by a Member to the Company will not be treated as Capital Contributions but will be treated as debt obligations having such terms as are Approved by the Board.

SECTION 4.5. No Preemptive Rights. Except as provided in Section 4.1(c), no Member shall have any preemptive, preferential or other similar right with respect to (i) the making of additional Capital Contributions to the Company, (ii) the issuance of any Interests by the Company or (iii) the issuance or sale of any other securities that may hereafter be issued or sold by the Company.

SECTION 4.6. Other Payments. No payment by a Member of any expenses of the Company shall be deemed a Capital Contribution without the Approval of the Board.

SECTION 4.7. Return of Contributions; No Interest on Capital. Except as expressly provided in Section 5.5 and Section 7.3 of this Agreement, a Member is not entitled to the return of any part of its Capital Contributions or to be paid interest in respect of such Capital Contributions. An unrepaid Capital Contribution is not a liability of the Company or of any Member.

ARTICLE V

ALLOCATIONS; DISTRIBUTIONS

SECTION 5.1. Allocations of Net Income and Net Losses.

(a) Except as provided in Section 5.2, all Net Income, Net Losses, and items thereof, of the Company for each fiscal year or other relevant period shall be allocated among the Members in proportion to their respective Ownership Percentages, as calculated immediately prior to such allocations.

(b) All items of income, gain, loss, and deduction realized by the Company during the winding up of the Company, or resulting from a sale or other disposition of a material portion of the assets of the Company, shall be allocated among the Members in such a manner as needed to cause each Member’s Capital Account balance (determined after taking into account all Distributions and all allocations for the current fiscal year, except for the allocations pursuant to this paragraph (b)) to be increased or reduced so that it equals such Member’s Target Capital Account Amount. For these purposes, a Member’s “Target Capital Account Amount” equals the amount of Distributions such Member would receive if each of the Company’s remaining as sets were deemed disposed of for an amount equal to the

Book Basis of each such asset, and the proceeds of such deemed disposition and all other cash of the Company remaining after satisfaction of all liabilities of the Company were distributed among the Members pursuant to Section 5.4.

SECTION 5.2. Regulatory Allocations For each fiscal year or other relevant period, the following items of income or loss shall, to the extent not previously reflected in the Capital Accounts of the Members, be specially allocated to their Capital Accounts, in the following order and priority:

(a) If there is a net decrease in “partnership minimum gain” (as defined in Treasury Regulations § 1.704-2(b)(2) and as computed under Treasury Regulation Section 1.704-2(d)) for the fiscal year or other relevant period, then, to the extent required by the Treasury Regulations, items of income (determined in accordance with the provisions of Treasury Regulation Section 1.704-2(f)(6)) shall be specially allocated to the Members in an amount equal to each Member’s share of the net decrease in partnership minimum gain (determined in accordance with the provisions of Treasury Regulation Section 1.704-2(g)). This paragraph (a) shall be interpreted consistently with, and subject to the exceptions contained in, Treasury Regulation Section 1.7 04-2(f).

(b) If there is a net decrease in “partner nonrecourse debt minimum gain” (as defined in Treasury Regulation Section 1.704-2(i)(2)) for the fiscal year or other relevant period, then, to the extent required by Treasury Regulations, items of income (determined in accordance with the provisions of Treasury Regulation Section 1.704-2(i)(4)) shall be specially allocated to the Members in an amount equal to each Member’s share of the net decrease in partner nonrecourse debt minimum gain (determined in accordance with the provisions of Treasury Regulation Section 1.704-2(i)(5)). This paragraph (b) shall be interpreted consistently with, and subject to the exceptions contained in, Treasury Regulation Section 1.704-2(i)(4).

(c) In the event that a deficit in a Member’s Adjusted Capital Account is created or increased as a result of any allocations, adjustments, or distributions described in Treasury Regulation 1.704-1(b)(2)(ii)(d)(4), (5), or (6), such Member will be allocated items of income and gain (consisting of a pro rata portion of each item of Company income and gain for such year) in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, such deficit as quickly as possible, provided that an allocation pursuant to this paragraph (c) shall be made only if and to the extent that such Member would have such a deficit after all other allocations provided for in this Agreement have been tentatively made as if this paragraph (c) were not in this Agreement.

(d) “Nonrecourse deductions” (as defined in Treasury Regulation Sections 1.704-2(b)(1) and (c)) shall be specially allocated to the Members in proportion to their respective Ownership Percentages.

(e) “Partner nonrecourse deductions” (as defined in Treasury Regulation Section 1.704-2(i)(2)) shall be specially allocated to the Members who bear the economic risk of loss for the liability to which the deductions are attributable, determined in accordance with the principles of Treasury Regulations Section 1.704-2(i)(l).

(f) No Net Losses shall be allocated to a Member to the extent that such allocation would cause or increase a deficit balance in such Member’s Adjusted Capital

Account. Instead, such Net Losses shall be allocated among the other Members in the same ratios that such other Members are allocated Net Losses for such year under Section 5.1.

(g) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Sections 734(b) or 743(b) is required to be taken into account in determining Capital Accounts under Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the amount of the adjustment shall be included as an item of income (if positive) or loss (if negative) and shall be specially allocated to the Members consistent with the manner in which their Capital Accounts are required to be adjusted by such Treasury Regulation.

(h) In the event the allocations specified in paragraphs (a) through (g) above (the “Regulatory Allocations”) cause adjustments to the Members’ Capital Accounts that are inconsistent with the manner in which the Members intend to divide Distributions pursuant to Section 5.4, the Board shall divide other allocations of Net Income, Net Losses, and other items among the Members so as to prevent the Regulatory Allocations from distorting the manner in which Company distributions will be divided among the Members pursuant to this Agreement. In general, the Members anticipate that this will be accomplished by specially allocating other Net Income, Net Losses, and items of income, gain, loss and deduction among the Members so that the net amount of the Regulatory Allocations and such special allocations to each such Person is zero. However, the Board will have discretion to accomplish this result in any reasonable manner.

(i) The Company’s “excess nonrecourse liabilities” (as defined in Treasury Regulations Section 1.704-3(a)(3)) shall be allocated among the Members in proportion to their Ownership Percentages.

(j) In the case of a sale or other disposition of depletable property, the portion of the amount realized on such sale or other disposition that does not exceed the Company’s Simulated Basis in the depletable property shall be allocated among the Members in the same ratios that the aggregate adjusted tax basis of the property was allocated under the last sentence of Section 5.3(d). The portion of the amount realized on the sale or other disposition of each such depletable property that exceeds the Company’s Simulated Basis in the property shall be allocated among the Members in the same manner that Net Income (i.e., Simulated Gain) is allocated pursuant to Section 5.1.

SECTION 5.3 Tax Allocations.

(a) Except as otherwise provided in this Section 5.3, for each taxable year or other relevant period, each item of Company income, gain, deduction and loss for tax purposes shall be allocated among the Members in the same proportion as each correlative item of income, gain, loss and deduction, as determined for Capital Account purposes, is allocated pursuant to Sections 5.1 and 5.2.

(b) If property contributed to the Company by a Member has an adjusted tax basis that differs from its initial Book Basis on the date of contribution or if the Book Basis of property is adjusted upon the occurrence of a Revaluation Event, income, gain, loss and deductions with respect to such property will, solely for tax purposes, be allocated among the Members so as to take account of such difference. Such allocations will be made among the Members in the manner provided in Section 704(c) of the Code, pursuant to the remedial method described in Treasury Regulation Section 1.704-3(d).

(c) Depreciation, depletion, intangible drilling cost, and amortization recapture amounts under Sections 1245, 1250 or 1254 of the Code, if any, resulting from any sale or disposition of tangible or intangible depreciable, depletable, or amortizable property shall, to the maximum extent permissible under the Code and Treasury Regulations, be allocated to the Members in the same proportions that the depreciation, depletion, intangible drilling cost, or amortization being recaptured was allocated.

(d) Cost and percentage depletion deductions with respect to, and any gain or loss on the sale or other disposition of, any property the production from which is or would be (in the case of nonproducing properties) subject to depletion shall be determined in a manner that is consistent with Section 613A(c)(7)(D) of the Code. For purposes of making such determination, the initial adjusted tax basis, or increase in adjusted tax basis, of the Company in any depletable property shall be allocated under Section 613A(c)(7)(D) of the Code among the Members in proportion to their respective Ownership Percentages which are in effect at the time the Capital Expenditure giving rise to such initial adjusted tax basis or increase in adjusted tax basis, as the case may be, was incurred by the Company; provided, however, that upon any adjustment in Ownership Percentages, the adjusted tax basis of the Company in all depletable properties held by the Company at the time of such adjustment in Ownership Percentages shall (to the maximum extent permissible under Treasury Regulation Section 1.613A-3(e)(3)(ii)) be reallocated among the Members so that the Members’ respective shares of adjusted tax basis in such depletable properties are in proportion to the Members’ respective adjusted Ownership Percentages.

(e) Any election or other decision relating to allocations pursuant to this Section 5.3 shall be made by the Board in any manner that reasonably reflects the purposes and intention of this Agreement. Allocations pursuant to this Section 5.3 are for purposes of federal, state and local taxes only and shall not affect or in any way be taken into account in computing any Member’s Capital Account balance or share of Net Income, Net Losses or distributions pursuant to any provision of the Agreement.

SECTION 5.4. Distributions. Except as provided in Section 5.5 or 7.3, any Available Cash or other property shall be distributed to the Members solely at such times and in such amounts as the Board shall determine. Each such Distribution to the Members shall be made in proportion to their respective Ownership Percentages, as calculated immediately prior to such Distribution.

SECTION 5.5. Tax Distributions. Notwithstanding the provisions of Section 5.4, within 10 days of the delivery of the Company’s Form 1065 and other documentation (including Schedule K-1 for each Member) pursuant to Section 9.2(b), the Company shall, to the extent that it has Available Cash for such purpose, distribute to the Members with respect to the immediately preceding taxable year an aggregate amount of cash (a “Tax Distribution”) which, in the good faith judgment of the Board, equals the excess of (a) the product of (i) the amount of taxable income of the Company in respect of such taxable year and all prior taxable years (net of taxable losses of the Company in respect of prior taxable years and not previously taken into account under this clause) and (ii) appropriate tax rates to be applied with respect to such taxable income, which shall be proposed by the Members and Approved by the Board, over (b) the cumulative amounts of Distributions made by the Company to the Members during the current and all prior taxable years. Any Tax Distribution will be divided among the Members in accordance with their respective Ownership Percentages, as calculated on the last day of the immediately preceding taxable year.

ARTICLE VI

TRANSFER OF INTERESTS; ADMISSION; WITHDRAWAL

SECTION 6.1. Transfers of Interests; General.

(a) No Member shall Transfer any Interests owned or held by it unless such Transfer has been approved (i) in the case of a Transfer by Abraxas, by the Blue Stone Designees and (ii) in the case of a Transfer by Blue Stone, by the Abraxas Designee; provided, however, that the foregoing requirement shall not apply to any Transfer that is required or permitted under the terms of Section 6.2.

(b) No Member shall Transfer any Interests owned or held by it unless each of the following requirements shall have been satisfied (or waived in the sole discretion of the Board):

(i) such Member shall have furnished to the Board an opinion of counsel satisfactory to the Board to the effect that such Transfer (x) may be made without violation of the Securities Act and any applicable state securities or blue sky laws, (y) will not cause the Company to become a publicly traded partnership for United States federal income tax purposes and (z) will not cause the Company to be deemed to be an “investment company” as such term is defined in the Investment Company Act of 1940, as amended; and

(ii) the transferee or transferor shall have paid to the Company all costs and expenses, including attorneys’ fees, incurred or expected to be incurred by the Company in connection with the Transfer.

(c) Any transferee of Interests (including any transferee that is an Affiliate of the transferor) who is not then a Member shall upon consummation of, and as a condition to, the Transfer execute and deliver to the Company an agreement in form and substance satisfactory to the Company pursuant to which such transferee (together with, if deemed appropriate by the Board, any Affiliate of such transferee that Controls such transferee) agrees to be bound by the terms of this Agreement.

(d) Any Transfer or attempted Transfer of Interests in violation of any provision of this Agreement shall be void ab initio. In the case of any Transfer made in contravention of this Article VI that cannot be treated as void under applicable Law, the transferee shall have only such rights as it is required to have under applicable Law, but shall not be admitted as a Member.

SECTION 6.2. Sale Rights. The right to initiate a Sale Transaction in accordance with this Section 6.2 may be exercised by either Blue Stone or Abraxas at any time after the expiration of 18 months from the date of this Agreement.

(a) In order to initiate a Sale Transaction under the terms of this Section 6.2, either Blue Stone or Abraxas (as applicable, the “Sale Initiator”) shall deliver a written notice (the “Initiation Notice”) to the Board and each of the Members other than the Sale Initiator (collectively, the “Other Members”) stating that it would like to initiate the pursuit of a transaction (a “Sale Transaction”) in which either (i) all of the outstanding Interests held by the Members would be sold (a “Company Sale”) for cash consideration to one or more third parties that are not Affiliates of the Sale Initiator (singly or

collectively, a “Third-Party Purchaser”) or (ii) all or substantially all of the properties and assets of the Company would be sold by the Company (an “Asset Sale”) for cash consideration to a Third-Party Purchaser.

(b) If the Sale Initiator delivers an Initiation Notice in accordance with paragraph (a), the Board shall manage and conduct a process relating to the structuring, negotiation and (subject to the provisions of paragraph (c) below) consummation of a Sale Transaction, which process shall include, but shall not be limited to, (i) causing the Company to engage an investment bank or other third party to act as sales agent or in a similar capacity (a “Sales Agent”) with respect to such Sale Transaction; (ii) causing the Company to engage a petroleum engineering firm (which may be the firm engaged by the Company pursuant to Section 10.7) to evaluate the oil and gas reserves of the Company in connection with the Sale Transaction; (iii) establishing a reasonable timeline in which to solicit potential Third-Party Purchasers, which shall continue for a period of no more than 180 days after the delivery of the Initiation Notice (unless the Board and the Sale Initiator approve an extension of such period) and (iv) taking all other actions the Board deems necessary or appropriate in its sole discretion to identify Third-Party Purchasers who are interested in consummating a Sale Transaction. The costs and expenses associated with the sale process described above shall be borne by the Company, except that any fee or other compensation payable to a Sales Agent shall be borne by the Members in the same proportions in which the proceeds from the Sale Transaction are to be divided among them pursuant to paragraph (e) below. In connection with the foregoing sale process, the Board shall permit potential Third-Party Purchasers, after executing a confidentiality agreement in form reasonably acceptable to the Board, to conduct a due diligence review of the Company an d its business, operations, prospects, investments, assets, liabilities, financial condition, and results of operations. In the case of any Third-Party Purchaser who submits an indication of interest that qualifies such Third-Party Purchaser, in the judgment of the Board, to conduct additional due diligence, the Company, the Sale Initiator and the Other Members shall permit and arrange for such potential Third-Party Purchaser to visit the offices of the Company (and use reasonable business efforts to arrange for them to visit the offices of any operators of oil and gas properties in which the Company has an interest and subject to the reasonable terms and conditions established by such operators) and ask questions of and receive answers from the management and technical personnel of the Company in connection with its due diligence review. Furthermore, the Sale Initiator and the Other Members shall cooperate in good faith with the Board and use their reasonable business efforts to consum mate any Sale Transaction, including by cooperating in any solicitation process conducted by, or on behalf of, the Board to identify potential Third-Party Purchasers.

(c) If, after conducting the sale process described above, the Sale Initiator desires to cause the Company or the Other Members to consummate a Sale Transaction with a specific Third-Party Purchaser, it shall give not less than 30 days’ prior written notice of such intended transaction to the Board and each of the Other Members. Such notice (the “Sale Notice”) shall identify the Third-Party Purchaser, shall state whether the Sale Transaction is to be in the form of a Company Sale or an Asset Sale and shall set forth the terms and conditions of the Sale Transaction, including the cash purchase price to be paid in exchange for the Interests to be sold by the Members or the properties and assets to be sold by the Company (as the case may be) and th e other material terms of the Sale Transaction; provided, however, that (i) to the extent that the terms of the Sale Transaction purport to impose indemnification obligations (including escrows, hold backs or other similar arrangements to support such

indemnification obligations) on the Other Members, the Board shall have determined that such terms are reasonable and customary; provided, however, that if such terms affect any Other Member in a manner that is disproportionately adversely different than the Sale Initiator, then the prior written consent of such Other Member to such obligations shall be required, (ii) the terms of the Sale Transaction shall not impose any non-competition or other similar restrictive covenant that would limit the scope of the business activities that may be conducted by any Other Member (other than a customary confidentiality covenant) without the prior written consent of such Other Member and (iii) the terms of the Sale Transaction shall not impose any other post-closing obligations that the Board determines are unduly burdensome on such Other Members; provided, however, that if such terms affect any Other Member in a manner that is disproportionately adversely different than the Sale Initiator, then the prior written consent of such Other Member to such obligations shall be required. Upon receipt of a Sale Notice that meets the foregoing requirements, each Member will be obligated (1) in the case of a Company Sale, to Transfer all of its Interests to such Third-Party Purchaser upon the terms and conditions contained in the Sale Notice, as the same are reflected in the agreement to be entered into to effect the Company Sale, or (2) in the case of an Asset Sale, to take any action or grant any approval required under the terms of this Agreement or otherwise in order to cause or permit the Company to effect the Asset Sale upon the terms and conditions contained in the Sale Notice, as the same are reflected in the agreement to be entered into to effect the Asset Sale.

(d) At the closing of any proposed Sale Transaction to be consummated in accordance with this Section 6.2, the Members will (i) in the case of a Company Sale, Transfer and assign to the Third-Party Purchaser, free and clear of all Liens, all of the outstanding Interests in the Company and will receive in exchange therefor the consideration to be paid or delivered by such Third-Party Purchaser as described in the Sale Notice and (ii) in the case of an Asset Sale, execute and deliver, or authorize and cause the Company to execute and deliver, such bills of sale, assignments, conveyances, consents, certificates and other documents as are reasonably necessary or appropriate to consummate and make effective the Asset Sale. In addition, upon the closing of any Sale Tra nsaction, if requested by the Sale Initiator, either Abraxas or any other operator of record of any of the oil and gas properties of the Company, shall relinquish its role as operator of record under the Operating Agreement and any other operating agreements to which the Company is a party in favor of the Third-Party Purchaser or its designee.

(e) Any consideration paid to the Members in a Company Sale shall be paid in cash and apportioned among the Members in the same manner as if such consideration were being distributed to the Members in accordance with Section 5.4. Any consideration paid to the Company in an Asset Sale shall be paid in cash and to the extent available to be distributed to the Members will be distributed by the Company to the Members in accordance with Section 5.4.

(f) If any Member has or obtains knowledge of (i) an offer by a third party to purchase the Company or any of its assets or (ii) an opportunity for the Company to participate in an asset sale by virtue of “tag-along” rights contained in an agreement between the Company and a third party, it shall promptly notify the Board.

SECTION 6.3. Admission. Any Person acquiring an Interest upon the consummation of a Transfer permitted pursuant to this Article VI shall be admitted to the Company as a Member when such Person shall have furnished to the Company (i) acceptance by such Person in form satisfactory to the Board of all the terms and conditions of this Agreement, (ii) the documents specified in Section 6.1 of this Agreement and (iii) such other documents or instruments as may be required under the Act in order to effect the admissi on of such Person as a member of the Company.

SECTION 6.4. Withdrawal. No Member may withdraw from the Company, other than as a result of a Transfer that is permitted in accordance with the terms of this Article VI.

SECTION 6.5. Involuntary Transfer. To the fullest extent permitted by Law, any Transfer of Interests in connection with any bankruptcy, insolvency or similar Proceedings involving a Member or pursuant to any judicial order, legal process, execution or attachment and any other involuntary Transfer not otherwise expressly provided for in this Agreement shall be subject to the restrictions set forth in this Agreement.

ARTICLE VII

DISSOLUTION; WINDING UP

SECTION 7.1. Dissolution.

(a) Except as provided in this Article VII, no Member shall have the right to cause the Company to be dissolved.

(b) The Company shall be dissolved upon the first to occur of the following:

(i) the written agreement by Abraxas and Blue Stone that the business of the Company shall be discontinued;

(ii) the election of either Abraxas or Blue Stone to dissolve the Company at any time after the occurrence of a Bankruptcy Event with respect to the other party;

(iii) the election of either Abraxas or Blue Stone to dissolve the Company at any time after the sale of all or substantially all of the properties and assets of the Company; or

(iv) any other event required to cause the dissolution of the Company under the Act.

(c) Any dissolution of the Company shall be effective as of the date on which the event occurs giving rise to such dissolution, but the Company shall not terminate unless and until all its affairs have been wound up and its assets distributed as provided in this Article VII and the applicable provisions of the Act.

SECTION 7.2. Winding Up. Upon the occurrence of an event that results in the dissolution of the Company, the business of the Company shall be wound up and shall, except to the extent consistent with such winding up, cease. The Board shall appoint one or more other Persons, who may or may not be Members, to act as liquidator. The liquidator shall proceed diligently to wind up the business and affairs of the Company and (subject to the limitations set forth in this Agreement) may deter mine all matters in connection with the winding up of the Company, including any arrangements to be made with creditors, the amount or necessity of reserves to cover contingent or unforeseen liabilities, and whether, to what extent, for what consideration, and on what terms any or all of the assets of the

Company are to be sold or distributed in kind to the Members. The liquidator may in its discretion retain any obligations due to the Company and distribute (or apply in satisfaction of Company obligations) the proceeds thereof as collected. The costs and expenses of the winding up and liquidation of the Company shall be borne by the Company. Until final distribution, the liquidator shall continue to manage the Company’s affairs and shall have all of the power and authority of the Board (subject to the limitations set forth in this Agreement and subject to the power of the Board to remove and replace such liquidator) and be entitled to indemnification and advance payment of expenses in accordance with the provisions of this Agreement as if the liquidator were a Covered Person. The liquidator shall give or cause to be g iven all notices to creditors required by applicable Law and, in addition to any reports otherwise required by this Agreement to be given to the Members, shall cause a proper accounting of the Company’s assets, liabilities and operations to be made and furnished to the Members as of the date all assets of the Company are finally distributed to the Members or applied in payment of Company liabilities.

SECTION 7.3. Application and Distribution of Proceeds of Liquidation. During or upon completion of the winding up of the Company, the assets of the Company shall be applied and distributed by the liquidator, in one or more installments, in the following order and priority:

(a) to the payment, or provision for payment, of the costs and expenses of the winding up;

(b) to the payment, or provision for payment, of creditors of the Company (including Members, other than in respect of Distributions) in the order of priority provided by applicable Law;

(c) to the establishment of any reserves deemed necessary or appropriate by the liquidator to provide for contingent or unforeseen liabilities of the Company; and

(d) the balance shall be distributed to the Members in accordance with Section 5.4.

All Distributions to the Members pursuant to paragraph (d) above shall be in the form of cash, unless the liquidator otherwise determines.

SECTION 7.4. Reasonable Time for Winding Up. A reasonable time shall be allowed for the orderly winding up of the business and affairs of the Company and the liquidation of the properties and assets of the Company in order to minimize any losses otherwise attendant upon such winding up.

SECTION 7.5. Waiver of Partition. Each Member hereby waives until termination of the Company any and all rights that it may have to maintain an action for partition of the properties and assets of the Company; provided, however, that nothing in this Section 7.5 shall affect the ability of the Board to authorize the distribution of assets of the Company in kind in connection with the liquidation of the Company (including any distribution of interests in such assets on a proportionate basis in accordance with the Ownershi p Percentages of the Members).

SECTION 7.6. Certificate of Cancellation On completion of the distribution of Company assets as provided herein, the liquidator (or such other Person or Persons as the Act may require or permit) shall file a Certificate of Cancellation with the Secretary of State of the State of Delaware, cancel any other filings as necessary and take such other actions as may be necessary to terminate the existence of the Company.

ARTICLE VIII

LIABILITY AND INDEMNIFICATION

SECTION 8.1. No Liability for Company Debts. Except as expressly provided in the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be liable for any such debts, obligations or liabilities. Additionally, except as otherwise expressly required by Law, no Member, in its capacity as a Member, shall have any liability in excess of (a) the amount of its Ca pital Contributions, (b) its share of any assets and undistributed profits of the Company, (c) its obligation to make other payments expressly provided for in this Agreement and (d) the amount of any Distributions wrongfully distributed to it.

SECTION 8.2. Exculpation. To the fullest extent permitted by Law, no Covered Person shall be liable to the Company for any action taken or failure to act for or on behalf of the Company or in furtherance of the business of the Company that is within the reasonable scope of the authority conferred on such Covered Person in or pursuant to the terms of this Agreement, including any action taken or the failure to take any action pursuant to Section 2.4 of this Agreement or Section 1.3 of the Master Services Agreem ent, unless the action or failure to act giving rise to a claim against such Covered Person constitutes fraud, intentional or willful misconduct, gross negligence or a material breach of the terms of any Transaction Agreement.

SECTION 8.3. Indemnification. To the fullest extent permitted by Law, the Company shall indemnify each Covered Person from and against any and all Covered Losses arising from any and all Claims or Proceedings in which such Covered Person may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as such, regardless of whether any of the foregoing arise from the sole, partial or concurrent negligence of such Covered Person; provided, however, that the Company shall not indemnify a Covered Person from Covered Losses to the extent that they arise from fraud, intentional or willful misconduct, gross negligence or a material breach of the terms of any Transaction Agreement. The termination of any Proceeding by judgment, order, settlement or upon a plea of nolo contendere, or its equivalent shall not, of itself, create a presumption that the Covered Person failed to meet the standards for indemnification set forth in the immediately preceding sentence. Any indemnification hereunder shall be satisfied solely out of the assets of the Company. In no event may a Covered Person subject the Members to personal liability by reason of these indemnification provisions. The indemnification provided by this Section 8.3 shall be in addition to any other rights to which a Covered Person or any other Person may be entitled under any agree ment, pursuant to any Approval of the Board, as a matter of Law or otherwise, and shall continue as to a Covered Person who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Covered Person. Notwithstanding anything to the contrary contained herein, it is understood and agreed that the provisions of this Article VIII are not intended to provide

indemnification to any Covered Person for any losses, damages, liabilities, costs or expenses for which such Covered Person or its Affiliates have agreed to indemnify the Company under the express terms of any of the Transaction Agreements or against any other remedy provided for under the provisions of such agreements.

SECTION 8.4. Advance Payment and Appearance as a Witness. To the fullest extent permitted by applicable Law, all costs and expenses (including legal fees) incurred by a Covered Person in defending any Claim or Proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such Claim or Proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indem nified as authorized by Section 8.3. The Company shall pay or reimburse expenses incurred by a Covered Person in connection with their appearance as a witness or other participant in a Proceeding at a time when they are not a named defendant or respondent in the Proceeding.

SECTION 8.5. Insurance. The Company may purchase and maintain insurance, to the extent and in such amounts as Approved by the Board, in its sole discretion, on behalf of the Covered Persons and such other Persons as the Board shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the Company’s activities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provi sions of this Agreement. With the Approval of the Board, the Company may enter into indemnity contracts with Covered Persons and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 8.3 and containing such other procedures regarding indemnification as are appropriate.

SECTION 8.6. Nonexclusivity of Rights. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of, and shall not limit, any other rights or remedies to which any Covered Person may be entitled or which may otherwise be available to any Covered Person at Law or in equity.

SECTION 8.7. Company is Primary Obligor. The Company hereby acknowledges and agrees that (a) it is and shall at all times be the indemnitor of first resort for each of the Covered Persons with respect to any and all Covered Losses or advancement of expenses pursuant to this Article VIII, (b) the obligations of the Company to each Covered Person under this Article VIII are primary, and any obligations of any Member or any of its Affiliates to provide advancement of expenses or indemnification to any Covered Per son that is employed by or is a representative of such Member or any of its Affiliates are secondary and (c) if any Member or any of its Affiliates is obligated to pay, or pays, or causes to be paid for any reason, any expense that the Company is otherwise obligated to pay to or on behalf of a Covered Person, then (i) such Member or its Affiliate, as the case may be, shall be fully subrogated to and otherwise succeed to all rights of such Covered Person with respect to such payment, including with respect to rights to claim such amounts from the Company and (ii) the Company shall reimburse, indemnify and hold harmless such Member or its Affiliate, as the case may be, for all such payments actually made by such entity or person on behalf of or for the benefit of such Covered Person.

SECTION 8.8. Savings Clause. If all or any part of this Article VIII shall be invalidated for any reason by any court of competent jurisdiction, the Company shall nevertheless indemnify and hold harmless each Covered Person, and may indemnify and hold harmless any other Person, for costs, charges, expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement, in

connection with any Covered Losses, to the fullest extent permitted by any portion of this Article VIII not invalidated and to the fullest extent otherwise permitted by applicable Law.

ARTICLE IX

CERTAIN TAX MATTERS

SECTION 9.1 Company Classification. Except with the prior written consent of all Members, for federal income tax purposes, the Company shall not elect under Treasury Regulation § 301.7701-3 or otherwise to be taxed other than as a partnership, nor shall the Company or any Member elect to exclude the Company from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state Law.

SECTION 9.2. Tax Returns and Tax Information.

(a) The Company shall cause all required federal, state, local and foreign tax returns of the Company to be prepared and timely filed. Each Member shall furnish to the Company all pertinent information in its possession relating to the Company, its assets and operations necessary to enable the Company’s tax returns to be prepared and timely filed.

(b) The Company shall cause to be delivered to each Member no later than March 31 of each fiscal year of the Company, the Company’s Form 1065 and all attachments and schedules thereto (including Schedule K-1 for such Member), in each case together with such other information with respect to the Company as may be necessary for the preparation of such Member’s federal or state income tax or information returns, including a schedule setting forth all information that is needed by any Member that is, or that has any partners or members who are, subject to tax under Section 511 of the Code in order for such Member (or its partners or members) to properly determine the amount of its unrelated business taxable income and unrelated debt financed income from the Company under Sections 512 and 514 of the Code.

(c) Unless waived by the Members, the Company shall cause to be delivered to the Members, at least five business days before the due date of each federal quarterly estimated tax payment, an estimate of the amount of unrelated business taxable income and unrelated debt financed income under Section 512 and 514 of the Code which is allocable from the Company to each Member for such quarterly period. All costs and expenses incurred in connection with the preparation and filing of such tax returns or estimates described in this Section 9.2 shall be borne by the Company.

(d) The Company shall notify the Members of the Company’s participation in any “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4(b)) no later than five days prior to the time the Company files (or, if earlier, is required to file) IRS Form 8886 “Reportable Transaction Disclosure Statement” with respect to such transaction. In addition, the Company shall provide the Members with such information as is needed for each Member to timely complete and submit its IRS Form 8886 “Reportable Transaction Disclosure Statement” with respect to any such reportable transaction, and to otherwise comply with the applicable U.S. Treasury Regulations.

SECTION 9.3. Tax Elections. The Board shall make all tax elections required or permitted to be made by the Company; provided, however, that (i) no election shall be made to classify the

Company as an association taxable as a corporation without the consent of all the Members and (ii) the Board shall cause the Company to make an election under Section 754 of Code if so requested by any Member transferring part or all of its Interest.

SECTION 9.4. Tax Matters Partner Blue Stone shall be the “tax matters partner” of the Company within the meaning of Section 6231(a)(7) of the Code, and is authorized to represent the Company in connection with any examination of the Company’s affairs by any tax authority, including administrative and judicial proceedings, and to expend Company funds for professional services and the costs associated therewith. Any other Member may participate at such Member’s expense in any such administrative or judicial proceeding to the extent permitted by applicable law. Not withstanding the foregoing, the tax matters partner shall not take any of the following actions without first obtaining the written consent of the other Members:

(a) Enter into a settlement agreement with the Internal Revenue Service which purports to bind the Company or the Members;

(b) File a petition as contemplated in Code Sections 6226(a) or 6228;

(d) File any request contemplated in Code Section 6227(c); and

(e) Enter into an agreement extending the period of limitations as contemplated in Code Section 6229(b)(1)(B).

The tax matters partner shall keep the other Members fully informed of all facts and developments relating to any tax audits, exams, litigation, or other tax proceedings.

SECTION 9.5 Withholding. The Company may withhold and pay to any applicable tax authority all amounts required by any Law to be withheld by the Company from or with respect to distributions to a Member or from or with respect to a Member’s distributive share of Company taxable income or loss (or item thereof). Each Member shall timely provide to the Company all information, forms and certifications necessary or appropriate to enable the Company to comply with any such withholding obligation and covenants to the Company that the information, forms and certifications furnished by it shall be true and accurate in all respects. Each Member shall, upon demand by the Company, indemnify the Company for the indemnifying Member’s share of any such withholding and all related costs and expenses of the Company. Any amounts so withheld in respect of a Member shall be treated as a distribution to such Member for all purposes of this Agreement.

ARTICLE X

BOOKS AND RECORDS; REPORTS

SECTION 10.1. Maintenance of and Access to Books and Records. At all times until the dissolution and termination of the Company, the Company shall maintain separate books of account which show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the conduct of the business of the Company

in accordance with this Agreement. In addition, the Company shall keep and maintain in its principal office all books, Records, documents and other information required to be kept and maintained in accordance with the Act and shall make such information available to any Member or the Blue Stone Assignee or their respective representatives requesting the same within five days after receipt of a written request by the Company.

SECTION 10.2. Access to Books and Records. The Company shall permit each of the Members and the Blue Stone Assignee, from time to time and at reasonable intervals, (a) to examine, audit and make copies of the books, Records and other documents and information of the Company as well as all such other data and information in the possession or control of the Board concerning the Company, Company properties and the ownership and operation thereof, which books, Records, documents and information shall be available to the Members or the Blue Stone Assignee or their representatives at all reasonable times at the principal office of the Company, or at such other office where such information is maintained, upon the written request of any Member or the Blue Stone Assignee, and (b) to discuss the business, financial condition and results of operations of the Company with the Board and its officers and the accountants, engineers and other representatives of the Company.

SECTION 10.3. Bank Accounts The Company shall cause to be established and maintained for and in the name of the Company one or more bank or investment accounts or arrangements. All Company funds shall be deposited in such accounts and shall not be commingled with funds of any other Person. All deposits to and disbursements from such accounts shall be made only for proper Company purposes and shall be signed by one or more authorized signatories designated by the Board.

SECTION 10.4. Financial and Other Reports.

(a) As soon as practicable after the end of each fiscal year of the Company (commencing with the fiscal year ending December 31, 2010), but in no event later than 45 days thereafter, the Company shall cause to be furnished to the Members and the Blue Stone Assignee the following audited consolidated financial statements, prepared in accordance with GAAP, together with a report thereon, unqualified as to scope, of the independent certified public accountants identified in or selected pursuant to Section 10.6:

(i) a consolidated balance sheet of the Company at the end of such year;

(ii) a consolidated statement of operations of the Company for such year;

(iii) a consolidated statement of cash flows of the Company for such year;

(iv) a statement of changes in Members’ equity for such year; and

(v) a statement of each Member’s Ownership Percentage at the end of such year;

setting forth in each case in comparative form the figures for the previous fiscal year, if applicable, all in reasonable detail.

(b) As soon as practicable after the end of each fiscal quarter (other than the fourth fiscal quarter of each year) of the Company (commencing with the fiscal quarter ending September 30, 2010), but in no event later than 25 days thereafter, the Company shall cause to be furnished to the Members and the Blue Stone Assignee unaudited consolidated financial statements for the Company for such fiscal quarter, which shall include at least a balance sheet as of the end of such fiscal quarter, a statement of operations and statement of cash flows for such fiscal quarter and a statement of each Member’s Ownership Percentage as of the end of such fiscal quarter, all prepared in accordance with both the Income Tax Method of Accounting and GAAP (subject to the absence of footno tes thereto and a report thereon from the independent certified public accountants).

(c) As soon as practicable after the end of each month (commencing with the month ending August 31, 2010), but in no event later than 25 days thereafter, the Company shall cause to be furnished to the Members and the Blue Stone Assignee unaudited consolidated monthly financial statements for the Company, which shall include at least a balance sheet as of the end of such month and a statement of operations and statement of cash flows for such month and a statement of each Member’s Ownership Percentage as of the end of such month, all prepared in accordance with both the Income Tax Method of Accounting and GAAP (subject to the absence of footnotes thereto and a report thereon from the independent certified public accountants).

(d) As soon as practicable after the beginning of each fiscal year of the Company (commencing with the fiscal year ending December 31, 2011), but in no event later than 45 days thereafter, the Company shall cause to be furnished to the Members and the Blue Stone Assignee an engineering report prepared by the independent petroleum engineers of the Company, which report will set forth estimates of the oil and gas reserves of the Company as of the preceding January 1 of such fiscal year and future net revenues expected to be derived therefrom in accordance with the rules and regulations of the SEC.

(e) As soon as practicable after the end of each fiscal quarter of the Company (commencing with the fiscal quarter ending September 30, 2010), but in no event later than 45 days after the end of such fiscal quarter, the Company shall cause to be furnished to each of the Members and the Blue Stone Assignee a quarterly management report reflecting (i) a description of the operational status of the oil and gas operations of the Company and (ii) any variance from the Quarterly Budget of the Company for such fiscal quarter.

(f) As soon as practicable after the end of each month (commencing with the month ending August 31, 2010), but in no event later than 45 days after the end of such month, the Company shall cause to be furnished to each of the Members and the Blue Stone Assignee a monthly management report reflecting a description of the operational status of the oil and gas operations of the Company.

SECTION 10.5. Annual and Quarterly Budgets.

(a) At least 30 days prior to the commencement of each fiscal year of the Company, the Company shall cause to be prepared and submitted to the Board the proposed budget (the “Annual Budget”) for the Company for such fiscal year, which budget will set forth a good faith estimate of the projected revenues expected to be received by the Company during such fiscal year and a statement of the costs and expenses proposed to be incurred, any debt service payments required or proposed to be made, any Capital Expenditures proposed to be made, any federal and state taxes expected

to be paid, and other cash outlays proposed to be made in connection with the business activities of the Company during such fiscal year. All such estimates of projected revenues and statements of proposed expenditures will be in reasonable detail and will be allocated among the four fiscal quarters of the applicable fiscal year.

(b) At least 15 days prior to the commencement of each fiscal quarter of the Company (other than the first fiscal quarter of each fiscal year), the Company shall cause to be prepared and submitted to the Board the proposed budget (the “Quarterly Budget”) for the Company for such fiscal quarter, which budget will set forth the same estimate of projected revenues and statements of proposed Capital Expenditures as are described in paragraph (a) above in the case of the Annual Budget but will be updated to reflect any changes in oil and gas prices, production, plans and any other relevant developments since the time the Annual Budget was approved. Upon the Approval of the Board of the Quarterly Budget for a fiscal quarter, the Annual Budget will automatic ally be deemed to have been amended to reflect any changes thereto provided for in the Quarterly Budget.

(c) At any time that the Board determines in good faith that a Budget should be updated to reflect any changes in oil and gas prices, production, plans, proposed transactions and any other relevant developments since the time such Budget was approved, the Company shall cause to be prepared and submitted to the Board the revised Budget, which Budget will set forth the same estimate of projected revenues and statements of proposed expenditures as are described in paragraphs (a) and (b) above in the case of an Annual Budget or Quarterly Budget, as applicable, but will be updated to reflect any such changes and developments since the time the Annual Budget or Quarterly Budget, as applicable, was approved. Upon the Approval of the Board of the revised Annual Budget or Quarterly Budget, as applicable, such Budget will automatically be deemed to have been amended to reflect any changes thereto provided for in such revised Budget.

SECTION 10.6. Independent Public Accounting Firm. The independent certified public accounting firm of the Company shall initially be BDO Seidman, LLP. Approval of the Board shall be required to change the independent certified public accounting firm of the Company or to appoint a new independent public accounting firm after the resignation or removal of BDO Seidman, LLP.

SECTION 10.7. Engineering Firm. The engineering firm of the Company shall initially be DeGolyer & McNaughton. Approval of the Board shall be required to change the engineering firm of the Company or to appoint a new engineering firm after the resignation or removal of DeGolyer & McNaughton.

ARTICLE XI

DEFINITIONS

SECTION 11.1. Definitions. As used in this Agreement, the terms set forth below shall have the following respective meanings:

“Act” means the Delaware Limited Liability Company Act, as amended from time to time, or any successor statute thereto.

“Adjusted Capital Account” means, as of the end of each fiscal year or other relevant period, the balance in a Member’s Capital Account (i) increased by (A) any additional Capital Contributions the Member is obligated to make, or is treated as obligated to make pursuant to the provisions of Treasury Regulations § 1.704-1(b)(2)(ii)(c), (B) the amount of the Member’s share of any “partnership minimum gain” (as defined in Treasury Regulations § 1.704-2(b)(2)), and (C) the amount of the Member’s share of any “partner nonrecourse debt minimum gain” (as defined in Treasury Regulations § 1.704-2(i)(2)), and (ii) decreased by any adjustments, allocations or distributions described in Treasury Regulations §§ 1.704-1(b)(2)(ii)(d)(4), (5) and (6). This definit ion shall be interpreted and applied consistently with the provisions of Treasury Regulations § 1.704-1(b)(2)(ii)(d).

“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such Person. Stockholders of Abraxas who beneficially own in excess of 5% but less than 20% of the issued and outstanding shares of Abraxas common stock shall not be deemed to be Affiliates of Abraxas for purposes of this Agreement solely as a result of such ownership.

“Approval of the Board” means the approval or consent of the number of members of the Board required under the terms of Section 2.1(d), and the phrase “Approved by the Board” has a correlative meaning.

“Available Cash” means the amount of cash on hand (including cash equivalents and temporary investments of Company cash) from time to time in excess of amounts required, in the sole determination of the Board, to pay or provide for payment of existing and projected obligations (including any Indebtedness), Capital Expenditures and acquisitions, and to provide a reasonable reserve for working capital and contingencies.

“Bankruptcy Event” means the occurrence of any of the following events with respect to either Abraxas or Blue Stone: (i) voluntarily filing a petition in bankruptcy, making an assignment for the benefit of the creditors, (ii) filing a petition or answer seeking, consenting to or acquiescing in any reorganization, arrangement, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, or (iii) taking any action seeking, consenting to or acquiescing in the appointment of a trustee, receiver or liquidator or any substantial part of its properties and assets.

“Book Basis” means, with respect to each Company asset, the adjusted basis of the asset for federal income tax purposes, except that (i) the initial Book Basis of an asset other than money contributed by a Member to the Company shall be the fair market value of the asset on the date of contribution, as agreed by the contributor and the Board, (ii) upon the occurrence of a Revaluation Event, the Book Basis of all Company assets (including intangibles) shall be adjusted to their respective fair market values on such date, as determined by the Board, (iii) the Book Basis of any Company asset distributed to any Member will be adjusted to equal the fair market value of such asset on the date of distribution as agreed by the Board and the recipient, (iv) the Book Basis of Company asse ts shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Section 734(b) of the Code or Section 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and Section 5.2(g); provided, however, that Book Basis shall not be adjusted to the extent the Board determines that an adjustment pursuant to subsection (ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection (iv), and

(v) if the Book Basis of any Company asset has been determined pursuant to the preceding subsections, the Book Basis of the asset shall thereafter be adjusted by Simulated Depletion or Book Depreciation in lieu of any depletion, depreciation, amortization or other cost recovery deductions otherwise allowable for federal income tax purposes.

“Book Depreciation” means, with respect to any depreciable or amortizable Company asset, an amount which bears the same ratio to the Book Basis of such asset as the amount of depreciation, amortization or other cost recovery deductions with respect to such asset, computed for federal income tax purposes, bears to the adjusted tax basis of such asset; provided, however, that, if the adjusted tax basis of the asset is zero, Book Depreciation shall be determined under any reasonable method selected by the Board and; provided, further, if such asset is subject to adjustments under the remedial allocation method of Treasury Regulations Section 1.704-3(d), Book De preciation shall be determined under Treasury Regulation Section 1.704-3(d)(2).

“Budget” means any Annual Budget or Quarterly Budget, as updated or revised from time to time in accordance with Section 10.5(c).

“Capital Account” means the account of a Member which is maintained in accordance with the provisions of Section 4.3.

“Capital Contribution” means the amount of cash and the initial Book Basis of any asset other than cash (net of liabilities secured thereby that the Company is treated as having assumed or taken subject to pursuant to Section 752 of the Code) contributed by a Member or a Member’s predecessors in interest to the capital of the Company.

“Capital Expenditure” means any expenditure incurred by the Company relating to general and administrative expenses, Oil and Gas Interests and drilling and completion activities.

“Claim” means any demand, claim, cause of action or chose in action, right of recovery or right of set-off of any kind of character.

“Code” means the Internal Revenue Code of 1986, as the same may be amended from time to time, or any successor statute thereto, together with all applicable regulations thereunder.

“Confidential Information” means any proprietary or confidential information of or relating to the Company and, with respect to each Member, the other Members, including any business information, intellectual property, trade secrets or other information relating to the respective businesses, operations, assets or liabilities of the Company or the Members; provided, however, that “Confidential Information” shall not include any information that (i) is generally available to the public (other than through a breach by the party disclosing the same of its obligations under this Agreement), (ii) is rightfully received from a third party if the information so received is not, to the knowledge of the recipien t, subject to any duty or obligation of confidentiality or non-disclosure owing to the Company or the Members, (iii) is developed by a party without the use of any proprietary or confidential information provided by the Company or the other Members or (iv) information that is required to be disclosed to the public by

applicable Law, any judicial or regulatory authority or any self-regulatory organization. For purposes of this Agreement, Confidential Information shall include any information covered by the Confidentiality Agreement.

“Confidentiality Agreement” means the Confidentiality Agreement, dated as of June 11, 2010, between Abraxas and Blue Stone Oil Corp., a Colorado corporation, which agreement is superseded by Section 12.2 of this Agreement.

“Control,” “Controlling” and “Controlled by” mean the ability (directly or indirectly through one or more intermediaries) to direct or cause the direction of the management or affairs of a Person, whether through the ownership of voting interests, by contract or otherwise.

“Covered Losses” means any and all losses, assessments, fines, penalties, administrative orders, obligations, judgments, amounts paid in settlement, costs, expenses, liabilities and damages (whether actual, consequential or punitive), including interest, penalties, reasonable court costs and attorney’s fees, disbursements and costs of investigations, deficiencies, levies, duties and imposts.

“Covered Person” means (i) any Member, any Affiliate of a Member or any officer, director, manager, member, shareholder, partner, employee, representative or agent of a Member or any of its Affiliates, (ii) any officer of the Company and (iii) any member of the Board, in each case to the extent any such Person is acting in such capacity in connection with the business of the Company.

“Distributions” means any distributions paid pursuant to Section 5.4, 5.5 or 7.3(d) or any other provisions of this Agreement, whether from operations or a sale or other disposition of assets and whether prior to or in connection with a liquidation of the Company.

“Electronic Transmission” means any form of electronic communication (such as facsimile transmission or email) that is generally accepted as a means of communication and that (i) creates a record that may be retained, retrieved, and reviewed by the recipient and (ii) may be directly reproduced in paper form by the recipient through an automated process.

“GAAP” means generally accepted accounting principles as in the effect in the United States at the time of the application thereof in accordance with this Agreement.

“Governmental Authority” means any nation or government, any state, city, municipality or political subdivision thereof, any federal or state court and any other agency, body, authority or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Income Tax Method of Accounting” means the accounting basis used to prepare financial statements for United States federal income tax purposes, provided such basis is consistent with federal income tax requirements for members who are taxed as corporations under the Internal Revenue Code.

“Indebtedness” means, with respect to any Person, any indebtedness of such Person in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing capital lease obligations or the balance deferred and unpaid of the purchase price of any property (except any such balance that

constitutes an accrued expense or trade payable arising in the ordinary course of business), if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the guarantee by such Person of any indebtedness of any other Person.

“Initial Assets” has the meaning set forth in the Subscription Agreement.

“Interest” means, with respect to any Member, the entire interest of such Member in the Company, including (i) the right of such Member to share in the profits of the Company, (ii) the right of such Member to distributions of the properties and assets of the Company and (iii) the right of such Member, if any, to participate in the management of the affairs of the Company.

“Law” means any applicable constitutional provision, statute, act, code, law, regulation, rule, ordinance, order, decree, ruling, proclamation, resolution, judgment, decision, declaration, or interpretative or advisory opinion or letter of a Governmental Authority having valid jurisdiction.

“Lien” means any mortgage, lien, pledge, assignment, charge, deed of trust, security interest, hypothecation, preference, deposit arrangement or encumbrance (or other type of arrangement having the practical effect of the foregoing) to secure or provide for the payment of any Indebtedness of any Person, whether arising by contract, operation of Law, or otherwise.

“Master Services Agreement” means the Master Services Agreement attached hereto as Exhibit B, dated as of the date hereof, between the Company and Blue Stone, pursuant to which Blue Stone will provide certain administrative and other services to the Company, and the Company will bear the costs and expenses incurred by Blue Stone in providing such services to the Company.

“Members” means any Person admitted as a member of the Company as of the date hereof or at any time hereafter in accordance with this Agreement (but such term does not include any Person who has ceased to be a member of the Company).

“Net Income” and “Net Losses” means, the taxable income or loss of the Company, as the case may be, as determined for federal income tax purposes as of the close of each fiscal year or other relevant period, computed with the following adjustments:

(a) gain or loss from the disposition of, any Company asset that has a Book Basis that differs from the asset’s adjusted tax basis will be computed based upon the Book Basis (rather than the adjusted tax basis) of such asset;

(b) tax-exempt income received by the Company will be included in gross income;

(d) any items of income, gain, loss, or deduction allocated pursuant to any provision of Section 5.2 will be excluded from the computation of Net Income and Net Losses for purposes of applying Section 5.1;

(e) for purposes of determining Net Income and Net Losses, the allocation of depletable basis in, depletion allowances with respect to, and taxable gain or loss from the sale, exchange or other disposition of, the Company’s depletable properties provided for in Section 613A(c)(7)(D) of the Code and/or otherwise computed for federal income tax purposes shall be disregarded. Instead, Net Income and Net Losses shall be determined by taking into account Simulated Depletion and Simulated Gain or Loss, as determined and defined in the following sentence. For purposes of determining Simulated Depletion and Simulated Gain or Loss, (i) the Company shall determine its tax basis in its depletable properties (“Simulated Basis”) without regard to the special rules set forth in Section 613A(c)(7)(D) of the Code, (ii) the Company shall determine depletion allowances (“Simulated Depletion”) with respect to such depletable properties by using either the cost depletion method or the percentage depletion method (as determined by the Board on a property by property basis), (iii) the Company shall reduce the Simulated Basis of such depletable properties by the Simulated Depletion attributable to such depletable properties, and (iv) the Company shall compute gain or loss on a sale, exchange, or other disposition of such depletable properties by subtracting Simulated Basis from the amount realized by the Company upon such disposition (“Simulated Gain or Loss”);

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

(g) Any increase or decrease to Book Basis resulting from a Revaluation Event or from the distribution of any Company asset to a Member shall be included in the computation of Net Income or Net Losses.

“Oil and Gas Interests” means (i) oil, gas and mineral leases, leasehold interests, mineral fee interests, royalty and overriding royalty interests, production payments, and all rights and interests in lands and leases pooled, unitized, or communitized therewith, (ii) wells or future wells located on a lease or on lands pooled, unitized, or communitized therewith, (iii) oil, gas or mineral unitization, pooling, operating, or communitization agreements, declarations, or orders, and the units created thereby, (iv) all oil, gas well gas, casinghead gas, condensate, or other substances produced incident therewith and all components of any of them produced from or allocated to the Initial Assets and subsequently acquired assets on and after the date of this Agreement, (v) all assignments, oil and gas sales, purchase, transportatio n, gathering, balancing, exchange, marketing and processing contracts, casinghead gas contracts, operating agreements, area of mutual interest agreements, joint venture agreements, acreage contribution agreements, farmout agreements, farmin agreements, participation agreements, saltwater disposal agreements, water injection agreements, line well injection agreements, hydrocarbon storage agreements, facilities or equipment leases, drilling contracts, road use agreements, surface use agreements, rights of way, servitudes, easements, licenses, permits, surface leases, and other related agreements and instruments or (vi) all of the personal property, fixtures, movable and immovable property and improvements located on or connected to, used or held for use with respect to any leases, wells or rights of way, including all pipelines and gathering systems used in connection with any leases, wells or rights of way.

“Operating Agreement” means the Operating Agreement attached hereto as Exhibit C, dated as of the date hereof, between the Company and Abraxas pursuant to which Abraxas will be designated as the operator of the Company’s oil and gas properties.

“Ownership Percentage” means, with respect to a Member at any time, the ratio of (i) the total amount (or agreed value) of Capital Contributions made by such Member prior to or at such time to (ii) the total amount (or agreed value) of Capital Contributions made by all of the Members prior to or at such time.

“Permitted Liens” means

(a) Liens securing Permitted Indebtedness;

(b) purchase money Liens or purchase money security interests upon or in any equipment acquired or held by the Company in the ordinary course of business prior to or at the time of, or within 20 days after, the Company’s acquisition of such equipment; provided, that, the Indebtedness secured by such Liens (i) was incurred solely for the purpose of financing the acquisition of such equipment, and does not exceed the aggregate purchase price of such equipment, (ii) is secured only by such equipment and not by any other assets of the Company, and (iii) is not increased in amount;

(c) Liens for taxes, assessments, or other governmental charges or levies not yet due or that (provided foreclosure, sale, or other similar Proceedings shall not have been initiated) are being contested in good faith by appropriate Proceedings, and such reserves as may be required by GAAP shall have been made therefor;

(d) Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, suppliers, laborers, construction, or similar Liens arising by operation of Law in the ordinary course of business in respect of obligations that are not yet due or that are being contested in good faith by appropriate Proceedings, provided, that, such reserves as may be required by GAAP shall have been made therefor;

(e) Liens to operators and non-operators under joint operating agreements arising in the ordinary course of the business of the Company to secure amounts owning, which amounts are not yet due or are being contested in good faith by appropriate Proceedings, provided, that, such reserves as may be required by GAAP shall have been made therefor;

(f) royalties, overriding royalties, net profits interests, production payments, reversionary interests, calls on production, preferential purchase rights and other burdens on or deductions from the proceeds of production, that do not secure Indebtedness for borrowed money;

(g) Liens arising in the ordinary course of business out of pledges or deposits under workers’ compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits, or similar legislation or to secure public or statutory obligations of the Company; and

(h) easements, rights-of-way, and other similar encumbrances, and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry, none of which interfere with the ordinary conduct of the business of the Company.

“Person” has the meaning given to such term in the Act.

“Plan Assets Regulations” means the regulations of the U.S. Department of Labor included with 29 C.F.R. section 2510.3-101, as amended by section 3(42) of the Employee Retirement Income Security Act of 1974, as amended.

“Proceeding” means any investigation, action, suit, arbitration or other legal proceeding, whether civil or criminal.

“Records” means all books, records and other documentation, both written and electronic, customarily used to conduct an oil and gas exploration and production business.

“Related Property and Records” means (i) personal property, improvements, lease and well equipment, pipelines, pumps, sulfur recovery facilities, dehydration facilities, treating facilities, valves, meters, separators, tanks, tank batteries, and other fixtures located on attributable to, or used in connection with any Oil and Gas Interests and (ii) lands and lease files, abstracts and title opinions, production records, well files, accounting records, tax records related to production taxes, ad valorem taxes and property taxes, seismic records and surveys, gravity maps, electric logs, engineering, geological or geophysical maps, data, and Records, and other files, documents, and Records related to any Oil and Gas Interests.

“Remaining Capital Commitment” means, with respect to a Member at any time, the amount, if any, by which the Capital Commitment of such Member exceeds the aggregate Capital Contributions made by it to the Company pursuant to Section 4.2.

“Revaluation Event” means, except as otherwise agreed by the Board, (i) the acquisition of an additional Interest (other than upon the initial formation of the Company) by any new or existing Member in exchange for more than a de minimis Capital Contribution or as consideration for the performance of services on behalf of the Company; (ii) the Distribution by the Company to a Member of more than a de minimis amount of money or other property as consideration for an Interest in the Company; and (iii) the liquidation of the Company within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g).

“SEC” means the United States Securities and Exchange Commission.

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

“Simulated Basis” has the meaning set forth in clause (e) of the definition of “Net Income” and “Net Loss.”

“Simulated Depletion” has the meaning set forth in clause (e) of the definition of “Net Income” and “Net Loss.”

“Simulated Gain or Loss” has the meaning set forth in clause (e) of the definition of “Net Income” and “Net Loss.”

“Subject Area” has the meaning set forth in the Subscription Agreement.

“Subscription Agreement” means the Subscription and Contribution Agreement attached hereto as Exhibit D, dated as of the date hereof, between Abraxas, Abraxas Operating, LLC, a Texas

limited liability company, and the Company, pursuant to which Abraxas and Abraxas Operating, LLC are contributing the Initial Assets to the Company.

“Transaction Agreements” means this Agreement, the Operating Agreement, the Master Services Agreement and the Subscription Agreement.

“Transfer” means, with respect to an Interest, a sale, transfer, assignment, grant of a Lien or any other disposition or hypothecation of such Interest, whether direct or indirect or voluntary, involuntary or by operation of Law, and the term “Transfer” used as a verb has a correlative meaning.

SECTION 11.2. Other Defined Terms. Each of the terms below has the meaning set forth in the provision of this Agreement identified opposite such term in the following table:

Term	Provision

Abraxas	Preamble
Abraxas Designee	Section 2.1(b)
Agreement	Preamble
Annual Budget	Section 10.5(a)
Asset Sale	Section 6.2(a)
Blue Stone	Preamble
Blue Stone Assignee	Section 2.1(b)
Blue Stone Designees	Section 2.1(b)
Board	Section 2.1(a)
Capital Calls	Section 4.2(b)
Capital Commitment	Section 4.1(a)
Certificate of Formation	Section 1.1
Company	Preamble
Company Sale	Section 6.2(a)
Contributing Member	Section 4.2(c)
Designating Party	Section 2.1(b)
Electing Member	Section 4.1(c)
Initiation Notice	Section 6.2(a)
Other Members	Section 6.2(a)
Permitted Indebtedness	Section 2.1(d)(ii)
Quarterly Budget	Section 10.5(b)
Regulatory Allocations	Section 5.2(h)
Sale Initiator	Section 6.2(a)
Sale Notice	Section 6.2(c)
Sale Transaction	Section 6.2(a)
Sales Agent	Section 6.2(b)
Subject Area	Section 1.6(a)
Target Capital Account Amount	Section 5.1(b)
Tax Distribution	Section 5.5
Third-Party Purchaser	Section 6.2(a)
Total Capital Commitments	Section 4.1(a)
Transaction Expenses	Section 12.3
Triggering Distribution	Section 4.1(b)

SECTION 11.3. Construction. When required by the context, the gender of words in this Agreement includes the masculine, feminine and neuter genders, and the singular includes the plural (and vice versa). Unless otherwise specified, references in this Agreement to (a) Articles and Sections are to Articles and Sections of this Agreement, (b) Schedules, Exhibits or Annexes are to those attached hereto, each of which is incorporated herein and made a part hereof for all purposes, (c) Article and Section headings are for convenience only and shall not affect the interpretation of this Agreement, (d) the terms “herein,” “hereof,” “hereinafter” or similar derivations are to this Agreement as a whole and not to any particular Article or Section, and (e) the terms “include,” “including” or similar derivations are without limitation.

ARTICLE XII

MISCELLANEOUS

SECTION 12.1. Notices. All notices and other communications under this Agreement or in connection herewith shall be in writing and shall be given by delivery in person or by overnight courier, by registered or certified mail (return receipt requested and with postage prepaid thereon) or by Electronic Transmission to the parties at the respective addresses set forth in Exhibit A (or at such other address as any party shall have furnished to the others in accordance with the terms of this Section 12.1). All notices and other communications that are addressed as provided in or pursuant to this Section 12.1 shall be deemed duly and validly given (a) if delivered in person or by overnight courier, upon delivery, (b) if delivered by registered or certified mail (return receipt requested and with postage paid thereon), 72 hours after being placed in a depository of the United States mails and (c) if delivered by Electronic Transmission, upon transmission and receipt thereof.

SECTION 12.2. Confidentiality. Each party hereto acknowledges the proprietary and confidential nature of the Confidential Information and agrees that it shall preserve the Confidential Information and shall not use, publish, disseminate, distribute or otherwise disclose all or any portion thereof without the prior written Approval of the Board. In the event that a party hereto receives either a request to disclose any Confidential Information under the terms of a subpoena or orde r issued by a court or other Governmental Authority of competent jurisdiction or advice of legal counsel that disclosure is required under applicable Law, such party agrees that, prior to disclosing any Confidential Information, such party shall (i) immediately notify the Board of the existence and terms of, and the circumstances attendant to, such request or advice, (ii) consult with the Board as to the advisability of taking legally available steps to resist or narrow any such request or to otherwise eliminate the need for such disclosure and (iii) if disclosure is required, use its reasonable best efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded to such portion of the Confidential Information as is required to be disclosed. Notwithstanding the foregoing, a Member may disclose Confidential Information to the extent (w) the disclosure is necessary as a result of the due and proper performance of its duties to the Company pursuant to this Agreement, (x) to the extent necessary to enforce rights hereunder (provided, however, that the Member seeking to enforce its rights shall take commercially reasonable steps to preserve the confidential nature of the Confidential Information and to limit the harm to the Company or the other Members from the disclosure thereof), (y) in connection with disclosures of a general nature regarding general financial information, return on investment and similar information, including without limitation, in connection with communications to direct and indirect beneficial owners of Interests and general marketing efforts or (z) to comply with applicable Law or the rules and regulations of any governmental, regulatory or self-regulatory organization.

The agreements contained in this Section 12.2 shall survive the withdrawal of any Member and, insofar as the Confidential Information relates to any other Member, the termination of the Company.

SECTION 12.3. Transaction Expenses. The Company shall be responsible for the payment of all fees and expenses incurred by Abraxas and Blue Stone in connection with the negotiation and preparation of this Agreement and the Transaction Agreements and all other all agreements and documents ancillary thereto and the transactions contemplated hereby and thereby (“Transaction Expenses”). Transaction Expenses shall include all fees, costs, and expenses of legal counsel, accountants and all othe r third party consultants and advisors engaged by each such Member to assist with the due diligence reviews conducted by them or the negotiation or preparation of this Agreement and the Transaction Agreements and all reasonable, direct out-of-pocket expenses for travel and similar matters. Transaction Expenses shall not include any costs or expenses incurred by Abraxas prior to the date hereof in connection with obtaining any necessary consents, authorizations or approvals required in order for it to fulfill its obligations under the Subscription Agreement (it being understood that the payment of any such costs or expenses incurred after the date hereof shall be governed by the Subscription Agreement). Promptly after the date hereof, the Company shall pay all Transaction Expenses or, if necessary, reimburse Abraxas and Blue Stone for any Transaction Expenses paid by them prior to the date hereof.

SECTION 12.4. Amendment; Waiver.

(a) Any amendment to this Agreement shall require the written approval of each of the Members.

(b) A waiver or consent, express or implied, to or of any breach or default by any Person in the performance of its obligations with respect to the Company is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company. Failure on the part of a Person to complain of any act or omission of any Person or to declare any Person in breach or default with respect to an obligation, irrespective of how long that failure continues, shall not be construed as a waiver of the breach or default until the applicable statute of limitations has run. No waiver of any obligation under this Agreement or the Act shall be effective unless in writing signed by or on behalf of the Person or Persons to whom the obligation is owed.

SECTION 12.5 Entire Agreement. This Agreement, together with the other agreements and instruments referred to herein (including the Transaction Agreements), constitutes the entire agreement among the Members with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, whether written or oral, among the Members or any of them with respect to the subject matter hereof. All Exhibits and Schedules hereto are expressly made a part of this Agreement.

SECTION 12.6. Parties in Interest. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns (it being understood and agreed that, except as expressly provided herein, nothing contained in this Agreement is intended to confer any rights, benefits or remedies of any kind or character on any other Person under or by reason of this Agreement). It is expressly understood and agreed that any attempted or purported assignment by any party of this Agreement in violation of the provisions of this Section 12.6 shall be null and void.

SECTION 12.7. Benefit of Agreement Nothing in this Agreement expressed or implied, shall be construed to give to any creditor of the Company or of any Member any legal or equitable right, remedy or Claim under or in respect of this Agreement.

SECTION 12.8. Governing Law. (a) This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware (without regard to any conflicts of law principles that would require the application of the Laws of any other jurisdiction).

SECTION 12.9. Severability. In the event that any provision contained herein shall be held to be invalid, illegal or unenforceable for any reason, the invalidity, illegality or unenforceability thereof shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

SECTION 12.10. Headings. The headings herein are for convenience of reference only, do not constitute a part of this Agreement and shall not be deemed to limit, extend or otherwise affect the meaning of any of the provisions hereof.

SECTION 12.11. Further Assurances. In connection with this Agreement and the transactions contemplated hereby, each Member agrees to execute and deliver any additional documents and instruments and to perform any additional acts necessary or appropriate to effectuate the provisions of this Agreement and those transactions.

SECTION 12.12. Rules of Construction. Each of the parties acknowledges that it has been represented by independent counsel of its choice throughout all negotiations that have preceded the execution of this Agreement and that it has executed the same with consent and upon the advice of said independent counsel. Each party and its counsel cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any and all drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against any party that drafted it is of no application and is hereby expressly waived. To the extent that any provision in this Agreement conflicts with any provision in any other Transaction Agreement, the provision in this Agreement shall govern.

SECTION 12.13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. In the event that any signature is delivered by Electronic Transmission of a facsimile thereof (including a “.pdf” format data file), such signature shall create a valid and binding obligation of the party executing with the same force and effect as if such facsimile were an original signature.

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EX-99.1 4 newsrelease.htm NEWS RELEASE newsrelease.htm

ABRAXAS PETROLEUM CORPORATION

www.abraxaspetroleum.com

Exhibit 99.1

NEWS RELEASE

Abraxas and Blue Stone Jointly Announce $100 Million

Eagle Ford Shale Joint Venture

SAN ANTONIO (August 18, 2010) – Abraxas Petroleum Corporation (NASDAQ:AXAS) today announced that the Company signed a joint venture agreement with Blue Stone Oil & Gas, LLC (“Blue Stone”) to develop the Eagle Ford Shale play in South Texas.

Abraxas will contribute 8,333 net acres in the Eagle Ford Shale play to Blue Eagle Energy, LLC (the “JV”) and receive a $25 million equity interest in the JV and Blue Stone will initially contribute $25 million in cash to the JV for a $25 million equity interest in the JV. In addition, Blue Stone has committed an additional $50 million in cash to the JV, which combined with the initial $25 million, will be used to acquire additional acreage and 3-D seismic data, and to drill and complete wells targeting the Eagle Ford Shale formation. Upon full funding, Abraxas will own a 25% equity interest in the JV and Blue Stone will own a 75% equity interest in the JV.

The JV’s subject area will encompass 12 counties across the Eagle Ford Shale play for expected future acreage acquisitions. Abraxas will operate the wells in the JV and Blue Stone will manage the day-to-day business affairs of the JV.

“We are very excited about partnering with Blue Stone as the joint venture will greatly accelerate our activity in the Eagle Ford Shale play, well above what we could have accomplished on our own. We are pleased that Blue Stone shares our confidence in the development potential of our acreage position which is located in all three hydrocarbon windows of the play. In addition to acquiring additional acreage and 3-D seismic data, we anticipate that the committed capital will allow the JV to drill and complete approximately 10 wells,” commented Bob Watson, Abraxas’ President and CEO.

Kyle R. Miller, Blue Stone’s President, further commented “We are delighted to partner with an experienced South Texas operator with a core acreage position in the Eagle Ford Shale play and look forward to expanding our position and developing the play.”

Rivington Capital Advisors, LLC, and its affiliate, Rivington Securities, LLC, acted as exclusive financial advisor to Blue Stone.

About Abraxas Petroleum

Abraxas Petroleum Corporation is a San Antonio based crude oil and natural gas exploration and production company with operations across the Rocky Mountain, Mid-Continent, Permian Basin and Gulf Coast regions of the United States.

18803 Meisner Drive

San Antonio, Texas 78258

Phone: 210.490.4788 Fax: 210.918.6675

About Blue Stone

Blue Stone Oil & Gas, LLC is a Denver based exploration and production start-up company principally focused on the Eagle Ford Shale play in South Texas. Blue Stone is led by Kyle R. Miller, formerly the managing member of Miller, Dyer & Co., operator of Chicago Energy Associates, LLC and its assets in eastern Utah prior to its divestiture to Whiting Oil & Gas Corp. in May 2008.

Safe Harbor for forward-looking statements: Statements in this release looking forward in time involve known and unknown risks and uncertainties, which may cause Abraxas’ actual results in future periods to be materially different from any future performance suggested in this release. Such factors may include, but may not be necessarily limited to, changes in the prices received by Abraxas for natural gas and crude oil. In addition, Abraxas’ future natural gas and crude oil production is highly dependent upon Abraxas’ level of success in acquiring or finding additional reserves. Further, Abraxas operates in an industry sector where the value of securities is highly volatile and may be influenced by economic and other factors beyond Abraxas’ control. In the c ontext of forward-looking information provided for in this release, reference is made to the discussion of risk factors detailed in Abraxas’ filings with the Securities and Exchange Commission during the past 12 months.

FOR MORE INFORMATION CONTACT:

Barbara M. Stuckey/Vice President - Corporate Finance

Telephone 210.490.4788

bstuckey@abraxaspetroleum.com

www.abraxaspetroleum.com

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Exhibit 99.2

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information is derived from the historical financial statements of the Company adjusted to reflect the following:

On August 18, 2010, Abraxas Petroleum Corporation and its wholly-owned subsidiary, Abraxas Operating, LLC, agreed to contribute 8,333 net acres in the Eagle Ford Shale play to Blue Eagle Energy, LLC (the “Blue Eagle JV”) and received a $25 million equity interest in the Blue Eagle JV pursuant to the terms of a Subscription and Contribution Agreement among Abraxas Petroleum, Abraxas Operating, Blue Eagle and Blue Stone Oil & Gas, LLC.

The Unaudited Pro Forma Condensed Balance Sheet of the Company as of June 30, 2010, has been prepared assuming that the contribution of the acreage and formation of Blue Eagle JV were consummated on June 30, 2010. The Unaudited Pro Forma Statements of Operations of the Company for the year ended December 31, 2009 and for the six month period ended June 30, 2010 have been prepared assuming that the transactions were consummated at the beginning of the reporting period.

The Unaudited Pro Forma Financial Information should be read in conjunction with the notes thereto, the Consolidated Financial Statements of the Company for the year ended December 31, 2009 and the six months ended June 30, 2010 and the notes thereto.

The Unaudited Pro Forma Financial Information is not indicative of the financial position or results of operations of the Company which would actually have occurred if the transactions were consummated at the dates presented or which may be obtained in the future. In addition, future results may vary significantly from the results reflected in such statements due to normal crude oil and natural gas production declines, reductions in prices paid for crude oil and natural gas, future acquisitions and other factors.

Abraxas Petroleum Corporation

Unaudited Proforma Condensed Balance Sheets

June 30, 2010

	Historical			Pro Forma adjustments				Pro Forma
	(in thousands)
Assets:
Current assets:
Cash	$	2,594		$	-			$	2,594
Accounts receivable, net:
Joint owners		943			-				943
Oil and gas production		6,886			-				6,886
Other		791			-				791
		8,620			-				8,620

Derivative asset – current		4,209			-				4,209
Other current assets		405			-				405
Total current assets		15,828			-				15,828

Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved		451,616			(25,000	)	(1a)		426,616
Other property and equipment		11,356			-				11,356
Total		462,972			(25,000	)			437,972
Less accumulated depreciation, depletion, and amortization		(317,906	)		-				(317,906	)
Total property and equipment – net		145,066			(25,000	)			120,066

Investment in Joint Venture		-			25,000		(1b)		25,000

Deferred financing fees, net		4,621			-				4,621
Derivative asset – long-term		7,480			-				7,480
Other assets		864			-				864
Total assets	$	173,859		$	-			$	173,859

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	6,205		$				$	6,205
Oil and gas production payable		3,313			-				3,313
Accrued interest		392			-				392
Other accrued expenses		1,480			-				1,480
Derivative liability - current		4,793			-				4,793
Current maturities of long-term debt		146			-				146
Total current liabilities		16,329			-				16,329

Long-term debt		144,317			-				144,317

Derivative liability - long-term		4,669			-				4,669
Future site restoration		9,634			-				9,634
Total liabilities		174,949			-				174,949

Stockholders’ deficit:
Common Stock, par value $.01 per share-		764			-				764
Additional paid-in capital		183,494			-				183,494
Accumulated deficit		(185,491	)		-				(185,491	)
Accumulated other comprehensive income		143			-				143
Total stockholders’ deficit		(1,090	)		-				(1,090	)
Total liabilities and stockholders’ deficit	$	173,859		$	-			$	173,859

Abraxas Petroleum Corporation

Unaudited Proforma Statement of Operations

Year Ended December 31, 2009

	Historical			Pro Forma Adjustments				Pro Forma
	(In thousands except per share data)
Revenues:
Oil and gas production revenues	$	51,829		$	-			$	51,829
Rig revenues		914			-				914
Other		7			-				7
		52,750			-				52,750
Operating costs and expenses:
Lease operating and production taxes		26,224			-				26,224
Depreciation, depletion, and amortization		17,886			(1,557	)	(2a)		16,329
Rig operations		758			-				758
General and administrative		7,705			-				7,705
		52,573			(1,557	)			51,016
Operating income		177			1,557				1,734

Other (income) expense:
Interest income		(15	)		-				(15	)
Amortization of deferred financing fees		1,326			-				1,326
Interest expense		11,346			-				11,346
Financing fees		362			-				362
Loss on derivative contracts		12,322			-				12,322
Other		2,071			-				2,071
		27,412			-				27,412
Net loss before income tax and non-controlling interest		(27,235	)		1,557				(25,678	)
Income tax		1,290			-				1,290
Net loss attributable to non-controlling interest		9,745			-				9,745
Net loss attributable to Abraxas		(18,780	)		1,557				(17,223	)

Basic earnings per common share:
Net income per common share - basic	$	(0.34	)					$	(0.31	)

Net income per common share - diluted	$	(0.34	)					$	(0.31	)

Weighted average shares:
Basic		55,499							55,499
Diluted		55,499							55,499

Abraxas Petroleum Corporation

Unaudited Proforma Statement of Operations

Six Months Ended June 30, 2010

	Historical			Pro Forma Adjustments			Pro Forma
	(In thousands except per share data)
Revenues:
Oil and gas production revenues	$	30,509		$	-			$	30,509
Rig revenues		520			-				520
Other		6			-				6
		31,035			-				31,035
Operating costs and expenses:
Lease operating and production taxes		12,854			-				12,854
Depreciation, depletion, and amortization		8,674			(744	)	(3a)		7,930
Rig operations		390			-				390
General and administrative		4,332			-				4,332
		26,250			(744	)			25,506
Operating income		4,785			744				5,529

Other (income) expense:
Interest income		(4	)		-				(4	)
Amortization of deferred financing fees		1,322			-				1,322
Interest expense		4,586			-				4,586
Gain on derivative contracts		(17,527	)		-				(17,527	)
Other		(75	)		-				(75	)
		(11,698	)		-				(11,698	)
Net income	$	16,483		$	744			$	17,227

Basic earnings per common share:
Net income per common share - basic	$	0.22						$	0.23

Net income per common share - diluted	$	0.21						$	0.22

Weighted average shares:
Basic		75,824							75,824
Diluted		77,052							77,052

NOTE 1. The Unaudited Pro Forma Condensed Balance Sheet as of June 30, 2010, reflects the disposition of properties and formation of Blue Eagle JV as if it had occurred as of June 30, 2010:

(a)

Contribution of oil and gas properties to Blue Eagle JV. This represents a credit to the full cost pool with no gain being recognized in accordance with full cost accounting rules. At the time the transaction was consummated, Abraxas had not yet acquired all of the committed acreage. Abraxas has until December 31, 2010 to satisfy the acreage commitment which will require a cash outlay of $400,000 to $700,000.

(b)

Investment in Blue Eagle JV.

There were no liabilities associated with the properties contributed.

NOTE 2. The Unaudited Pro Forma Statement of Operations for the year ended December 31, 2009, reflects the disposition of properties and formation of Blue Eagle JV as if it were consummated on January 1, 2009.

(a)

Adjust depletion to reflect the impact of the properties contributed to the Blue Eagle JV.

NOTE 3. The Unaudited Pro Forma Statement of Operations for the six months ended June 30, 2010, reflects the disposition of properties and formation of Blue Eagle JV as if it were consummated on January 1, 2009.

(a)

Adjust depletion to reflect the impact of the properties contributed to the Blue Eagle JV.

NOTE 4. There was no historical production associated with the properties contributed to the Blue Eagle JV, accordingly there is no adjustment to operations related to these properties. Additionally there is no adjustment to equity or earnings of the joint venture.

-----END PRIVACY-ENHANCED MESSAGE-----

Nevada	1-16071	74-2584033
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification Number)