UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from  to

Commission File Number 001-10924

CLAYTON WILLIAMS ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2396863
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Six Desta Drive - Suite 6500
Midland, Texas	79705-5510
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (432) 682-6324

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

There were 12,163,536 shares of Common Stock, $.10 par value, of the registrant outstanding as of November 6, 2012.

CLAYTON WILLIAMS ENERGY, INC.

TABLE OF CONTENTS

	PART I.  FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	3
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and nine months ended September 30, 2012 and 2011	5
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
	PART II. OTHER INFORMATION
Item 1A.	Risk Factors	43
Item 6.	Exhibits	44
	Signatures	45

2

PART I.  FINANCIAL INFORMATION

Item 1 - Financial Statements

CLAYTON WILLIAMS ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS
	September 30, 2012			December 31, 2011
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	22,694		$	17,525
Accounts receivable:
Oil and gas sales	36,770			41,282
Joint interest and other, net	12,357			14,517
Affiliates	513			990
Inventory	44,272			44,868
Deferred income taxes	8,202			8,948
Fair value of derivatives	945			—
Prepaids and other	5,730			14,813
	131,483			142,943
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method	2,497,466			2,103,085
Natural gas gathering and processing systems	45,477			26,040
Contract drilling equipment	88,570			75,956
Other	20,970			19,134
	2,652,483			2,224,215
Less accumulated depreciation, depletion and amortization	(1,271,601		)	(1,156,664		)
Property and equipment, net	1,380,882			1,067,551
OTHER ASSETS
Debt issue costs, net	10,898			11,644
Fair value of derivatives	7,745			—
Investments and other	15,531			4,133
	34,174			15,777
	$	1,546,539		$	1,226,271
The accompanying notes are an integral part of these consolidated financial statements.

3

CLAYTON WILLIAMS ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
	September 30, 2012		December 31, 2011
	(Unaudited)
CURRENT LIABILITIES
Accounts payable:
Trade	$	76,426	$	98,645
Oil and gas sales	36,129		37,409
Affiliates	123		1,501
Fair value of derivatives	—		5,633
Accrued liabilities and other	21,088		13,042
	133,766		156,230
NON-CURRENT LIABILITIES
Long-term debt	769,572		529,535
Deferred income taxes	152,022		134,209
Fair value of derivatives	—		494
Asset retirement obligations	51,547		40,794
Deferred revenue from volumetric production payment	39,170		—
Accrued compensation under non-equity award plans	22,675		20,757
Other	861		751
	1,035,847		726,540
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, par value $.10 per share, authorized — 3,000,000 shares; none issued	—		—
Common stock, par value $.10 per share, authorized — 30,000,000 shares: issued and outstanding — 12,163,536 shares at September 30, 2012 and December 31, 2011	1,216		1,216
Additional paid-in capital	152,515		152,515
Retained earnings	223,195		189,770
	376,926		343,501
	$	1,546,539	$	1,226,271

The accompanying notes are an integral part of these consolidated financial statements.

4

CLAYTON WILLIAMS ENERGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands, except per share)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
REVENUES
Oil and gas sales	$	101,638		$	99,752		$	308,116		$	300,488
Natural gas services	671			334			1,305			1,108
Drilling rig services	5,348			929			11,478			3,614
Gain on sales of assets	106			49			543			14,570
Total revenues	107,763			101,064			321,442			319,780
COSTS AND EXPENSES
Production	32,564			24,284			93,937			75,237
Exploration:
Abandonments and impairments	306			1,256			2,292			2,307
Seismic and other	2,710			1,842			5,445			5,287
Natural gas services	508			233			956			781
Drilling rig services	5,335			1,673			12,164			4,378
Depreciation, depletion and amortization	37,661			25,901			103,486			74,987
Impairment of property and equipment	—			5,035			5,711			9,459
Accretion of asset retirement obligations	1,069			706			2,628			2,077
General and administrative	5,830			7,142			25,133			22,678
Loss on sales of assets and impairment of inventory	207			114			485			417
Total costs and expenses	86,190			68,186			252,237			197,608
Operating income	21,573			32,878			69,205			122,172
OTHER INCOME (EXPENSE)
Interest expense	(9,786		)	(8,717		)	(27,817		)	(24,304		)
Loss on early extinguishment of long-term debt	—			(907		)	—			(5,501		)
Gain (loss) on derivatives	(21,901		)	92,286			9,856			74,128
Other	(559		)	527			739			3,514
Total other income (expense)	(32,246		)	83,189			(17,222		)	47,837
Income (loss) before income taxes	(10,673		)	116,067			51,983			170,009
Income tax (expense) benefit	3,497			(41,544		)	(18,558		)	(60,693		)
NET INCOME (LOSS)	$	(7,176	)	$	74,523		$	33,425		$	109,316
Net income (loss) per common share:
Basic	$	(0.59	)	$	6.13		$	2.75		$	8.99
Diluted	$	(0.59	)	$	6.13		$	2.75		$	8.99
Weighted average common shares outstanding:
Basic	12,164			12,163			12,164			12,160
Diluted	12,164			12,163			12,164			12,161

The accompanying notes are an integral part of these consolidated financial statements.

5

CLAYTON WILLIAMS ENERGY, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited) (In thousands)
	Common Stock			Additional				Total
	No. of	Par		Paid-In		Retained		Stockholders’
	Shares	Value		Capital		Earnings		Equity
BALANCE,
December 31, 2011	12,164	$	1,216	$	152,515	$	189,770	$	343,501
Net income	—	—		—		33,425		33,425
BALANCE,
September 30, 2012	12,164	$	1,216	$	152,515	$	223,195	$	376,926

The accompanying notes are an integral part of these consolidated financial statements.

6

CLAYTON WILLIAMS ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
	Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	33,425		$	109,316
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization	103,486			74,987
Impairment of property and equipment	5,711			9,459
Exploration costs	2,292			2,307
(Gain) loss on sales of assets and impairment of inventory, net	(58		)	(14,153		)
Deferred income tax expense	18,558			60,693
Non-cash employee compensation	2,200			6,104
Unrealized gain on derivatives	(14,817		)	(82,029		)
Accretion of asset retirement obligations	2,628			2,077
Amortization of debt issue costs and original issue discount	1,587			1,623
Loss on early extinguishment of long-term debt	—			5,501
Amortization of deferred revenue from volumetric production payment	(5,862		)	—
Changes in operating working capital:
Accounts receivable	7,150			768
Accounts payable	(5,772		)	(4,456		)
Other	7,355			3,090
Net cash provided by operating activities	157,883			175,287
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment	(438,482		)	(282,474		)
Proceeds from volumetric production payment	45,032			—
Proceeds from sales of assets	867			12,466
Increase in equipment inventory	64			2,844
Other	(195		)	(133		)
Net cash used in investing activities	(392,714		)	(267,297		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt	240,000			445,366
Repayments of long-term debt	—			(323,500		)
Premium on early extinguishment of long-term debt	—			(2,765		)
Proceeds from exercise of stock options	—			213
Net cash provided by financing activities	240,000			119,314
NET INCREASE IN CASH AND CASH EQUIVALENTS	5,169			27,304
CASH AND CASH EQUIVALENTS
Beginning of period	17,525			8,720
End of period	$	22,694		$	36,024
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts capitalized	$	19,295		$	8,064

The accompanying notes are an integral part of these consolidated financial statements.

7

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

1. Nature of Operations

Clayton Williams Energy, Inc. (a Delaware corporation),  is an independent oil and gas company engaged in the exploration for and development and production of oil and natural gas primarily in its core areas in Texas, Louisiana and New Mexico.  Unless the context otherwise requires, references to “CWEI” mean Clayton Williams Energy, Inc., the parent company, and references to the “Company”, “we”, “us” or “our” mean Clayton Williams Energy, Inc. and its consolidated subsidiaries.  Approximately 26% of the Company’s outstanding Common Stock is beneficially owned by Clayton W. Williams, Jr. (“Mr. Williams”), Chairman of the Board, President and Chief Executive Officer of the Company, and approximately 25% is owned by a partnership in which Mr. Williams’ adult children are limited partners.

Substantially all of our oil and gas production is sold under short-term contracts, which are market-sensitive.  Accordingly, our results of operations and capital resources are highly dependent upon prevailing market prices of, and demand for, oil and natural gas.  These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control.  These factors include the level of global supply and demand for oil and natural gas, market uncertainties, weather conditions, domestic governmental regulations and taxes, political and economic conditions in oil producing countries, price and availability of alternative fuels, and overall domestic and foreign economic conditions.

2. Presentation

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ materially from those estimates.

The consolidated financial statements include the accounts of CWEI and its wholly-owned subsidiaries.  We account for our undivided interest in oil and gas limited partnerships using the proportionate consolidation method.  Under this method, we consolidate our proportionate share of assets, liabilities, revenues and expenses of such limited partnerships.  Less than 5% of our consolidated total assets and total revenues are derived from oil and gas limited partnerships.  All significant intercompany transactions and balances associated with the consolidated operations have been eliminated.  Certain reclassifications of prior year financial statement amounts have been made to conform to current year presentations.

In the opinion of management, our unaudited consolidated financial statements as of September 30, 2012 and for the interim periods ended September 30, 2012 and 2011 include all adjustments that are necessary for a fair presentation in accordance with GAAP.  These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2011.

3. Long-Term Debt

Long-term debt consists of the following:

	September 30, 2012		December 31, 2011
	(In thousands)
7.75% Senior Notes due 2019, net of unamortized original issue discount of $428 at September 30, 2012 and $465 at December 31, 2011	$	349,572	$	349,535
Revolving credit facility, due November 2015	420,000		180,000
	$	769,572	$	529,535

8

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Senior Notes

In July 2005, we issued $225 million of aggregate principal amount of 7¾% Senior Notes due 2013 (“2013 Senior Notes”).  The 2013 Senior Notes were issued at face value and bore interest at 7¾% per year, payable semi-annually on February 1 and August 1 of each year, beginning February 1, 2006.  In March 2011, we redeemed $143.2 million in aggregate principal amount of 2013 Senior Notes in a tender offer and recorded a $4.6 million loss on early extinguishment of long-term debt, consisting of a $2.8 million premium and a $1.8 million write-off of debt issuance costs.  On August 1, 2011, we called at par and redeemed in full the remaining $81.8 million of 2013 Senior Notes and recorded an additional $907,000 loss on early extinguishment of long-term debt related to the write-off of debt issuance costs.

In March 2011, we issued $300 million of aggregate principal amount of 7.75% Senior Notes due 2019 (“2019 Senior Notes”).  The 2019 Senior Notes were issued at face value and bear interest at 7.75% per year, payable semi-annually on April 1 and October 1 of each year, beginning October 1, 2011.  In April 2011, we issued an additional $50 million aggregate principal amount of 2019 Senior Notes with an original issue discount of 1% or $500,000.  We may redeem some or all of the 2019 Senior Notes at redemption prices (expressed as percentages of principal amount) equal to 103.875% beginning on April 1, 2015, 101.938% beginning on April 1, 2016, and 100% beginning on April 1, 2017 or for any period thereafter, in each case plus accrued and unpaid interest.

The Indenture governing the 2019 Senior Notes contains covenants that restrict our ability to:  (1) borrow money; (2) issue redeemable or preferred stock; (3) pay distributions or dividends; (4) make investments; (5) create liens without securing the 2019 Senior Notes; (6) enter into agreements that restrict dividends from subsidiaries; (7) sell certain assets or merge with or into other companies; (8) enter into transactions with affiliates; (9) guarantee indebtedness; and (10) enter into new lines of business.  One such covenant provides that we may only incur indebtedness if the ratio of consolidated EBITDAX to consolidated interest expense (as these terms are defined in the Indenture) does not exceed certain ratios specified in the Indenture.  These covenants are subject to a number of important exceptions and qualifications as described in the Indenture.  We were in compliance with these covenants at September 30, 2012.

Revolving Credit Facility

We have a credit facility with a syndicate of banks that provides for a revolving line of credit of up to $565 million, limited to the amount of a borrowing base as determined by the banks.  The borrowing base, which is based on the discounted present value of future net cash flows from oil and gas production, is redetermined by the banks semi-annually in May and November.  We or the banks may also request an unscheduled borrowing base redetermination at other times during the year.  If, at any time, the borrowing base is less than the amount of outstanding credit exposure under the revolving credit facility, we will be required to (1) provide additional security, (2) prepay the principal amount of the loans in an amount sufficient to eliminate the deficiency (or by a combination of such additional security and such prepayment eliminate such deficiency), or (3) prepay the deficiency in not more than five equal monthly installments plus accrued interest.

In May 2012, the banks increased the borrowing base from $475 million to $565 million and increased the maximum credit facility from $500 million to $565 million.  The banks also increased the aggregate commitment from $350 million to $475 million in April 2012 and to $555 million in August 2012. At September 30, 2012, after allowing for outstanding letters of credit totaling $4.1 million, we had $131 million available under the revolving credit facility based on then-existing commitments.  During the first nine months of 2012, we increased indebtedness outstanding under the revolving credit facility by $240 million.

The revolving credit facility is collateralized primarily by 80% or more of the adjusted engineered value (as defined in the revolving credit facility) of our oil and gas interests evaluated in determining the borrowing base.  The obligations under the revolving credit facility are guaranteed by each of CWEI’s material domestic subsidiaries.

At our election, annual interest rates under the revolving credit facility are determined by reference to (1) LIBOR plus an applicable margin between 1.75% and 2.75% per year or (2) if an alternate base rate loan, the greatest of (A) the prime rate, (B) the federal funds rate plus 0.50%, or (C) one-month LIBOR plus 1% plus, if any of (A), (B) or (C), an applicable margin between 0.75% and 1.75% per year.  We also pay a commitment fee on the unused portion of the revolving credit facility at a rate between 0.375% and 0.50%.  The applicable margins are based on actual borrowings outstanding as a percentage of the borrowing base.  Interest and fees are payable no less often than quarterly.  The effective annual interest rate on borrowings under the revolving credit facility, excluding bank fees and amortization of debt issue costs, for the nine months ended September 30, 2012 was 2.6%.

9

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The revolving credit facility also contains various covenants and restrictive provisions that may, among other things, limit our ability to sell assets, incur additional indebtedness, make investments or loans and create liens.  One such covenant requires that we maintain a ratio of consolidated current assets to consolidated current liabilities of at least 1 to 1.  Another financial covenant prohibits the ratio of our consolidated funded indebtedness to consolidated EBITDAX (determined as of the end of each fiscal quarter for the then most-recently ended four fiscal quarters) from being greater than 4 to 1.  The computations of consolidated current assets, current liabilities, EBITDAX and indebtedness are defined in the revolving credit facility.  We were in compliance with all financial and non-financial covenants at September 30, 2012.

4. Acquisition of Southwest Royalties, Inc. Limited Partnerships

On March 14, 2012, Southwest Royalties, Inc. (“SWR”), a wholly owned subsidiary of CWEI, completed the mergers of each of the 24 limited partnerships of which SWR was the general partner (“SWR Partnerships”), into SWR, with SWR continuing as the surviving entity in the mergers. At the effective time of the mergers, all of the units representing limited partnership interests in the SWR Partnerships, other than those held by SWR, were converted into the right to receive cash. SWR did not receive any cash payment for its partnership interests in the SWR Partnerships. However, as a result of the mergers, SWR acquired 100% of the assets and liabilities of the SWR Partnerships. SWR paid aggregate merger consideration of $38.6 million in the mergers. Pro forma financial information is not presented as it would not be materially different from the information presented in the consolidated statements of operations and comprehensive income (loss) of CWEI.

To obtain the funds to finance the aggregate merger consideration, SWR entered into a volumetric production payment (“VPP”) with a third party for upfront cash proceeds of $44.4 million and deferred future advances aggregating $4.7 million.  Under the terms of the VPP, SWR conveyed to the third party a term overriding royalty interest covering approximately 725,000 barrels of oil equivalents (“BOE”) of estimated future oil and gas production from certain properties derived from the mergers.  The scheduled volumes under the VPP relate to production months from March 2012 through December 2019 and are to be delivered to, or sold on behalf of, the third party free of all costs associated with the production and development of the underlying properties.  Once the scheduled volumes have been delivered to the third party, the term overriding royalty interest will terminate.  SWR retained the obligation to prudently operate and produce the properties during the term of the VPP, and the third party assumed all risks related to the adequacy of the associated reserves to fully recoup the scheduled volumes and also assumed all risks associated with product prices.  As a result, the VPP has been accounted for as a sale of reserves, with the sales proceeds being deferred and amortized into oil and gas sales as the scheduled volumes are produced (see Note 6).

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Cash and cash equivalents	$	4,118
Oil and gas properties	41,098
Other non-current assets	210
Total assets acquired	45,426
Asset retirement obligations	(6,864		)
Total liabilities assumed	(6,864		)
Net assets acquired	$	38,562

10

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Asset Retirement Obligations

Changes in asset retirement obligations (“ARO”) are as follows:

	September 30, 2012			December 31, 2011
	(In thousands)
Beginning of period	$	40,794		$	40,444
Additional ARO from new properties	7,687			1,526
Sales or abandonments of properties	(967		)	(4,425		)
Accretion expense	2,628			2,757
Revisions of previous estimates	1,405			492
End of period	$	51,547		$	40,794

Our ARO is measured using primarily Level 3 inputs.  The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, inflation rate and well life.  The inputs are calculated based on historical data as well as current estimated costs.

6. Deferred Revenue from Volumetric Production Payment

The net proceeds from the VPP discussed in Note 4 are recorded as a non-current liability in the consolidated balance sheets.  Deferred revenue from VPP will be amortized over the life of the VPP and will be recognized in oil and gas sales in the consolidated statements of operations and comprehensive income (loss).

Changes in deferred revenue from the VPP are as follows:

	September 30, 2012			December 31, 2011
	(In thousands)
Beginning of period	$	—		$	—
Deferred revenue from VPP	45,032			—
Amortization of deferred revenue from VPP	(5,862		)	—
End of period	$	39,170		$	—

Under the terms of the VPP, SWR conveyed to a third party a term overriding royalty interest covering approximately 725,000 BOE of estimated future oil and gas production. As of September 30, 2012, we have a remaining obligation to deliver approximately 642,000 BOE.

7. Compensation Plans

Stock-Based Compensation

We presently have options outstanding under a stock option plan for independent directors covering 6,000 shares of Common Stock.  As of September 30, 2012, the options had a weighted average exercise price of $28.86 per share (ranging from $12.14 per share to $41.74 per share), a weighted average remaining contractual term of 2.8 years, and an aggregate intrinsic value of $138,160 (based on a market price at September 30, 2012 of $51.89 per share).  No options were granted during the nine months ended September 30, 2012 or 2011.

Non-Equity Award Plans

The Compensation Committee of the Board has adopted an after-payout (“APO”) incentive plan (the “APO Incentive Plan”) for officers, key employees and consultants who promote our drilling and acquisition programs.  The Compensation Committee’s objective in adopting this plan is to further align the interests of the participants with ours by granting the participants an APO

11

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

interest in the production developed, directly or indirectly, by the participants.  The plan generally provides for the creation of a series of partnerships or participation arrangements, which are treated as partnerships for tax purposes (“APO Partnerships”), between us and the participants, to which we contribute a portion of our economic interest in wells drilled or acquired within certain areas.  Generally, we pay all costs to acquire, drill and produce applicable wells and receive all revenues until we have recovered all of our costs, plus interest (“payout”).  At payout, the participants receive 99% to 100% of all subsequent revenues and pay 99% to 100% of all subsequent expenses attributable to the economic interests that are subject to the APO Partnerships.  Between 5% and 7.5% of our economic interests in specified wells drilled or acquired by us subsequent to October 2002 are subject to the APO Incentive Plan.  We record our allocable share of the assets, liabilities, revenues, expenses and oil and gas reserves of these APO Partnerships in our consolidated financial statements.  Participants in the APO Incentive Plan are immediately vested in all future amounts payable under the plan.

The Compensation Committee has also adopted an APO reward plan (the “APO Reward Plan”) which offers eligible officers, key employees and consultants the opportunity to receive bonus payments that are based on certain profits derived from a portion of our working interest in specified areas where we are conducting drilling and production enhancement operations.  The wells subject to an APO Reward Plan are not included in the APO Incentive Plan.  Likewise, wells included in the APO Incentive Plan are not included in the APO Reward Plan.  Although conceptually similar to the APO Incentive Plan, the APO Reward Plan is a compensatory bonus plan through which we pay participants a bonus equal to a portion of the APO cash flows received by us from our working interest in wells in a specified area.  Unlike the APO Incentive Plan, however, participants in the APO Reward Plan are not immediately vested in all future amounts payable under the plan.  To date, we have granted awards under the APO Reward Plan in 13 specified areas, each of which established a quarterly bonus amount equal to 7% or 10% of the APO cash flow from wells drilled or recompleted in the respective areas after the effective date set forth in each plan, which dates range from January 1, 2007 to April 1, 2011.  Of these 13 awards, one award fully vested November 4, 2011, three awards fully vested August 9, 2012, three awards will fully vest on May 5, 2013 and six awards will fully vest on June 1, 2013.

In January 2007, we granted awards under the Southwest Royalties Reward Plan (the “SWR Reward Plan”), a one-time incentive plan which established a quarterly bonus amount for participants equal to the after-payout cash flow from a 22.5% working interest in one well. As of October 25, 2011, the plan was fully vested and 100% of subsequent quarterly bonus amounts are payable to participants.

To continue as a participant in the APO Reward Plan or the SWR Reward Plan, participants must remain in the employment or service of the Company through the full vesting date established for each award.  The full vesting date may be accelerated in the event of a change of control or sale transaction, as defined in the plan documents.

We recognize compensation expense related to the APO Partnerships based on the estimated value of economic interests conveyed to the participants. Estimated compensation expense applicable to the APO Reward Plan and SWR Reward Plan is recognized over the vesting periods, which range from two years to five years. We recorded a $2.2 million credit to compensation expense for the three months ended September 30, 2012 and a $1.1 million charge to compensation expense for the three months ended September 30, 2011 in connection with all non-equity award plans. We recorded compensation expense of $2.2 million for the nine months ended September 30, 2012 and $6.1 million for the nine months ended September 30, 2011 in connection with all non-equity award plans. Aggregate compensation under non-equity award plans is reflected on the balance sheet as detailed in the following schedule:

	September 30, 2012		December 31, 2011
	(In thousands)
Current liabilities:
Accrued liabilities and other	$	2,207	$	1,994
Non-current liabilities:
Accrued compensation under non-equity award plans	22,675		20,757
Total accrued compensation under non-equity award plans	$	24,882	$	22,751

12

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Derivatives

Commodity Derivatives

From time to time, we utilize commodity derivatives in the form of swap contracts to attempt to optimize the price received for our oil and gas production.  Under swap contracts, we receive a fixed price for the respective commodity and pay a floating market price as defined in each contract (generally NYMEX futures prices), resulting in a net amount due to or from the counterparty.  Commodity derivatives are settled monthly as the contract production periods mature.

The following summarizes information concerning our net positions in open commodity derivatives applicable to periods subsequent to September 30, 2012.  The settlement prices of commodity derivatives are based on NYMEX futures prices.

Swaps:

	Oil			Gas
	Bbls	Price		MMBtu (a)	Price
Production Period:
4th Quarter 2012	702,000	$	90.40	—	$	—
2013	1,913,000	$	97.20	1,480,000	$	3.34
2014	600,000	$	99.30	—	$	—
	3,215,000			1,480,000

(a) One MMBtu equals one Mcf at a Btu factor of 1,000.

Accounting For Derivatives

We did not designate any of our currently open commodity derivatives as cash flow hedges; therefore, all changes in the fair value of these contracts prior to maturity, plus any realized gains or losses at maturity, are recorded as other income (expense) in our statements of operations and comprehensive income (loss).

Effect of Derivative Instruments on the Consolidated Balance Sheets

	Fair Value of Derivative Instruments as of September 30, 2012
	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
		(In thousands)			(In thousands)
Derivatives not designated as hedging instruments:
Commodity derivatives	Fair value of derivatives:			Fair value of derivatives:
	Current	$	945	Current	$	—
	Non-current	7,745		Non-current	—
Total		$	8,690		$	—

13

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Fair Value of Derivative Instruments as of December 31, 2011
	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
		(In thousands)			(In thousands)
Derivatives not designated as hedging instruments:
Commodity derivatives	Fair value of derivatives:			Fair value of derivatives:
	Current	$	—	Current	$	5,633
	Non-current	—		Non-current	494
Total		$	—		$	6,127

Gross to Net Presentation Reconciliation of Derivative Assets and Liabilities

	September 30, 2012
	Assets			Liabilities
	(In thousands)
Fair value of derivatives — gross presentation	$	18,655		$	9,965
Effects of netting arrangements	(9,965		)	(9,965		)
Fair value of derivatives — net presentation	$	8,690		$	—

	December 31, 2011
	Assets			Liabilities
	(In thousands)
Fair value of derivatives — gross presentation	$	26		$	6,153
Effects of netting arrangements	(26		)	(26		)
Fair value of derivatives — net presentation	$	—		$	6,127

All of our derivative contracts are with JPMorgan Chase Bank, N.A.  We have elected to net the outstanding positions with this counterparty between current and noncurrent assets or liabilities since we have the right to settle these positions on a net basis.

Effect of Derivative Instruments Recognized in Earnings on the Consolidated Statements of Operations and Comprehensive Income (Loss)

	Amount of Gain or (Loss) Recognized in Earnings
	Three Months Ended									Nine Months Ended
Location of Gain or (Loss)	September 30, 2012									September 30, 2012
Recognized in Earnings	Realized			Unrealized			Total			Realized			Unrealized		Total
				(In thousands)									(In thousands)
Derivatives not designated as hedging instruments:
Commodity derivatives:
Other income (expense) -
Gain (loss) on derivatives	$	(1,390	)	$	(20,511	)	$	(21,901	)	$	(4,961	)	$	14,817	$	9,856
Total	$	(1,390	)	$	(20,511	)	$	(21,901	)	$	(4,961	)	$	14,817	$	9,856

14

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Amount of Gain or (Loss) Recognized in Earnings
	Three Months Ended						Nine Months Ended
Location of Gain or (Loss)	September 30, 2011						September 30, 2011
Recognized in Earnings	Realized		Unrealized		Total		Realized			Unrealized		Total
			(In thousands)							(In thousands)
Derivatives not designated as hedging instruments:
Commodity derivatives:
Other income (expense) -
Gain (loss) on derivatives	$	1,188	$	91,098	$	92,286	$	(7,901	)	$	82,029	$	74,128
Total	$	1,188	$	91,098	$	92,286	$	(7,901	)	$	82,029	$	74,128

9. Financial Instruments

Cash and cash equivalents, receivables, accounts payable and accrued liabilities were each estimated to have a fair value approximating the carrying amount due to the short maturity of those instruments.  Indebtedness under our revolving credit facility was estimated to have a fair value approximating the carrying amount since the interest rate is generally market sensitive.

Fair Value Measurements

We follow a framework for measuring fair value, which outlines a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.  We categorize our assets and liabilities recorded at fair value in the accompanying consolidated balance sheets based upon the level of judgment associated with the inputs used to measure their fair value.

Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 - Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

15

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The financial assets and liabilities measured on a recurring basis at September 30, 2012 and December 31, 2011 were commodity derivatives.  The fair value of all derivative contracts is reflected on the balance sheet as detailed in the following schedule:

	September 30, 2012		December 31, 2011
	Significant Other		Significant Other
	Observable Inputs		Observable Inputs
Description	(Level 2)		(Level 2)
	(In thousands)
Assets:
Fair value of commodity derivatives	$	8,690	$	—
Total assets	$	8,690	$	—
Liabilities:
Fair value of commodity derivatives	$	—	$	6,127
Total liabilities	$	—	$	6,127

Fair Value of Other Financial Instruments

We estimate the fair value of our 2019 Senior Notes using quoted market prices (Level 1 inputs). Fair value is compared to the carrying value in the table below:

	September 30, 2012				December 31, 2011
	Carrying		Estimated		Carrying		Estimated
Description	Amount		Fair Value		Amount		Fair Value
	(In thousands)
7.75% Senior Notes due 2019	$	349,572	$	350,900	$	349,535	$	334,300

10. Income Taxes

Our effective federal and state income tax expense rate for the nine months ended September 30, 2012 of 35.7% differed from the statutory federal rate of 35% due primarily to increases related to the effects of the Texas Margin Tax and certain non-deductible expenses, offset in part by tax benefits derived from excess statutory depletion deductions.

We file federal income tax returns with the United States Internal Revenue Service (“IRS”) and state income tax returns in various state tax jurisdictions.  Our tax returns for fiscal years after 2009 currently remain subject to examination by appropriate taxing authorities.  None of our income tax returns are under examination at this time.

16

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Sales of Assets and Impairments of Inventory

Net gain (loss) on sales of assets and impairment of inventory for the three months and nine months ended September 30, 2012 and September 30, 2011 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(In thousands)						(In thousands)
Gain on sales of assets	$	106		$	49		$	543		$	14,570
Loss on sales of assets and impairment of inventory:
Loss on sales of assets	(38		)	(20		)	(38		)	(138		)
Impairment of inventory	(169		)	(94		)	(447		)	(279		)
	(207		)	(114		)	(485		)	(417		)
Net gain (loss)	$	(101	)	$	(65	)	$	58		$	14,153

In February 2011, we sold two2,000 horsepower drilling rigs and related equipment for $22 million of total consideration.  In connection with the sale, we recorded a gain of $13.2 million during the first quarter of 2011.  Proceeds from the sale consisted of $11 million cash and an $11 million promissory note that was subsequently exchanged for a membership interest in Dalea Investment Group, LLC in June 2012 (see Note 12).

We maintain an inventory of tubular goods and other well equipment for use in our exploration and development drilling activities.  Inventory is carried at the lower of average cost or estimated fair market value.  We categorize the measurement of fair value of inventory as Level 2 under applicable accounting standards.  To determine estimated fair value of inventory, we subscribe to market surveys and obtain quotes from equipment dealers for similar equipment.  We then correlate the data as needed to estimate the fair value of the specific items (or groups of similar items) in our inventory.  If the estimated fair values for those specific items (or groups of similar items) in our inventory are less than the related average cost, a provision for impairment is made.

12. Investment in Dalea Investment Group, LLC

In June 2012, we cancelled an $11 million note receivable (see Note 11) in exchange for a 7.66% non-controlling membership interest in Dalea Investment Group, LLC (“Dalea”), an international oilfield services company formed in March 2012.  Since the membership interests in Dalea are privately-held and are not traded in an active market, our investment in Dalea is carried at cost of $11 million.   We have not estimated the fair value of our investment in Dalea because there have been no identified events or changes in circumstances that may have had a significant effect on its carrying value and because it is not practicable to estimate its fair value at this time.

17

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Costs of Oil and Gas Properties

The following sets forth the net capitalized costs for oil and gas properties as of September 30, 2012 and December 31, 2011.

	September 30, 2012			December 31, 2011
	(In thousands)
Proved properties	$	2,410,409		$	2,021,181
Unproved properties	87,057			81,904
Total capitalized costs	2,497,466			2,103,085
Accumulated depletion	(1,198,605		)	(1,095,197		)
Net capitalized costs	$	1,298,861		$	1,007,888

14. Impairment of Property and Equipment

We impair our long-lived assets, including oil and gas properties and contract drilling equipment, when estimated undiscounted future net cash flows of an asset are less than its carrying value.  The amount of any such impairment is recognized based on the difference between the carrying value and the estimated fair value of the asset.  We categorize the measurement of fair value of these assets as Level 3 inputs.  We estimate the fair value of the impaired property by applying weighting factors to fair values determined under three different methods: discounted cash flow method, flowing daily production method and proved reserves per BOE method. We then assign applicable weighting factors based on the relevant facts and circumstances.  There were no provisions for impairment of proved properties for the three months ended September 30, 2012, and we recorded provisions for impairment of proved properties of $5.7 million for the nine months ended September 30, 2012, $5 million for the three months ended September 30, 2011, and $9.5 million for the nine months ended September 30, 2011.  These impairments were related to non-core areas in the Permian Basin to reduce the carrying values of those properties to their estimated fair value for the three months and nine months ended September 30, 2012 and 2011, respectively.

Unproved properties are nonproducing and do not have estimable cash flow streams. Therefore, we estimate the fair value of individually significant prospects by obtaining, when available, information about recent market transactions in the vicinity of the prospects and adjust the market data as needed to give consideration to the proximity of the prospects to known fields and reservoirs, the extent of geological and geophysical data on the prospects, the remaining terms of leases holding the acreage in the prospects, recent drilling results in the vicinity of the prospects, and other risk-related factors such as drilling and completion costs, estimated product prices and other economic factors. Individually insignificant prospects are grouped and impaired based on remaining lease terms and our historical experience with similar prospects. Based on the assessments previously discussed, we will impair our unproved oil and gas properties when we determine that a prospect’s carrying value exceeds its estimated fair value. We categorize the measurement of fair value of unproved properties as Level 3 inputs. We recorded provisions for impairment of unproved properties aggregating $187,000 for the three months ended September 30, 2012, $711,000 for the nine months ended September 30, 2012, $832,000 for the three months ended September 30, 2011 and $1.1 million for the nine months ended September 30, 2011, and charged these impairments to exploration costs in the accompanying statements of operations and comprehensive income (loss).

18

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Segment Information

We have two reportable operating segments, which are oil and gas exploration and production and contract drilling services.

The following tables present selected financial information regarding our operating segments for the three-month and nine-month periods ended September 30, 2012 and 2011.

For the Three Months Ended
September 30, 2012
(Unaudited)				Contract			Intercompany			Consolidated
(In thousands)	Oil and Gas			Drilling			Eliminations			Total
Revenues	$	102,415		$	14,869		$	(9,521	)	$	107,763
Depreciation, depletion and amortization (a)	35,580			3,666			(1,585		)	37,661
Other operating expenses (b)	43,117			13,169			(7,757		)	48,529
Interest expense	9,786			—			—			9,786
Other (income) expense	22,463			(3		)	—			22,460
Income (loss) before income taxes	(8,531		)	(1,963		)	(179		)	(10,673		)
Income tax (expense) benefit	2,810			687			—			3,497
Net income (loss)	$	(5,721	)	$	(1,276	)	$	(179	)	$	(7,176	)
Total assets	$	1,504,338		$	63,731		$	(21,530	)	$	1,546,539
Additions to property and equipment	$	107,178		$	3,023		$	(179	)	$	110,022

For the Nine Months Ended
September 30, 2012
(Unaudited)				Contract			Intercompany			Consolidated
(In thousands)	Oil and Gas			Drilling			Eliminations			Total
Revenues	$	309,964		$	46,134		$	(34,656	)	$	321,442
Depreciation, depletion and amortization (a)	104,416			10,703			(5,922		)	109,197
Other operating expenses (b)	130,668			40,963			(28,591		)	143,040
Interest expense	27,817			—			—			27,817
Other (income) expense	(10,592		)	(3		)	—			(10,595		)
Income (loss) before income taxes	57,655			(5,529		)	(143		)	51,983
Income tax (expense) benefit	(20,493		)	1,935			—			(18,558		)
Net income (loss)	$	37,162		$	(3,594	)	$	(143	)	$	33,425
Total assets	$	1,504,338		$	63,731		$	(21,530	)	$	1,546,539
Additions to property and equipment	$	419,094		$	12,614		$	(143	)	$	431,565

19

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Three Months Ended
September 30, 2011
(Unaudited)				Contract			Intercompany			Consolidated
(In thousands)	Oil and Gas			Drilling			Eliminations			Total
Revenues	$	100,135		$	13,979		$	(13,050	)	$	101,064
Depreciation, depletion and amortization (a)	30,267			3,285			(2,616		)	30,936
Other operating expenses (b)	35,513			11,639			(9,902		)	37,250
Interest expense	8,717			—			—			8,717
Other (income) expense	(91,579		)	(327		)	—			(91,906		)
Income (loss) before income taxes	117,217			(618		)	(532		)	116,067
Income tax (expense) benefit	(41,760		)	216			—			(41,544		)
Net income (loss)	$	75,457		$	(402	)	$	(532	)	$	74,523
Total assets	$	1,166,492		$	59,997		$	(11,167	)	$	1,215,322
Additions to property and equipment	$	127,252		$	6,999		$	(532	)	$	133,719

For the Nine Months Ended
September 30, 2011
(Unaudited)				Contract			Intercompany			Consolidated
(In thousands)	Oil and Gas			Drilling			Eliminations			Total
Revenues	$	316,166		$	38,772		$	(35,158	)	$	319,780
Depreciation, depletion and amortization (a)	82,832			9,107			(7,493		)	84,446
Other operating expenses (b)	108,577			31,823			(27,238		)	113,162
Interest expense	24,304			—			—			24,304
Other (income) expense	(58,592		)	(13,549		)	—			(72,141		)
Income (loss) before income taxes	159,045			11,391			(427		)	170,009
Income tax (expense) benefit	(56,706		)	(3,987		)	—			(60,693		)
Net income (loss)	$	102,339		$	7,404		$	(427	)	$	109,316
Total assets	$	1,166,492		$	59,997		$	(11,167	)	$	1,215,322
Additions to property and equipment	$	303,537		$	13,563		$	(427	)	$	316,673

(a) Includes impairment of property and equipment.

(b) Includes the following expenses: production, exploration, natural gas services, drilling rig services, accretion of asset retirement obligations, general and administrative and loss on sales of assets and impairment of inventory.

20

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. Guarantor Financial Information

In March and April 2011, we issued $350 million of aggregate principal amount of 2019 Senior Notes (see Note 3).  Presented below is condensed consolidated financial information of CWEI (“Issuer”) and the Issuer’s material wholly owned subsidiaries, all of which have jointly and severally, irrevocably and unconditionally guaranteed the performance and payment when due of all obligations under the 2019 Senior Notes and are referred to as “Guarantor Subsidiaries” in the following condensed consolidating financial statements.  We have reclassified amounts in the previously reported condensed consolidating financial statements in this Note 16 between the Issuer and the Guarantor Subsidiaries to conform to the current year presentation, which includes applying equity-method accounting for the investment in subsidiaries at the Issuer, and allocating appropriate income taxes to the Guarantor Subsidiaries.

The financial information which follows sets forth our condensed consolidating financial statements as of and for the periods indicated.

Condensed Consolidating Balance Sheet September 30, 2012 (Unaudited) (Dollars in thousands)
	Issuer		Guarantor Subsidiaries		Adjustments/ Eliminations			Consolidated
Current assets	$	139,981	$	216,612	$	(225,110	)	$	131,483
Property and equipment, net	1,011,179		369,703		—			1,380,882
Investments in subsidiaries	298,527		—		(298,527		)	—
Fair value of derivatives	7,745		—		—			7,745
Other assets	12,877		13,552		—			26,429
Total assets	$	1,470,309	$	599,867	$	(523,637	)	$	1,546,539
Current liabilities	$	245,366	$	113,510	$	(225,110	)	$	133,766
Non-current liabilities:
Long-term debt	769,572		—		—			769,572
Deferred income taxes	144,074		117,139		(109,191		)	152,022
Other	43,562		70,691		—			114,253
	957,208		187,830		(109,191		)	1,035,847
Equity	267,735		298,527		(189,336		)	376,926
Total liabilities and equity	$	1,470,309	$	599,867	$	(523,637	)	$	1,546,539

21

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet December 31, 2011 (Dollars in thousands)
	Issuer		Guarantor Subsidiaries		Adjustments/ Eliminations			Consolidated
Current assets	$	142,102	$	164,515	$	(163,674	)	$	142,943
Property and equipment, net	737,562		329,989		—			1,067,551
Investments in subsidiaries	271,342		—		(271,342		)	—
Other assets	13,538		2,239		—			15,777
Total assets	$	1,164,544	$	496,743	$	(435,016	)	$	1,226,271
Current liabilities	$	233,729	$	86,175	$	(163,674	)	$	156,230
Non-current liabilities:
Long-term debt	529,535		—		—			529,535
Fair value of derivatives	494		—		—			494
Deferred income taxes	141,923		111,662		(119,376		)	134,209
Other	34,738		27,564		—			62,302
	706,690		139,226		(119,376		)	726,540
Equity	224,125		271,342		(151,966		)	343,501
Total liabilities and equity	$	1,164,544	$	496,743	$	(435,016	)	$	1,226,271

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Three Months Ended September 30, 2012 (Unaudited) (Dollars in thousands)
	Issuer			Guarantor Subsidiaries			Adjustments/ Eliminations			Consolidated
Total revenue	$	74,129		$	34,065		$	(431	)	$	107,763
Costs and expenses	57,952			28,669			(431		)	86,190
Operating income (loss)	16,177			5,396			—			21,573
Other income (expense)	(32,431		)	185			—			(32,246		)
Equity in earnings of subsidiaries	3,628			—			(3,628		)	—
Income tax (expense) benefit	5,450			(1,953		)	—			3,497
Net income (loss)	$	(7,176	)	$	3,628		$	(3,628	)	$	(7,176	)

22

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Nine Months Ended September 30, 2012 (Unaudited) (Dollars in thousands)
	Issuer			Guarantor Subsidiaries			Adjustments/ Eliminations			Consolidated
Total revenue	$	222,570		$	99,896		$	(1,024	)	$	321,442
Costs and expenses	166,584			86,677			(1,024		)	252,237
Operating income (loss)	55,986			13,219			—			69,205
Other income (expense)	(19,672		)	2,450			—			(17,222		)
Equity in earnings of subsidiaries	10,185			—			(10,185		)	—
Income tax (expense) benefit	(13,074		)	(5,484		)	—			(18,558		)
Net income (loss)	$	33,425		$	10,185		$	(10,185	)	$	33,425

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Three Months Ended September 30, 2011 (Unaudited) (Dollars in thousands)
	Issuer		Guarantor Subsidiaries		Adjustments/ Eliminations			Consolidated
Total revenue	$	68,727	$	32,561	$	(224	)	$	101,064
Costs and expenses	44,290		24,120		(224		)	68,186
Operating income (loss)	24,437		8,441		—			32,878
Other income (expense)	81,512		1,677		—			83,189