Clayton Williams Energy (CWEI) DEF 14A Definitive proxy

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.     )
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Clayton Williams Energy, Inc.
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CLAYTON WILLIAMS ENERGY, INC.

Six Desta Drive, Suite 6500

Midland, Texas 79705

NOTICE OF 2009 ANNUAL MEETING OF SHAREHOLDERS

To Be Held Wednesday, May 6, 2009

To Our Shareholders:

You are cordially invited to attend the 2009 Annual Meeting of Shareholders of Clayton Williams Energy, Inc., referred to as the Company, to be held at the ClayDesta Conference Center, Six Desta Drive, Suite 6550, Midland, Texas, at 11:00 a.m. local time on Wednesday, May 6, 2009, for the following purposes:

1.To elect two directors for a term of three years, such term to continue until the annual meeting of shareholders in 2012 and until each director’s successor is duly elected and qualified;

2.To advise on the selection of KPMG LLP as our independent auditors for 2009; and

3.To transact such other business as may properly come before the meeting and any adjournments or postponements thereof.

Shareholders of record of our common stock at the close of business on March 12, 2009 will receive notice of and be entitled to vote at the meeting in person or by proxy.  A list of shareholders entitled to vote at the meeting will be available at our corporate offices for 10 days prior to the meeting, and may be inspected during normal business hours by shareholders for purposes relevant to the meeting.  The list will also be available for inspection by shareholders during the annual meeting.

Midland, Texas	By Order of the Board of Directors
March 24, 2009	Mel G. Riggs
	Secretary

YOUR VOTE IS IMPORTANT.  Please vote promptly whether or not you plan to attend the meeting.  After reading the proxy statement, please vote by Internet or request a proxy card to complete, sign and return by mail.  If your shares are held by a bank, broker, or other nominee on your behalf, please follow the voting instructions provided to you by that bank, broker or other nominee.

TABLE OF CONTENTS

	Page
Annual Meeting of Shareholders	3
Information About the Annual Meeting and Voting	3
Corporate Governance	5
Election of Two Directors	9
Executive Compensation	10
Compensation Committee Report	30
Compensation Committee Interlocks and Insider Participation	31
Advisory Vote on Selection of Independent Auditors	31
Report of the Audit Committee	31
Fees to KPMG LLP	32
Security Ownership of Certain Beneficial Owners and Management	33
Section 16(a) Beneficial Ownership Reporting Compliance	34
Certain Transactions and Relationships	35
Shareholder Proposals	36
Other Business	36

CLAYTON WILLIAMS ENERGY, INC.

Six Desta Drive, Suite 6500

Midland, Texas 79705

Proxy Statement

Annual Meeting of Shareholders

Your vote is very important. For this reason, the Board of Directors is requesting that you allow your common stock to be represented at the 2009 annual meeting of shareholders of Clayton Williams Energy, Inc., referred to as the Company, by the proxies that we have made available to you over the Internet or, upon your request, have delivered to you by mail.  On or about March 26, 2009, our agent mailed a Notice of Internet Availability of Proxy Materials to shareholders containing instructions on how to access this proxy statement and vote online.

Information About the Annual Meeting and Voting

Time and Place

The Company’s 2009 annual meeting of shareholders will be held at the ClayDesta Conference Center, Six Desta Drive, Suite 6550, Midland, Texas, at 11:00 a.m. local time on Wednesday, May 6, 2009.

Items to be Voted Upon

You will be voting on the following matters:

·The election of two directors for a term of three years, such term to continue until the annual meeting of shareholders in 2012 and until each director’s successor is duly elected and qualified (see page 9);

·Advising the Audit Committee on the selection of KPMG LLP as our independent auditors for 2009 (see page 31); and

·Such other business as may properly come before the annual meeting and any adjournments or postponements thereof.

Who May Vote

You are entitled to vote your common stock if our records show that you held your shares as of the close of business on March 12, 2009, the record date selected by the Board of Directors, referred to as the Board.  Each shareholder is entitled to one vote for each share of common stock held on that date, at which time we had 12,131,613 shares of common stock outstanding and entitled to vote.  The Company’s common stock is its only issued and outstanding class of stock.

Method of Delivery

Under rules adopted by the U.S. Securities and Exchange Commission, referred to as the SEC, we are furnishing proxy materials to our shareholders on the Internet rather than mailing printed copies of those materials to each shareholder.  On or about March 26, 2009, our agent mailed to you a Notice of Internet Availability of Proxy Materials, which included instructions as to how you may access and review the proxy materials and vote your

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shares on the Internet.  If you do not want to access the proxy materials by Internet, you may request a paper copy of the proxy materials at no cost to you by following the instructions included in the Notice of Internet Availability of Proxy Materials.

How to Vote

You may vote your shares prior to May 6, 2009 by one of the following methods:

· Via the Internet at www.proxyvote.com by following the instructions provided in the Notice of Internet Availability of Proxy Materials;

· By phone, after your receipt of paper copies of the proxy materials; or

· By requesting, completing and mailing in a paper proxy card, as outlined in the Notice of Internet Availability of Proxy Materials.

You may vote via the Internet or by phone until 11:59 p.m., Eastern Time, on Tuesday, May 5, 2009.  If you mail in a paper proxy card, our agent must receive your paper proxy card on or before Tuesday, May 5, 2009.  You may also vote in person at the annual meeting by completing a ballot; however, attending the annual meeting without completing a ballot will not count as a vote.

If your shares are registered directly in your name with our transfer agent, Wells Fargo Minnesota, N.A. Shareowner Services, you are considered a shareholder of record with respect to those shares and our agent, Broadridge Financial Solutions, Inc., will send directly to you the Notice of Internet Availability of Proxy Materials.  If your shares are held by a bank, broker or other nominee rather than in your own name, you are considered the beneficial owner of the shares, and the Notice of Internet Availability of Proxy Materials will be forwarded to you by or on behalf of your bank, broker or other nominee.  In either case, please carefully consider the information contained in the proxy statement and, regardless of whether you plan to attend the meeting, vote via the Internet, by phone or by mailing in a paper proxy card so that we can be assured of having a quorum present at the annual meeting and that your shares may be voted in accordance with your wishes even if you later decide not to attend the annual meeting.

If you submit a properly completed proxy via the Internet, by phone or by mailing in a paper proxy card, we will vote your shares as you direct.  However, if you submit a proxy and do not specify how to vote, we will vote your shares:

· “FOR” the election of the two nominees for director identified on page 9;

· “FOR” the selection of KPMG LLP as the Company’s independent auditors for 2009 (advisory vote), as explained on page 31; and

· In our discretion as to other business that is properly brought before the annual meeting or any adjournment or postponement of the annual meeting.

We encourage you to register your vote via the Internet.  If you attend the meeting, you may also submit your vote in person and any votes that you previously submitted, whether via the Internet, by phone or by mailing in a paper proxy card, will be superseded by the vote that you cast at the meeting.  If you are a beneficial owner, to vote at the meeting you will need to contact the bank, broker or other nominee that holds shares on your behalf and obtain a “legal proxy” to bring to the meeting.

Changing Your Vote

You can revoke your proxy at any time before it is voted at the annual meeting by:

· Timely submitting a new proxy with a later date via the Internet, by phone or by mail;

· Attending the annual meeting and voting in person; or

· Sending written notice of revocation to our Secretary, Mel G. Riggs.

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Quorum

A quorum of shareholders is necessary to hold a valid meeting.  The presence in person or by proxy of the holders of at least a majority of the shares of our common stock entitled to vote at the meeting is a quorum.  Abstentions and broker “non-votes” will be counted as present for establishing a quorum.

A broker “non-vote” occurs on an item when shares held by a bank, broker or other nominee are present or represented at the meeting but such bank, broker, or other nominee is not permitted to vote on that item without instruction from the beneficial owner of the shares and no instruction is given.  If you have returned valid proxy instructions or vote in person, your shares will be counted for the purpose of determining whether there is a quorum, even if you abstain from any matter introduced at the meeting.

Votes Required

The nominees for election as directors at the annual meeting will be elected by a plurality of the votes of the shares present in person or represented by proxy at the annual meeting and entitled to vote.  The Company’s Certificate of Incorporation and Bylaws prohibit cumulative voting in the election of directors.  Neither abstentions nor broker non-votes will have an effect on the votes for or against the election of a director.

Advice on the selection of KPMG LLP as our independent auditors for 2009, and any other matters submitted to a vote of the shareholders at the annual meeting, will be determined by the affirmative vote of a majority of the shares present or represented by proxy at the annual meeting and entitled to vote on such matters.  Abstentions will count toward the number of shares present but will not count as an affirmative vote and, therefore, an abstention will have the effect of a vote against the selection of KPMG LLP as our independent auditors for 2009, and against any other matter submitted to a vote of the shareholders at the annual meeting.  Broker non-votes will not be considered present at the annual meeting with respect to this proposal, or any other matter submitted to a vote of the shareholders at the annual meeting, and so will have no effect on the approval of these proposals.

Proxy Solicitation

This proxy is being solicited by the Board of Directors.  In addition to the Internet availability of proxy materials or, upon your request, the mailing of these materials to you, our employees and agents may solicit proxies personally, electronically, telephonically or otherwise, and they will receive no extra compensation for making solicitations.  The extent to which these proxy soliciting efforts will be necessary depends upon how promptly proxies are submitted.  We encourage you to submit your proxy without delay.  We will pay our costs of soliciting proxies and will also reimburse brokers and other nominees for their expenses in sending these materials to you and getting your voting instructions.

Corporate Governance

Role of the Board

The business and affairs of the Company are managed under the direction of our Board of Directors.  The Board has responsibility for establishing broad corporate policies and for overall performance and direction of the Company.  Members of the Board stay informed of the Company’s business by participating in Board and committee meetings, by reviewing analyses and reports sent to them regularly, and through discussions with the Chief Executive Officer and other officers.

Board Structure

The Board is composed of three classes of members.  One class of directors is elected each year to hold office for a three-year term and until successors of such class are duly elected and qualified.  The Board currently consists of seven directors.  The directors serving on the Board for most of 2008 were Clayton W. Williams, Jr., L. Paul Latham, Mel G. Riggs, Stanley S. Beard, Davis L. Ford, Robert L. Parker, and Jordan R. Smith.  In December 2008, Mr. Beard

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resigned from the Board, and the Board appointed Ted Gray, Jr. to fill the unexpired term of Mr. Beard.  The class in which each director serves and the nominees for directors at the annual meeting are described below under “Election of Two Directors.”

Director Independence

A majority of the directors serving on our Board qualify as independent directors under regulations of the SEC, and under the corporate governance listing standards of The NASDAQ Stock Market LLC, referred to as NASDAQ, and also qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code, referred to as the Tax Code.  In determining independence, each year the Audit Committee affirmatively determines, among other things, whether the directors have any relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director pursuant to federal securities laws and NASDAQ corporate governance listing standards.  When determining if such a relationship exists, the Audit Committee considers all relevant facts and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation, and the frequency or regularity of the services, whether the services are being carried out at arm’s length in the ordinary course of business, and whether the services are being provided substantially on the same terms to the Company as those prevailing at the time from unrelated parties for comparable transactions.  Such relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships.

In 2008, Parker Drilling Company performed contract drilling services for the Company on an arm’s length basis at market rates.  Robert L. Parker is a director of the Company and, until April 28, 2006, Mr. Parker was a director of Parker Drilling. Mr. Parker’s son, Robert L. Parker, Jr., is the president and chief executive officer of Parker Drilling.  The payments made by the Company to Parker Drilling in 2008 and in each of the past three fiscal years did not exceed 5% of Parker Drilling’s consolidated gross revenues for such years.  The Audit Committee determined that these relationships between Mr. Parker and his son with Parker Drilling would not interfere with Mr. Parker’s exercise of independent judgment in carrying out the responsibilities of a director of the Company.  Additionally, Ted Gray, Jr. manages a portion of the investment assets of Mr. and Mrs. Williams.  Our Board determined that the relationship between Mr. Gray and Mr. and Mrs. Williams would not interfere with Mr. Gray’s exercise of independent judgment in carrying out the responsibilities of a director of the Company.  Applying these independence standards, the Audit Committee has determined that Messrs. Gray, Ford, Parker and Smith are all independent directors.

Codes of Conduct and Ethics

The Company has adopted a Code of Conduct and Ethics, referred to as the Code of Conduct, which applies to all directors, executive officers and employees of the Company and its subsidiaries.  The Code of Conduct assists directors, officers and employees in complying with applicable law, in resolving ethical issues that may arise, and in complying with the Company’s policies.  The Code of Conduct is also designed to promote, among other things, ethical handling of actual or apparent conflicts of interest; full, fair, accurate and timely disclosure in filings with the SEC and in other public disclosures; compliance with applicable law; and prompt internal reporting of violations of the Code of Conduct.

The Code of Conduct is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.”  We will provide the Code of Conduct in print, free of charge, to shareholders who request it.  Any waiver of the Code of Conduct with respect to executive officers or directors may be made only by the Board or a Board committee and will be promptly disclosed to shareholders on our website, as will any amendments to the Code of Conduct.

Communications with the Board

Communications by shareholders or by other parties may be sent to the Board by U.S. mail or overnight delivery and should be addressed to the Board c/o Secretary, Clayton Williams Energy, Inc., Six Desta Drive, Suite 6500, Midland, Texas  79705.  Communications directed to the Board, or one or more Board members, will be forwarded directly to the designated member or members and may be made anonymously.

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Identification of Director Candidates

The Company’s Nominating and Governance Committee identifies and reviews director candidates to determine whether they qualify for and should be considered for membership on the Board.  If any vacancies on the Board arise, the Nominating and Governance Committee may consider potential candidates that come to the attention of the Committee through current members of the Board, management of the Company, shareholders, or other persons.  Candidates for nomination to the Board, whether recommended to the Committee by other members of the Board, management, shareholders or otherwise, are evaluated with the intention of achieving a balance of knowledge, experience and capability on the Board and in light of the membership criteria established by the Nominating and Governance Committee which are as follows:

·High professional and personal ethics and values;

·Broad experience in management, policy-making and/or finance;

·Commitment to enhancing shareholder value and to representing the interests of shareholders;

·Sufficient time to carry out their duties; and

·Experience adequate to provide insight and practical wisdom.

Consideration of Director Nominees

The policy of the Nominating and Governance Committee is to consider properly submitted shareholder nominations for candidates for Board membership as described above.  Any shareholder nominations proposed for consideration by the Nominating and Governance Committee should include the nominee’s name and qualifications for Board membership and should be addressed to:  Secretary, Clayton Williams Energy, Inc., Six Desta Drive, Suite 6500, Midland, Texas 79705.

2008 Board Meetings and Annual Meeting

The Board met five times in 2008 and took action by unanimous written consent four times.  All of the directors attended 100% of the meetings of the Board in 2008.  Mr. Smith attended all five meetings of the Compensation Committee (100%), four of the five meetings of the Audit Committee (80%), and one of two meetings of the Nominating and Governance Committee (50%).  Each of the other directors attended 100% of the meetings of the committees of the Board on which he served.  All directors other than Mr. Smith attended the 2008 annual meeting of shareholders.  The Company encourages all Board members to attend its annual meetings.

Board Committees

The Board has three standing committees:  Compensation, Audit, and Nominating and Governance.  The Audit Committee of the Board has determined that each member of these committees is independent consistent with federal securities laws and NASDAQ corporate governance listing standards.

Compensation Committee

The Compensation Committee held five meetings during 2008 and took action by unanimous written consent two times.  Directors Gray (Chairman), Ford, Parker and Smith currently serve on the Compensation Committee.  The purposes of the Compensation Committee are:

·To review, evaluate, and approve the agreements, plans, policies and programs of the Company to compensate its officers;

·To review the Compensation Discussion and Analysis prepared by management and proposed for inclusion in the Company’s Proxy Statement for its annual meeting of shareholders and to

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determine whether to recommend to the Board that the Compensation Discussion and Analysis be included in such Proxy Statement;

·To provide assistance to the Board in discharging its responsibilities relating to the compensation of the Chief Executive Officer and other executive officers of the Company; and

·To perform such other functions as the Board may assign to the Committee from time to time.

The specific responsibilities of the Compensation Committee are identified in the Committee’s charter, which is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.”

Pursuant to its charter, the Compensation Committee may appoint subcommittees for any purpose that the Compensation Committee deems appropriate and delegate to these subcommittees any power and authority the Compensation Committee deems appropriate.  Historically the Compensation Committee has not delegated any of its powers and authority and, at this time, the Compensation Committee does not intend to delegate its powers and authority to any subcommittee in the foreseeable future.

Agendas for meetings of the Compensation Committee are generally prepared by the Company’s Chief Executive Officer and Chief Operating Officer, in consultation with the Chairman of the Compensation Committee.  Compensation Committee meetings are regularly attended by several of the Company’s officers, including the Chairman of the Board, President and Chief Executive Officer, the Executive Vice President and Chief Operating Officer, and the Senior Vice President and Chief Financial Officer.  The Compensation Committee has the authority to secure the services of independent advisors and the Company’s legal, accounting and human resources departments to support the Compensation Committee in fulfilling its responsibilities.  The Compensation Committee has authority under its Charter to retain, approve fees for, and terminate independent advisors as it deems necessary to assist in the fulfillment of its responsibilities.  A detailed description of the processes and procedures of the Compensation Committee for the consideration and determination of executive and director compensation can be found under “Executive Compensation — Compensation Discussion and Analysis.”

None of the individuals serving on the Compensation Committee has ever been an officer or employee of the Company.  The Audit Committee has determined that all of the members of the Compensation Committee satisfy the independence requirements of federal securities laws and NASDAQ corporate governance listing standards.  Additionally, all of the members of the Compensation Committee qualify as “non-employee directors” for purposes of SEC requirements, and as “outside directors” for purposes of Section 162(m) of the Tax Code.

Nominating and Governance Committee

The Nominating and Governance Committee met two times in 2008.  Directors Smith (Chairman), Ford, Gray and Parker currently serve on this Committee.  The purposes of the Committee are:

·To identify individuals qualified to become Board members, and to select the director nominees for election at the annual meetings of shareholders or for appointment to fill vacancies;

·To recommend to the Board director nominees for each committee of the Board;

·To advise the Board about appropriate composition of the Board and its committees;

·To advise the Board about and recommend to the Board appropriate corporate governance practices and to assist the Board in implementing those practices;

·To lead the Board in its annual review of the performance of the Board and its committees; and

·To perform such other functions as the Board may assign to the Committee from time to time.

Ted Gray, Jr. was appointed to the Board to fill the unexpired term of Stanley S. Beard, who resigned in December 2008.  Mr. Gray’s appointment was unanimously approved by the Board, including all members of the Nominating and Governance Committee, although the Committee did not meet independently to evaluate and select Mr. Gray for appointment.

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The specific responsibilities of the Nominating and Governance Committee are identified in the Committee’s charter, which is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.”

Audit Committee

The Audit Committee held five meetings during 2008 and took action by unanimous written consent two times.  Directors Parker (Chairman), Ford, Gray, and Smith currently serve on the Audit Committee.  The Board has determined that no member of the Audit Committee meets all of the criteria needed to qualify as an “audit committee financial expert” as defined by SEC regulations.  The Board believes that each of the current members of the Audit Committee has sufficient knowledge and experience in financial matters to perform his duties on the Audit Committee.  In addition, the Audit Committee has engaged, at the Company’s expense, Davis Kinard & Co., certified public accountants, as a financial accounting consultant to independently advise the Audit Committee in the area of technical accounting issues and to assist the Audit Committee in fully understanding any matters that may come before the Audit Committee, including matters related to:

·Generally accepted accounting principles and the application of such principles in connection with accounting for estimates, accruals and reserves;

·Internal controls and procedures for financial reporting; and

·Other Audit Committee functions.

The specific responsibilities of the Audit Committee are identified in the Audit Committee’s charter, which is available on our website at www.claytonwilliams.com under “Investor Relations/Governance.” The Audit Committee serves as an independent and objective party to oversee the accounting and financial reporting practices of the Company, and the audits of its financial statements.  The Audit Committee has the sole authority and responsibility with respect to the selection, engagement, compensation, oversight, evaluation and, where appropriate, dismissal of the independent auditors and any other public accounting firm engaged by the Company.  The independent auditors, and any other public accounting firm engaged by the Company, report directly to the Audit Committee.

Election of Two Directors

The Board of Directors is composed of three classes of members.  One class of directors is elected each year to hold office for a three-year term and until successors of such class are duly elected and qualified.  Except where the authority to do so has been withheld, it is the intention of the persons named in the proxy to vote to elect Ted Gray, Jr. and Mel G. Riggs as directors for three-year terms.  Each of the nominees has consented to being named in the Proxy Statement and to serve, if elected, but if either of them should decline or be unable to serve for any reason, the proxies will be voted to fill any vacancy so arising in accordance with the discretionary authority of the persons named in the proxy.

Information is provided below for each of the nominees for election and each director continuing in office regarding their age, positions with the Company or other principal occupations for the past five years, other directorships and the year initially elected a director of the Company.  For information concerning the ownership of Company common stock by each director, see “Security Ownership of Certain Beneficial Owners and Management.”  There are no family relationships among the directors or officers of the Company, except that Mr. Williams is the father-in-law of Gregory S. Welborn, Vice President – Land.

Nominees for Election to the Board of Directors

For Three-Year Term Expiring in 2012

TED GRAY, JR., age 58, was appointed a director of the Company in December 2008 and serves as a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Mr. Gray is a Vice President at UBS Financial Services, Inc. in Austin, Texas where he is a member of a team managing portfolios for high net worth individuals and foundations.  Prior to joining UBS Financial Services, Inc. in December 2008, Mr. Gray was an

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investment advisor with Morgan Stanley in Austin, Texas for 8 years and has been involved in banking and investment activities since 1972.

MEL G. RIGGS, age 54, is Senior Vice President and Chief Financial Officer of the Company, having served in such capacities since September 1991.  Mr. Riggs has served as a director of the Company since May 1994.

The Board of Directors unanimously recommends a vote FOR the election of Messrs. Gray and Riggs to the Board of Directors.

Members of the Board of Directors Continuing in Office

Term Expiring in 2010

CLAYTON W. WILLIAMS, JR., age 77, is Chairman of the Board, President, Chief Executive Officer and a director of the Company, having served in such capacities since September 1991.  For more than the past five years, Mr. Williams has also been the chief executive officer and a director of certain entities, referred to as the Williams Entities, which are controlled directly or indirectly by Mr. Williams.  See “Certain Transactions and Relationships.”  Mr. Williams beneficially owns, either individually or through his affiliates, approximately 26% of the outstanding shares of our common stock.  See “Security Ownership of Certain Beneficial Owners and Management.”

L. PAUL LATHAM, age 57, is Executive Vice President, Chief Operating Officer and a director of the Company, having served in such capacities since September 1991.  Mr. Latham is the sole general partner of The Williams Children’s Partnership, Ltd., referred to as WCPL, a limited partnership in which the adult children of Clayton W. Williams, Jr. are the limited partners.  WCPL holds approximately 25% of the outstanding shares of the Company’s common stock.  As the sole general partner, Mr. Latham has the power to vote or direct the voting of the shares of the Company’s common stock held by WCPL.  See “Security Ownership of Certain Beneficial Owners and Management.”  Mr. Latham also serves as an officer and director of certain Williams Entities.

Members of the Board of Directors Continuing in Office

Term Expiring in 2011

DAVIS L. FORD, age 71, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Dr. Ford has served as a director of the Company since his appointment in February 2004.  Dr. Ford has been president of Davis L. Ford & Associates, an environmental engineering and consulting firm, for more than the past five years and is also an adjunct Professor at The University of Texas at Austin.

ROBERT L. PARKER, age 85, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Mr. Parker has served as a director of the Company since May 1993.  Mr. Parker is retired.  Until his retirement in April 2006, he was the Chairman of the Board of Parker Drilling Company, a publicly owned corporation providing contract drilling services, a position he held since 1991.

JORDAN R. SMITH, age 74, is a director of the Company and a member of the Audit, Compensation and Nominating and Governance Committees of the Board.  Mr. Smith has served as a director of the Company since July 2000.  Mr. Smith is President of Ramshorn Investments, Inc., a wholly owned subsidiary of Nabors Industries, having served in such capacity for more than the past five years.  Mr. Smith serves as a director of Delta Petroleum Corporation, a publicly owned corporation in the energy business, and has served on the Board of the University of Wyoming Foundation and the Board of the Domestic Petroleum Council.  Mr. Smith is also Founder and Chairman of the American Junior Golf Association.

Executive Compensation

Compensation Discussion and Analysis

General

For most of 2008, the Compensation Committee consisted of Messrs. Beard, Ford, Parker and Smith, all of whom are independent directors under current federal securities laws and NASDAQ corporate governance listing standards and are “outside directors” for purposes of Section 162(m) of the Tax Code.  In December 2008, Mr.

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Beard resigned from the Board.  The Compensation Committee establishes the salaries of all corporate officers, including the named executive officers set forth in the Summary Compensation Table below, and directs and administers the Company’s incentive compensation plans other than the Outside Directors Stock Option Plan.  The Compensation Committee also reviews with the Board its recommendations relating to the future direction of corporate compensation practices and benefit programs.

Throughout this proxy statement, the following individuals are referred to as the named executive officers:

·Clayton W. Williams, Jr., Chairman of the Board, President and Chief Executive Officer

·L. Paul Latham, Executive Vice President and Chief Operating Officer

·Mel G. Riggs,  Senior Vice President and Chief Financial Officer

·Patrick C. Reesby, Vice President  – New Ventures

·Michael L. Pollard, Vice President and Principal Accounting Officer

Compensation Philosophy and Principles

The Compensation Committee acknowledges that the oil and gas exploration and production industry is highly competitive and that experienced professionals have significant career mobility.  The Company competes for executive talent with a large number of exploration and production companies, some of which have significantly larger market capitalization than the Company.  Comparatively, the Company is a smaller company in a highly competitive industry, and its ability to attract, retain and reward its executive officers and other key employees is essential to maintaining an advantageous position in the oil and gas business.  The Company’s comparatively smaller size within its industry and its relatively small executive management team provide unique challenges in this industry, and therefore, are substantial factors in the design of the executive compensation program.  The Compensation Committee’s goal is to maintain compensation programs that are effective in attracting and retaining talented individuals within the independent oil and gas industry.  Each year, the Compensation Committee reviews the executive compensation program to assess whether the program remains comparable with those of similar companies, considers the program’s effectiveness in creating adequate incentives for executives to find, acquire, develop and produce oil and gas reserves in a cost-effective manner, and determines what changes, if any, are appropriate.

The Compensation Committee has adopted a compensation policy which it believes to be a balance between fair and reasonable cash compensation and incentives linked to the Company’s performance, taking into consideration compensation of individuals with similar duties who are employed by its peers in the industry.  The policy takes into account the cyclical nature of the oil and gas business, which may result in traditional performance standards being skewed due to erratic product prices.  An analysis of the Company’s goals has resulted in a policy which places emphasis on increasing the Company’s proved oil and gas reserves and production, coupled with maintaining an acceptable balance between its overhead and profit margin.  As described more fully below, the Compensation Committee may, in addition to base salaries, award bonuses, stock options and direct participation incentives based upon the performance of the Company and the efforts of individual executives and key employees.

In determining the form and amount of compensation payable to the Company’s executive officers, the Compensation Committee is guided by the following objectives and principles:

·Compensation levels should be sufficiently competitive to attract and retain key executives.  The Compensation Committee aims to ensure that the Company’s executive compensation program attracts, motivates and retains outstanding talent and rewards them for the Company achieving and maintaining a competitive position in its industry.  Total compensation (i.e., maximum achievable compensation) should increase with position and responsibility.

·Compensation should relate directly to performance, and incentive compensation should constitute a substantial portion of total compensation.  The Compensation Committee aims to foster a pay-for-performance culture, with a significant portion of total compensation being contingent, directly or indirectly, on Company or individual performance.  Accordingly, a substantial portion of total compensation should be tied to and vary with the Company’s financial,

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operational and strategic performance, as well as individual performance.  Executives with greater roles in particular projects and the ability to directly impact the Company’s strategic goals and long-term results should bear a greater proportion of the risk if these goals and results are not achieved, and be rewarded if the Company’s goals and results are achieved or exceeded.

·Long-term incentive compensation should align executives’ interests with the Company’s shareholders.  Awards of long-term incentive compensation encourage executives to focus on the Company’s long-term strategic growth and prospects and incentivize executives to manage the Company from the perspective of its shareholders.

·Retirement benefits should comprise an element of executive compensation.  The Company does not offer retirement benefits to its executive officers other than through its tax-qualified 401(k) plan.  Therefore, the Compensation Committee has designed the Company’s long-term incentive compensation to also provide a competitive level of replacement income upon retirement.

The Company’s executive compensation program is designed to reward the achievement of objectives regarding Company growth and productivity, but it also takes into consideration the role and responsibilities of individual executive officers within the Company and internal pay equity.  Therefore, the Company’s executive compensation is designed:

·To encourage the Company’s executive officers to maintain a thorough and dynamic understanding of the competitive environment and to position the Company as a respected force within its industry;

·To incentivize the Company’s executive officers to develop strategic opportunities which benefit the Company and its shareholders;

·To sustain an internal culture focused on performance and the development of the Company’s assets into producing properties;

·To require the Company’s executive officers and other key employees to share the risks facing its shareholders, but to enable them to share in the rewards associated with the successful development of the Company’s assets into producing properties; and

·To implement a culture of compliance and unwavering commitment to operate the Company’s business with the highest standards of professional conduct and compliance.

Setting Executive Compensation

Management’s Role in Setting Executive Compensation

Mr. Williams evaluates all executive officers, including the named executive officers other than himself, and makes recommendations to the Compensation Committee regarding base salary levels, and the amounts of any incentive bonus payments and long-term incentive awards to be granted to all executive officers.  Messrs. Latham and Riggs assist Mr. Williams in his evaluation and the preparation of compensation recommendations, except with respect to their own compensation.  Additionally, Messrs. Williams, Latham and Riggs regularly attend Compensation Committee meetings and, upon the Compensation Committee’s request, provide compensation and other information to the Compensation Committee, including historical and prospective breakdowns of primary compensation components for each executive officer, internal pay equity analyses and information regarding the compensation paid to similarly situated executive officers within the Company’s peer group of industry competitors, as described in greater detail below.  These recommendations are given significant weight by the Compensation Committee but are not necessarily determinative of the compensation decisions made by the Compensation Committee; these recommendations are used as points of reference, not as a replacement for the Compensation Committee’s own judgment of internal pay equity or the individual performance of an executive that the Compensation Committee also considers when making compensation decisions.

Use of Independent Consultants

The Compensation Committee Charter provides the Compensation Committee with the authority to retain and terminate any compensation consulting firm or other adviser it deems appropriate.  Although the Compensation

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Committee has discussed and considered the use of an independent compensation consultant, historically, the Compensation Committee has not utilized independent advisors and compensation consultants in determining the appropriate level of the compensation for the Company’s executive officers.  Instead, the Compensation Committee has relied on the Company’s legal, accounting and human resources departments in compiling public information to be utilized in determining the appropriate compensation package for the Company’s executive officers.  For 2008, the Compensation Committee relied upon publicly available information compiled under the supervision of Mr. Latham with respect to the peer group of competitor companies described below.

Market Compensation Analysis

To provide a frame of reference in evaluating the reasonableness and competitiveness of executive compensation, senior management selects similarly situated companies who are competitors of the Company in attracting and retaining management and obtains market pay levels for such companies from public filings.  In 2008, the Compensation Committee reviewed a comparative analysis of the compensation paid to the directors, chief executive officer and other executive officers by a peer group of independent exploration and production companies.  The analysis for directors consisted of compensation for 2006, and the analysis for officers consisted of 2004 through 2006 compensation.  The Compensation Committee generally performs this analysis during the first quarter of the year at which time current public information is not available with respect to the Company’s peer group.  Therefore, the information reviewed by the Compensation Committee relates to a period ending the second year preceding the current year.  However, as compensation tends to increase over time, the Compensation Committee is comfortable utilizing less current information given its focus on incentive compensation over base salary and discretionary bonuses.  The peer group was determined by senior management, and the comparative data was compiled by Company personnel under the supervision of Mr. Latham.  The Compensation Committee concluded that the group of companies selected was an appropriate peer group for the comparison of salary and other compensation payable to the Company’s Chief Executive Officer, its other named executive officers and its directors.  The peer companies represented a wide range of independent exploration and production companies, including both small and larger companies that operate in the same area of operations as the Company.  The group of peer companies included in the compensation analysis reviewed by the Compensation Committee in 2008 was comprised of Abraxas Petroleum Corporation, Brigham Exploration Company, Comstock Resources, Inc., Concho Resources, Inc., Delta Petroleum Corporation, Denbury Resources Inc., Goodrich Petroleum Corporation, The Meridian Resource Corporation, Parallel Petroleum Corporation, Petrohawk Energy Corporation, Petroquest Energy, Inc., Plains Exploration & Production Company, Swift Energy Company, and Whiting Petroleum Corporation.  The objective of the Compensation Committee in reviewing market pay levels is to ensure that compensation payable to its executive officers is not out of market.  As noted, however, market pay levels are only one factor considered, with pay decisions ultimately reflecting an evaluation of individual contributions of an executive officer and the executive’s value to the Company.

The Compensation Committee does not believe that it is appropriate to establish compensation levels based exclusively or primarily on benchmarking to the Company’s peers.  The Compensation Committee looks to external market data only as a reference point in reviewing and establishing individual pay components and total compensation and ensuring that the Company’s executive compensation is competitive in the marketplace.  The Compensation Committee does not attempt to set total compensation or any component of compensation within a specific percentile of the Company’s peer group.

Determining Compensation Levels

The Compensation Committee annually determines the individual pay components of the Company’s executive officers.  In making such determinations, the Compensation Committee reviews and considers (1) the compensation analysis referred to above prepared by Company personnel, (2) recommendations of the Company’s Chief Executive Officer, based on individual responsibilities and performance, (3) historical compensation levels for each executive officer, (4) industry conditions and the Company’s future objectives and challenges, and (5) the overall effectiveness of the executive compensation program.

Historically, the base compensation of the Company’s executive officers has been less than 50% of the total compensation of the executive officers, with the bulk of the remainder of compensation consisting of discretionary bonuses and long-term incentives, and with other annual compensation consisting of less than 10% of the total compensation.  This is not due to any specific policy, practice or formula regarding the proper allocation between different elements of total compensation, but does reflect the desire of the Compensation Committee to emphasize variable components of compensation to foster a pay-for-performance culture.

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The components of compensation paid to executive officers in 2008 were:

·Base salary;

·Discretionary bonus;

·Long-term incentive awards; and

·Other annual compensation.

Compensation of executive officers has generally consisted of these elements since 2001.

The Compensation Committee has reviewed all components of the compensation of the Chief Executive Officer and the executive officers, including salary, bonus, equity and long-term compensation, accumulated realized and unrealized stock option gains, the dollar value to the executive and the cost to the Company of all perquisites and other personal benefits, and the projected future payouts under non-equity awards described below.  In addition, the Compensation Committee has reviewed components of compensation of executive officers of the other peer companies in the industry with such components including salary, bonus, stock options, restricted stock awards, life insurance, vehicle allowances and other compensation.  The Compensation Committee has reviewed the compensation policies of the Company and discussed the increased competition encountered by the Company in attracting and retaining qualified employees.

Based upon recommendations of Messrs. Williams and Latham, and upon its own judgment, the Compensation Committee approved the base salary, discretionary bonus, long-term incentive awards and other annual compensation of each of the Company’s executive officers in 2008.  The Compensation Committee believes these approved forms and levels of compensation are reasonable, appropriate and consistent with the Company’s compensation philosophy and principles.  Further, the Compensation Committee believes the Company’s executive compensation program is effective because (1) the Company has retained its executive team in a competitive industry, and (2) the Company has demonstrated its ability to find, acquire, develop and produce oil and gas reserves in a cost-effective manner.

Base Salary

Base salary is set by the Compensation Committee at a level based on each executive officer’s position, level of responsibility, and individual performance.  As indicated above, base salary is typically less than 50% of each executive officer’s total compensation.  Although this result cannot occur explicitly by design, due to the nature of the Company’s long-term incentive compensation program discussed in greater detail below, it is the general intent of the Compensation Committee that a significant portion of the total compensation paid to the executive officers be attributable to variable compensation, either in the form of discretionary bonuses or long-term incentive awards.  The Compensation Committee believes that this mix of total compensation fosters a pay-for-performance culture by tailoring annual compensation to the success of projects in which an executive officer is involved, while ensuring that the executive will continue to receive a consistent base amount of compensation.  Historically, the Compensation Committee has annually increased the base salary of its executive officers other than Mr. Williams, whose base salary remained unchanged for the period beginning in 2001 and ending in June 2008.

Following its initial review of the compensation programs of the Company’s peers in the first quarter of 2008, and at the recommendation of Mr. Williams, the Compensation Committee determined that the annual base salaries of the named executive officers should remain unchanged.  In June 2008, the Compensation Committee revisited the base salaries of the Company’s executives and, based on the recommendation of Messrs. Williams and Latham, approved increases to the base salary of each executive officer (including Mr. Williams) equal to 10% of base salary, except for Mr. Pollard, whose base salary was increased by 19%.

Bonus

Bonuses are discretionary and are paid if and when the Compensation Committee determines they are necessary to reward exceptional individual performance and to encourage loyalty to the Company and the interests of its shareholders.  The Compensation Committee believes that such bonuses serve both as a reward for performance and an incentive for future extraordinary performance in anticipation of such recognition.  The Company has historically paid Christmas bonuses to all employees, including executive officers, in amounts ranging from one-third to one-half of a month’s base salary.

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Executive officers of the Company, including Messrs. Williams, Latham and Riggs, may recommend bonuses to the Compensation Committee for their approval to reward individual performance.  Annual bonuses may also be used to compensate particular executives and key employees who the Compensation Committee determines are less than fully compensated at a particular point in time due to the failure of the long-term incentive awards granted to the employee to result in payment.  As is described in greater detail below, the nature of the Company’s long-term incentive award program is such that an award could fail to ever result in payment through no lack of effort by the executive and in circumstances where the performance of the Company as a whole is very good.  Although as a general policy, the Compensation Committee believes that executives should share the risks and rewards of the Company’s shareholders, if over a period of time an executive is undercompensated due to the nature of the Company’s long-term incentive program, the Compensation Committee will consider paying additional cash bonuses to the executive.

Long-Term Incentive Compensation

Long-term incentive compensation available to the Company’s executive officers consists of both equity-based awards and non-equity awards.  Following is a discussion of each long-term incentive award used by the Company.

Equity Awards

All equity awards to the Company’s executive officers have been in the form of stock options granted under the Company’s 1993 Stock Compensation Plan which provides for the grant of non-qualified options to officers, directors (other than “outside directors”), employees and advisors of the Company or any of its subsidiaries.  A total of 1,798,200 shares of common stock are authorized and reserved for issuance under the plan subject to adjustments to reflect changes in the Company’s capitalization resulting from stock splits, stock dividends and similar events.  Presently, 101,766 shares remain available for grant under the plan.  The Compensation Committee has the sole authority to interpret the plan, to determine the persons to whom options will be granted, to determine the basis upon which the options will be granted, and to determine the exercise price, duration and other terms of options to be granted under the plan; provided that (1) the exercise price of each option granted under the plan may not be less than the fair market value of the common stock at the date of grant of such option, (2) the exercise price must be paid in cash upon exercise of such option, (3) no option may be exercisable more than ten years after the date of grant, and (4) no option is transferable other than by will or the laws of descent and distribution.

No option is exercisable after an optionee terminates his relationship with the Company or a subsidiary of the Company, subject to the right of the Compensation Committee to extend the exercise period for not more than 90 days following the date of termination of an optionee’s employment.  If an optionee’s employment is terminated by reason of disability, the Compensation Committee has the authority to extend the exercise period for not more than one year following the date of termination of the optionee’s employment.  If an optionee dies and has not fully exercised options granted under the plan, such options may be exercised in whole or in part within 90 days of the optionee’s death by the executors or administrators of the optionee’s estate or by the optionee’s heirs.  No such extension may extend the exercisability of an option beyond its original ten year term.

The vesting period, if any, specified for each option will be accelerated upon the occurrence of a change of control or a threatened change of control of the Company.

Mr. Williams is the Company’s Chief Executive Officer and owns a significant portion of the Company’s outstanding common stock.  Since 2001, only Mr. Williams has been awarded stock options under this plan.  The Company did not grant any stock options to Mr. Williams in 2008.  In March 2008, the Compensation Committee elected to change the nature of long-term incentive compensation for Mr. Williams and, rather than continuing to award Mr. Williams stock option grants, took action to include Mr. Williams in the APO Incentive Plan and the APO Reward Plan beginning in 2008, as described in greater detail in the following section titled “Non-Equity Awards.”

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Non-Equity Awards

APO Incentive Plan

The principal form of long-term incentive compensation for all executive officers (including Mr. Williams beginning in 2008), key employees and consultants of the Company is an after-payout (or “APO”) incentive plan, referred to as the APO Incentive Plan, that was created to incentivize the Company’s executives to find, acquire, develop and produce oil and gas reserves in a cost-effective manner, and to reward those executives for the successful management of projects that produce value to the Company’s shareholders.  The APO Incentive Plan provides for the creation of a series of partnerships (either limited partnerships or tax partnerships) through which the Company contributes a portion of its working interests in wells drilled or acquired within certain geographical areas.  Under the APO Incentive Plan, the Company pays all costs and receives all revenues relative to the contributed working interests until it achieves “Payout,” which is generally the return of its costs, plus interest.  After Payout, the officers, key employees and consultants who were granted the right to participate in the partnership, receive at least 99% of the partnership’s subsequent revenues and pay at least 99% of its subsequent expenses.  The Compensation Committee believes that aligning a portion of the executive officers’ long-term compensation to the performance of the Company’s exploration, development and acquisition programs is both a reward for the acquisition and development of such properties and an incentive to manage the properties in a manner that will maximize the long-term success for both the Company and themselves.

From 2002 through 2005, APO Incentive Plan awards were structured as limited partner interests in Texas limited partnerships.  Since 2006, the APO Incentive Plan awards have been structured as participation agreements that are intended by the participants to be treated as partnerships solely for federal and state income tax purposes.  Although the economics of the APO Incentive Plan awards in the Texas limited partnership structure and the participation agreement structure have remained unchanged, the current practice of utilizing participation agreements is preferable to, and is less burdensome for the Company to administer than, the limited partnership structure.

Although the percentage of the Company’s contributed working interests varies from partnership to partnership, contributions under the APO Incentive Plan have ranged from 3.5% to 7.5% of the Company’s working interests in the applicable wells, depending on the nature of the underlying project.  The percentage of working interests contributed is determined in the discretion of the Compensation Committee after considering recommendations made by Mr. Williams.

At the time APO Incentive Plan awards are granted, the ultimate amount payable to the participants under the award is not determinable.  Each APO Incentive Plan award represents a potential working interest in one or more wells in a limited geographic area.  Potentially, the award may never become payable, or it may become payable at an indeterminable future date.  The participants who receive specific APO Incentive Plan awards, and the size of the APO Incentive Plan award granted to each participant, is determined in the discretion of the Compensation Committee after considering recommendations made by Mr. Williams.  Generally, each particular working interest in a geographic area is awarded to the executive officers and key employees primarily responsible for that project.  The size of the APO Incentive Plan award granted to each participant out of that particular working interest is generally determined based upon his or her potential individual impact on the success of the project.

Once granted, an APO Incentive Plan award is fully vested and is not forfeitable, except in circumstances of fraud against the Company by a participant.  However, the Company retains the right to grant new APO Incentive Plan awards in the same geographic area.  This effectively limits a participant’s award to the then-existing wells, without preserving a participant’s future interest in further drilling activity in that same geographic area.

The Compensation Committee believes that the APO Incentive Plan satisfies several important compensatory objectives.

·It aligns the interests of the Company’s executive officers and key employees with those of its shareholders by conditioning payment under the APO Incentive Plan awards upon Payout and positive cash flows into the Company.

·It encourages the Company’s executive officers and key employees to find, acquire, develop and produce oil and gas reserves for the Company in a cost-effective manner.

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·Previously granted APO Incentive Plan awards provide current income to the Company’s executive officers and key employees.

·APO Incentive Plan awards potentially provide future income to the Company’s executive officers and key employees that will be available to them in their retirement.  Hence, the APO Incentive Plan provides both current incentives and potential retirement income to the Company’s executive officers.

Beginning in 2008, Mr. Williams also participates in the APO Incentive Plan.  The Compensation Committee discussed and considered the following matters related to the inclusion of Mr. Williams in the APO Incentive Plan:

·Mr. Williams beneficially owns or controls approximately 26% of the Company’s outstanding common stock.  In addition, WCPL, a limited partnership in which Mr. Williams’ adult children are the limited partners, owns an additional 25% of the Company’s outstanding common stock.

·Mr. Williams views his equity ownership in the Company as a long-term investment for the accumulation of family wealth.  Except for one occasion in 2000, Mr. Williams has never disposed of any shares of the Company’s common stock except by gift or other transfer to family or household employees.  Since Mr. Williams has not routinely disposed of his equity holdings in the Company for cash, the acquisition of common stock through the exercise of stock options is not a viable source of liquidity for Mr. Williams.

·Because Mr. Williams and WCPL own, on a combined basis, in excess of 50% of the Company’s outstanding common stock, Mr. Williams’ incentive to create shareholder value is already closely aligned with that of the other shareholders of the Company.  Therefore, as an incentive, additional stock option grants may no longer be as effective as a form of compensation that could generate cash flow and allow him to either acquire additional shares of the Company’s common stock in the open market or diversify his personal investments without selling common stock or diluting his equity ownership in the Company.

·The Company currently utilizes the APO Incentive Plan to incentivize and compensate all other executive officers, key employees and consultants.  In the past, Mr. Williams has been excluded from participating in this plan since he was receiving equity awards instead.  Permitting Mr. Williams to participate in the APO Incentive Plan would likely be an effective way to provide incentive to Mr. Williams, just as the Compensation Committee believes it has been effective for other executive officers.

After considering these factors, the Compensation Committee took action to include Mr. Williams in the APO Incentive Plan beginning in 2008.  The Compensation Committee established the following parameters in connection with Mr. Williams’ participation in the APO Incentive Plan:

·Mr. Williams will continue to recommend to the Compensation Committee the percentage of the Company’s working interest that will be assigned to each partnership, as well as the unit allocation of that working interest among the participants, other than Mr. Williams.

·In each partnership authorized by the Compensation Committee, Mr. Williams will be granted an interest equal to 40% of the working interest being allocated among all other participants, except that Mr. Williams’ interest will be reduced as needed to limit the total working interest being assigned to any partnership to 10% of the Company’s working interest.

·All other provisions of the APO Incentive Plan will be uniformly applied to all participants, including Mr. Williams.

The Compensation Committee believes that allowing Mr. Williams to participate in the APO Incentive Plan is an effective component of the overall compensation package for Mr. Williams.  This plan creates additional incentives for Mr. Williams to find, acquire, develop and produce oil and gas reserves in a cost-effective manner by restricting payments to him under the APO Incentive Plan to a portion of the after-payout cash flow of specified

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exploration, development and acquisition projects of the Company.  The Compensation Committee further believes that his participation in the APO Incentive Plan will provide Mr. Williams with current cash flow and will be a potential source of post-retirement income.

A detailed description of the awards made under the APO Incentive Plan and amounts paid to the named executive officers in 2008 pursuant to APO Incentive Plan awards can be found under “ — Summary Compensation Table” and “— Grants of Plan-Based Awards.”

APO Reward Plan

In 2008, the Compensation Committee authorized the formation of the APO Reward Plan to reward eligible executive officers, key employees and consultants for continued quality service to the Company, and to encourage retention of those employees and service providers by providing them the opportunity to receive bonus payments that are based on certain profits derived from a portion of the Company’s working interest in specified areas where the Company is conducting drilling and production enhancement operations.  The wells subject to the APO Reward Plan are mutually exclusive from any wells subject to a participation agreement created under the APO Incentive Plan.  Although conceptually similar to the APO Incentive Plan, the APO Reward Plan is a compensatory bonus plan pursuant to which the Company pays participants a bonus equal to a portion of APO cash flows received by the Company pursuant to its working interest.  Unlike the APO Incentive Plan, however, participants in the APO Reward Plan are not immediately vested in all future amounts payable under the Plan.  Participants are entitled to receive distributions with respect to awards under the APO Reward Plan from and after the date of grant; however, in the event a participant terminates employment with the Company prior to the vesting date, the award will be forfeited to the Company and the participant will not be entitled to participate in future distributions.  The Company utilizes the APO Reward Plan in situations where the grant of awards under the APO Incentive Plan would result in federal income tax complications to the recipient.

The Compensation Committee authorized the granting of awards in three APO Reward Plans in 2008, the Amacker Tippet Reward Plan, the Austin Chalk Reward Plan and the Barstow Area Reward Plan.  The vesting date for each of these APO Reward Plans is May 5, 2013.  Messrs. Williams, Latham, Riggs and Pollard received awards under each of these APO Reward Plans.  A detailed description of the awards made under the APO Reward Plan and amounts paid to the named executive officers in 2008 pursuant to APO Reward Plan awards can be found under “ — Summary Compensation Table” and “ — Grants of Plan-Based Awards.”

SWR Reward Plan

In October 2006, the Compensation Committee authorized the establishment of the Southwest Royalties Reward Plan, which we refer to as the SWR Reward Plan, a one-time incentive plan designed to reward eligible employees and other service providers for continued quality service to the Company, and to encourage retention of those employees and service providers by providing them the opportunity to receive bonus payments that are based on certain profits derived from a portion of the Company’s working interest in the RS Windham C3 well in Upton County, Texas.  Eligible participants in the SWR Reward Plan include those officers, key employees and consultants, excluding Mr. Williams, who made significant contributions to the acquisition and development of Southwest Royalties, Inc.  The Company granted 100% of the awards available under the SWR Reward Plan in January 2007.  Messrs. Latham, Riggs and Pollard received awards under the SWR Reward Plan.

The SWR Reward Plan provides for quarterly cash bonuses to the participants, as a group, equal to the after-Payout cash flow from a 22.5% working interest in the RS Windham C3 well.  Only two-thirds of the quarterly bonus amount is payable to the participants until the full vesting date. The remaining one-third is deferred.  The full vesting date is October 25, 2011, or sooner in the event of a change of control or sale transaction, as defined in the SWR Reward Plan.  After the full vesting date, the deferred portion of the quarterly bonus amount, with interest at 4.83% per year, as well as 100% of all subsequent quarterly bonus amounts, are payable to participants.  The quarterly bonus amounts are allocated among the participants based on each participant’s bonus percentage.

To continue as a participant in the SWR Reward Plan, participants must remain in the employment or service of the Company through the full vesting date.  Participants who remain in the employment or service of the Company through the full vesting date will continue as participants for the duration of the SWR Reward plan, subject to certain restrictions.  Awards with respect to the SWR Reward Plan are further described in the footnotes under “ — Summary Compensation Table” and under “ — Nonqualified Deferred Compensation.”

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APO Working Interest Trusts

In 2001, prior to adopting the current structure of the APO Incentive Plan, the Compensation Committee approved the creation of six trusts through which the Company’s executive officers and key employees, excluding Mr. Williams, received after-Payout working interests in wells drilled by the Company.  These trusts were structured so that the participants were beneficiaries of the assigned working interest once Payout was achieved.  Two of the trusts achieved Payout status and have been dissolved.  Upon dissolution, each trust distributed to the beneficiaries a fractional direct ownership in the working interests held by the trust.  Four of the trusts did not achieve Payout status and have been dissolved, with the working interests being reassigned to the Company.  Messrs. Latham, Riggs and Pollard received payments in 2008 from the APO Working Interest Trusts as described in the footnotes under “— Summary Compensation Table.”

APO Working Interest Grant

In May 2003, the Compensation Committee approved the grant of 5% of the Company’s after-Payout working interests in certain acreage in New Mexico to key employees, other than Mr. Williams, who contributed to the success of that project.  In connection with the grant, the participants received a cash payment equal to the net revenues attributable to the distributed interests from the date Payout status was achieved (May 2002) through June 2003, and received an assignment of their proportionate share of the working interests in the acreage effective July 1, 2003.  All net revenues, consisting of oil and gas sales, net of production taxes and other expenses, attributable to the distributed interests are paid to the participants in proportion to each participant’s ownership interest in the grant.  Messrs. Latham, Riggs and Pollard received payments in 2008 from the APO Working Interest Grant as described in the footnotes under “— Summary Compensation Table.”

Other Compensation

The Company’s executive officers also participate in the employee benefit programs that are provided to its full-time employees generally, including its group health plan, group life insurance program, and its 401(k) Plan & Trust which provides for matching contributions equal to 100% of participant deferrals up to 6% of compensation for purposes of the plan.  In addition, certain of the Company’s executive officers receive a monthly automobile allowance, and the Company pays various club membership dues and personal expenses on behalf of certain executive officers.

None of the named executive officers are entitled to severance benefits.  However, as further described under “— Potential Payments Upon Termination or Change in Control”, awards granted pursuant to the SWR Reward Plan and stock options granted under the Company’s 1993 Stock Compensation Plan vest upon certain change in control events.

Director Compensation

During 2008, compensation for non-employee directors consisted of an annual retainer fee of $10,000 plus a $7,500 fee for each Board meeting attended and a $1,000 fee for attending a committee meeting held on a day other than the same day of a Board meeting.  As compensation for service on the Board during 2008, employee directors received an annual fee of $5,000, plus a $2,500 fee for each Board meeting attended.  Compensation for non-employee directors is reviewed annually by the Compensation Committee.  No change in compensation for non-employee directors was made for the fiscal year 2008.  However, in May 2008, the Compensation Committee increased the annual retainer for non-employee director compensation from $10,000 to $25,000 effective January 1, 2009 in lieu of granting any additional stock options under the Director Stock Option Plan discussed below.

The named executive officers also acting as directors for 2008 are Messrs. Williams, Latham and Riggs.  Each of these named executive officers received compensation as described in the footnotes under “ — Summary Compensation Table” for their services as directors.

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Director Stock Option Plan

The Company maintains an Outside Directors Stock Option Plan in which only outside directors who are not employed by the Company or any of its affiliates are eligible to participate.  A total of 86,300 shares of common stock have been authorized and reserved for issuance under the plan, subject to adjustments to reflect changes in capitalization resulting from stock splits, stock dividends and similar events.  Prior to 2009, the plan provided that an option for 1,000 shares of the Company’s common stock will be granted on January 1 of each calendar year to each non-employee director in office on that date.  In May 2008, the Compensation Committee terminated grants under the plan effective January 1, 2009.  Compensation paid to non-employee directors in 2008 is summarized under “ — Director Compensation Table.”

Deductibility of Executive Compensation

Section 162(m) of the Tax Code places a limit of $1,000,000 on the amount of compensation the Company may deduct for federal income tax purposes in any one year with respect to the Company’s Chief Executive Officer and the next three most highly compensated officers (other than the Chief Financial Officer).  However, performance-based compensation that meets certain requirements is excluded from this $1,000,000 limitation.

In reviewing the effectiveness of the executive compensation program, the Compensation Committee considers the anticipated tax treatment to the Company and to the named executive officers of various payments and benefits.  However, the deductibility of certain compensation payments depends upon the timing of payments under long-term incentive awards or the exercise of previously granted options, as well as interpretations and changes in the tax laws and other factors beyond the Compensation Committee’s control.  For these and other reasons, including to maintain flexibility in compensating the named executive officers in a manner designed to promote varying corporate goals, the Committee will not necessarily, or in all circumstances, limit executive compensation to that which is deductible under Section 162(m) of the Tax Code and has not adopted a policy requiring all compensation to be deductible.  In addition, the Company’s 1993 Stock Compensation Plan is not currently designed to comply with the performance-based compensation exclusion under Section 162(m) of the Tax Code.  In addition, base salaries and bonuses paid to the Company’s named executive officers do not comply with the performance-based compensation exclusion under Section 162(m) of the Tax Code and are subject to the $1,000,000 limitation on deductibility.

Nevertheless, none of the compensation paid to the Company’s named executive officers in 2008 was subject to any limitations on deductibility under the Tax Code.  The Compensation Committee will consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its other compensation objectives.

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Summary Compensation Table

The following table summarizes, with respect to the Chairman of the Board, President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, and each of the Company’s other named executive officers, information relating to the compensation earned for services rendered in all capacities during fiscal years 2008, 2007 and 2006.  Columns (e) and (h) have been deleted from the SEC-prescribed tabular format because the Company does not grant stock awards or sponsor pension plans and because awards under the SWR Reward Plan do not currently provide for above market interest.

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary ($)		Bonus ($)(1)		Option Awards ($)(2)		Non-Equity Incentive Plan Compensation ($)(3)		All Other Compensation ($)(4)		Total ($)
Clayton W. Williams, Jr.	2008	$	519,750	$	37,688	$	—	$	99,316	$	69,983	$	726,737
Chairman of the Board,	2007	$	495,000	$	33,061	$	—	$	—	$	69,767	$	597,828
President and Chief Executive Officer	2006	$	495,000	$	38,125	$	—	$	—	$	77,941	$	611,066
L. Paul Latham	2008	$	294,000	$	215,698	$	—	$	326,293	$	42,985	$	878,976
Executive Vice President	2007	$	280,000	$	67,503	$	—	$	217,263	$	32,754	$	597,520
and Chief Operating Officer	2006	$	278,000	$	32,398	$	—	$	186,970	$	31,886	$	529,254
Mel G. Riggs	2008	$	250,986	$	218,628	$	—	$	282,699	$	47,028	$	799,341
Senior Vice President and	2007	$	239,000	$	40,646	$	—	$	438,675	$	36,827	$	755,148
Chief Financial Officer	2006	$	237,000	$	42,395	$	—	$	165,835	$	35,295	$	480,525
Patrick C. Reesby	2008	$	210,000	$	459,167	$	—	$	596,264	$	33,120	$	1,298,551
Vice President - New	2007	$	200,000	$	46,937	$	—	$	172,043	$	24,928	$	443,908
Ventures	2006	$	200,000	$	158,333	$	—	$	162,608	$	24,304	$	545,245
Michael L. Pollard	2008	$	196,216	$	88,906	$	—	$	109,131	$	32,700	$	426,953
Vice President and Principal Accounting Officer(5)

(1)	This column includes director fees of $15,000 for Mr. Williams and $17,500 each for Messrs. Latham and Riggs in 2008 and $10,000 for Mr. Williams and $12,500 for Messrs. Latham and Riggs for 2007 and 2006.
(2)	All Option Awards held by the named executive officers were fully vested prior to January 1, 2006, and as such, no amount is recognized in future years for financial statement reporting purposes in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”). For information concerning Option Awards, see “ — Compensation Discussion and Analysis — Long-Term Incentive Compensation — Equity Awards.”
(3)	Amounts shown as Non-Equity Incentive Plan Compensation in the Summary Compensation Table for 2008 include compensation derived from various non-equity awards described under “— Compensation Discussion and Analysis — Long-Term Incentive Compensation — Non-Equity Awards” and, in the case of Mr. Latham, payments from overriding royalty interests and selected working interests granted prior to the Company’s initial public offering in 1993. Following is a summary of amounts earned in 2008 by source:

Source	Williams		Latham		Riggs		Reesby		Pollard
APO Incentive Plan	$	—	$	115,741	$	115,741	$	596,264	$	62,101
APO Reward Plan	99,316		24,829		24,829		—		7,821
SWR Reward Plan	—		7,276		7,276		—		3,487
APO Working Interest Trusts	—		20,405		28,204		—		9,059
APO Working Interest Grant	—		106,648		106,649		—		26,663
Other	—		51,394		—		—		—
	$	99,316	$	326,293	$	282,699	$	596,264	$	109,131

	With respect to the SWR Reward Plan, two-thirds of the awards are payable (in the form of quarterly cash bonuses) to the named executive officers.  One-third of the awards are automatically deferred and held by the Company until the “full vesting date.”  On such date, the deferred portion of the quarterly bonus amounts, with interest at 4.83% per year, will be paid to the named executive officers in a single lump sum payment.  Of the amounts reported under the SWR Reward Plan, the following amounts were not deferred:  Mr. Latham - $4,850; Mr. Riggs - $4,850; and Mr. Pollard - $2,325.  For more information regarding amounts deferred, see “ — Pension Benefits and Nonqualified Deferred Compensation.”
(4)	This column includes compensation derived from executive perquisites consisting of an auto allowance, social club dues, Company contributions to the Company’s 401(k) plan, and personal use of charter aircraft. For more information on this compensation, see “ — All Other Compensation from Summary Compensation Table” and “ — Perquisites and Other Personal Benefits” below.
(5)	Although Mr. Pollard was an executive officer of the Company in 2006 and 2007, he was not a named executive officer until 2008.

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The Company has not entered into any employment agreements with its named executive officers.

As a percentage of Mr. Williams’ total compensation for the year ended December 31, 2008, his base salary accounted for approximately 72%, his incentive compensation (including discretionary bonuses) accounted for approximately 19%, and all other forms of compensation accounted for 9%.  Until 2006, most of Mr. Williams’ incentive compensation was paid in the form of stock options; however, no stock options were granted to Mr. Williams in 2008, 2007 or 2006.  For information about Mr. Williams’ stock option holdings, see “ — Option Exercises and Stock Vested.”  For Messrs. Latham, Riggs, Reesby and Pollard, base salary ranged from approximately 16% to 46% of total compensation, incentive compensation (including discretionary bonuses) ranged from 46% to 81% of total compensation, and all other compensation ranged from approximately 3% to 8% of total compensation.

Supplemental Information About the APO Incentive Plan and the APO Reward Plan

The following table sets forth certain information regarding all partnerships and participation agreements formed under the APO Incentive Plan and all plans formed under the APO Reward Plan in 2008 and prior years.

Name	Year Formed	No. of Participants	No. of Units (1)	Area of Interest	Working Interest Assigned
APO Incentive Plan:
CWEI Cotton Valley I, L.P. (2)	2002	23	100.00	East Central Texas	5.00%
CWEI South Louisiana I, L.P. (3)	2002	24	100.00	South Louisiana	5.00%
CWEI Romere Pass, L.P. (3)	2002	26	104.78	Romere Pass Unit	5.00%
CWEI Longfellow Ranch I, L.P.(4)	2003	18	100.00	Pecos Co., Texas	5.00%
CWEI South Louisiana II, L.P. (2)	2004	27	100.00	South Louisiana	5.00%
CWEI Mississippi I, L.P. (3)	2004	24	100.00	Mississippi	3.00%
Rocky Arroyo, L.P. (3)	2005	24	100.00	New Mexico	5.00%
CWEI Mississippi II, L.P. (3)	2005	26	100.00	Mississippi	4.00%
CWEI West Pyle/McGonagill, L.P. (3)	2005	25	100.00	West Texas	3.50%
CWEI Destefano, L.P. (3)	2005	27	100.00	East Central Texas	4.00%
CWEI South Louisiana III, L.P.	2005	34	100.00	South Louisiana	5.00%
CWEI North Louisiana, L.P.	2005	32	100.00	North Louisiana	5.00%
Floyd Prospect, L.P.	2005	33	100.00	Louisiana - Floyd Prospect	6.00%
CWEI West Wolfcamp I, L.P. (3)	2005	32	100.00	West Texas	4.50%
CWEI South Louisiana IV, L.P.	2006	38	100.00	South Louisiana	6.00%
Floyd Prospect II PA	2006	36	100.00	Louisiana - Floyd Prospect	6.00%
CWEI North Louisiana Hosston/Cotton Valley PA	2006	35	100.00	North Louisiana - Hosston/CV	5.00%
CWEI North Louisiana Bossier PA	2006	35	100.00	North Louisiana – Bossier	5.00%
Floyd Prospect III PA	2006	33	100.00	Louisiana - Floyd Prospect	6.00%
CWEI North Louisiana Hosston/Cotton Valley II PA	2006	33	100.00	North Louisiana - Hosston/CV	5.00%
CWEI North Louisiana Bossier II PA	2006	33	100.00	North Louisiana - Bossier	5.00%
CWEI South Louisiana V PA	2006	35	100.00	South Louisiana	5.00%
West Coast Energy Properties PA	2006	20	100.00	West Coast Properties – California and Texas	7.50%
CWEI RMS/Warwink PA	2007	23	100.00	RMS/Warwink area in West Texas	5.00%
East Texas Bossier — Big Bill Simpson PA	2007	24	100.00	East Texas Bossier	5.00%
East Texas Bossier — Margarita PA	2007	24	100.00	East Texas Bossier	5.00%

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Name	Year Formed	No. of Participants	No. of Units (1)	Area of Interest	Working Interest Assigned
CWEI North Louisiana Hosston/Cotton Valley III PA	2008	32	100.00	North Louisiana Hosston/CV	7.00%
CWEI South Louisiana VI PA	2008	34	100.00	South Louisiana	7.00%
CWEI North Louisiana Bossier III PA	2008	32	100.00	N LA/Bossier	7.00%
CWEI Andrews PA	2008	33	100.00	Andrews Co., TX	7.00%
CWEI Crockett County PA	2008	33	100.00	Crockett Co., TX	7.00%
CWEI Utah PA	2008	30	100.00	Utah	5.60%
CWEI East Texas Bossier-Sunny PA	2008	25	100.00	East Texas Bossier-Sunny	7.00%
CWEI Sacramento Basin I PA	2008	9	100.00	California, Counties of Colusa, Sutter, Yolo, Solano and Sacramento	7.00%
APO Reward Plan:
CWEI Amacker Tippett Reward Plan	2008	33	100.00	Amacker Tippett Area in Upton Co., TX	7.00%
CWEI Austin Chalk Reward Plan	2008	28	100.00	Robertson and Burleson Co.,TX	7.00%
CWEI Barstow Area Reward Plan	2008	34	100.00	Ward Co., TX	7.00%

(1)Ownership interests in participation agreements, which are usually stated in percentages, have been converted to equivalent units on the basis of 1% equals 1 unit.

(2)Partnership has achieved Payout status, which is generally the return of its costs, plus interest.

(3)Partnership did not achieve Payout status and has been dissolved.  Accordingly, no payments will be made to participants in each of these partnerships.

(4)Partnership achieved Payout status in connection with the sale of all partnership assets, and was subsequently dissolved.

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The following table sets forth the number of units awarded under the APO Incentive Plan and the APO Reward Plan to each named executive officer in 2008 and prior years.

	Units Awarded to Named Executive Officers(1)
Name	Clayton W. Williams, Jr.	L. Paul Latham	Mel G. Riggs	Patrick C. Reesby	Michael L. Pollard
APO Incentive Plan:
CWEI Cotton Valley I, L.P.	—	6.67	6.67	—	2.42
CWEI South Louisiana I, L.P.	—	5.83	5.83	28.61	2.12
CWEI Romere Pass, L.P.	—	13.33	13.33	17.61	1.21
CWEI Longfellow Ranch I, L.P.	—	5.00	51.67	—	1.82
CWEI South Louisiana II, L.P.	—	4.94	4.94	26.62	2.69
CWEI Mississippi I, L.P.	—	5.07	5.07	3.82	2.77
Rocky Arroyo, L.P.	—	7.00	7.00	—	3.00
CWEI Mississippi II, L.P.	—	6.00	6.00	2.50	3.00
CWEI West Pyle/McGonagill, L.P.	—	7.00	30.00	—	3.00
CWEI Destefano, L.P.	—	7.88	7.87	—	3.00
CWEI South Louisiana III, L.P.	—	4.93	4.93	25.62	2.00
CWEI North Louisiana, L.P.	—	4.94	4.94	20.00	2.25
Floyd Prospect, L.P.	—	4.12	4.12	25.00	1.80
CWEI West Wolfcamp I, L.P.	—	7.00	7.00	—	3.00
CWEI South Louisiana IV, L.P.	—	5.00	5.00	22.05	3.00
Floyd Prospect II PA	—	4.50	4.50	25.00	2.00
CWEI North Louisiana Hosston/Cotton Valley PA	—	5.00	5.00	20.00	3.00
CWEI North Louisiana Bossier PA	—	5.00	5.00	20.00	3.00
Floyd Prospect III	—	3.50	4.50	25.00	2.00
CWEI North Louisiana Hosston/Cotton Valley II	—	4.00	5.00	20.00	3.00
CWEI North Louisiana Bossier II	—	4.00	5.00	20.00	3.00
CWEI South Louisiana V PA	—	4.00	5.00	22.05	3.00
West Coast Energy Properties PA	—	10.50	20.00	—	2.50
CWEI RMS/Warwink PA	—	10.00	15.00	—	2.75
East Texas Bossier – Big Bill Simpson PA	—	7.75	7.75	—	2.75
East Texas Bossier – Margarita PA	—	7.75	7.75	—	2.75
CWEI North Louisiana Hosston/Cotton Valley III PA	28.57	2.86	3.57	14.29	2.35
CWEI South Louisiana VI PA	28.57	2.86	3.57	14.29	2.14
CWEI North Louisiana Bossier III PA	28.57	2.50	2.86	14.29	1.96
CWEI Andrews PA	28.57	5.18	5.18	—	2.25
CWEI Crockett County PA	28.57	5.18	5.18	—	2.25
CWEI Utah PA	28.57	3.57	3.57	—	3.57
CWEI East Texas Bossier-Sunny PA	28.57	5.54	5.54	—	1.96
CWEI Sacramento Basin I PA	28.57	7.14	25.73	—	3.57
APO Reward Plan:
CWEI Amacker Tippett Reward Plan	28.57	7.14	7.14	—	2.25
CWEI Austin Chalk Reward Plan	28.57	3.57	3.57	—	2.25
CWEI Barstow Area Reward Plan	28.57	5.36	5.36	—	2.25

(1)Under the terms of the APO Incentive Plan units are fully vested when awarded.  APO Reward Plan units will be fully vested five years from date of award.

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The following table sets forth estimated future payouts to named executive officers from partnerships formed under the APO Incentive Plan, APO Reward Plan and SWR Reward Plan.

Name	Estimated Future Payouts to Named Executive Officers ($)(1)
Clayton W. Williams, Jr.	$	—
L. Paul Latham	$	830,848
Mel G. Riggs	$	834,054
Patrick C. Reesby	$	—
Michael L. Pollard	$	266,867

(1)Estimated future payouts have been computed based on the future net revenues from proved oil and gas reserves attributable to the named executive officers at December 31, 2008.  These reserve estimates were made using guidelines established by the SEC, except that the future net revenues are undiscounted.  Because of the uncertainties inherent in estimating quantities of proved reserves and future product prices and costs, it is not possible to predict estimated future payouts with any degree of certainty.

All Other Compensation from Summary Compensation Table

The following table contains a breakdown of the compensation and benefits included under the “All Other Compensation” column in the Summary Compensation Table for 2008.

ALL OTHER COMPENSATION

Name	Perquisites and Other Personal Benefits ($)		Company Contributions to Retirement and 401(k) Plans ($)(1)		Total ($)
Clayton W. Williams, Jr.	$	56,183	$	13,800	$	69,983
L. Paul Latham	$	29,185	$	13,800	$	42,985
Mel G. Riggs	$	33,600	$	13,428	$	47,028
Patrick C. Reesby	$	19,320	$	13,800	$	33,120
Michael L. Pollard	$	18,900	$	13,800	$	32,700

(1)Constitutes a matching contribution equal to 100% of a participant’s deferrals up to 6% of the participant’s compensation for purpose of the plan.

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Perquisites and Other Personal Benefits

The following table contains a breakdown of the perquisites and other personal benefits included in the “All Other Compensation” supplemental table above for 2008.

PERQUISITES AND OTHER PERSONAL BENEFITS

Name	Automobile Allowance ($)		Personal Use of Charter Aircraft ($)(1)		Social Club Dues ($)		Total Perquisites and Other Personal Benefits ($)
Clayton W. Williams, Jr.	$	18,900	$	23,618	$	13,665	$	56,183
L. Paul Latham	$	18,900	$	763	$	9,522	$	29,185
Mel G. Riggs	$	18,900	$	763	$	13,937	$	33,600
Patrick C. Reesby	$	18,900	$	—	$	420	$	19,320
Michael L. Pollard	$	18,900	$	—	$	—	$	18,900

(1)The personal use of charter aircraft is measured by the incremental cost to the Company based on the personal portion of flight hours associated with any charter flight that is predominately used for a business purpose. The Company does not provide any officer with the use of charter aircraft for trips that are not predominantly related to company business.

Grants of Plan-Based Awards

The following table provides information concerning each grant of an award made to each named executive officer in the last completed fiscal year under the Company’s long-term incentive compensation plans.  For a detailed description of these plans, see “ — Compensation Discussion and Analysis — Long-Term Incentive Compensation.”

26

There are no thresholds, targets or maximums associated with awards granted by the Company in APO Incentive Plan or the APO Reward Plan.  Therefore, the table below sets forth the number of units granted to the named executive officers pursuant to the APO Incentive Plan and the APO Reward Plan in 2008.  Only columns related to Non-Equity Incentive Plan Awards have been retained from the SEC-prescribed tabular format because the Company does not grant stock awards or equity incentive plan awards and did not grant any option awards in 2008.

GRANTS OF PLAN-BASED AWARDS

	Non-Equity Incentive Plan Awards (Units)(1)
Name	A	B	C	D	E	F	G	H
Clayton W. Williams, Jr.	28.57	28.57	28.57	28.57	28.57	28.57	28.57	28.57
L. Paul Latham	2.86	2.86	2.50	5.18	5.18	3.57	5.54	7.14
Mel G. Riggs	3.57	3.57	2.86	5.18	5.18	3.57	5.54	25.73
Patrick C. Reesby	14.29	14.29	14.29	—	—	—	—	—
Michael L. Pollard	2.35	2.14	1.96	2.25	2.25	3.57	1.96	3.57

(1)Letter “A” through “H” correspond to specific awards under the APO Incentive Plan, as follows:  A - North Louisiana Hosston/Cotton Valley III PA; B - South Louisiana VI PA; C - North Louisiana Bossier III PA; D - Andrews PA; E - Crockett County PA; F - Utah PA; G - East Texas Bossier-Sunny PA; H - Sacramento Basin I PA.

	Non-Equity Incentive Plan Awards (Units)(2)
Name	I	J	K
Clayton W. Williams, Jr.	28.57	28.57	28.57
L. Paul Latham	7.14	3.57	5.36
Mel G. Riggs	7.14	3.57	5.36
Patrick C. Reesby	—	—	—
Michael L. Pollard	2.25	2.25	2.25

(2)Letter “I” through “K” correspond to specific awards under the APO Reward Plan, as follows:  I -  Amacker Tippett Reward Plan; J - Austin Chalk Reward Plan; K -  Barstow Area Reward Plan.

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Outstanding Equity Awards at Fiscal Year-End

The following table provides information concerning unexercised options for each of the Company’s named executive officers as of December 31, 2008.  Columns (d) and (g) through (j) have been deleted from the SEC-prescribed tabular format because the Company does not grant equity incentive plan awards or stock awards.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

	Option Awards
	Number of Securities Underlying Unexercised Options		Option Exercise		Option Expiration
Name	Exercisable (#)	Unexercisable (#)	Price ($)		Date
Clayton W. Williams, Jr.	—	—	$	—	—
L. Paul Latham	—	—	—		—
Mel G. Riggs	5,000	—	$	5.50	04/16/2009
	2,888	—	$	5.50	04/16/2009
Patrick C. Reesby	1,000	—	$	5.50	04/16/2009
	2,000	—	$	5.50	04/16/2009
	2,079	—	$	5.50	04/16/2009
	3,015	—	$	5.50	04/16/2009
Michael L. Pollard	—	—	$	—	—

Option Exercises and Stock Vested

The following table provides information concerning each exercise of stock options during 2008 on an aggregated basis with respect to each of the Company’s named executive officers.  Columns (d) and (e) have been deleted from the SEC-prescribed tabular format because the Company does not grant stock awards.

OPTION EXERCISES AND STOCK VESTED

	Option Awards
Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)(1)
Clayton W. Williams, Jr.	750,000	$	19,649,625
L. Paul Latham	—	$	—
Mel G. Riggs	—	$	—
Patrick C. Reesby	—	$	—
Michael L. Pollard	—	$	—

(1)Calculated by determining the difference between the market price of the underlying securities at date exercised and the exercise price of the options.

Pension Benefits and Nonqualified Deferred Compensation

The Company does not sponsor or maintain either a defined benefit pension plan or a nonqualified deferred compensation plan for the benefit of the Company’s employees.  However, the SWR Reward Plan requires that one-third of the quarterly bonus amounts payable to participants be deferred and unvested until the earlier to occur of October 25, 2011, or a “sale transaction” or “change of control.”  In the event a participant terminates employment for any reason prior to the full vesting date, the deferred portion of the SWR Reward Plan awards will be forfeited.  Interest at the rate of 4.83% per year accrues on the deferred bonus amounts.

28

For purposes of the SWR Reward Plan, a “change of control” shall generally mean: (1) the date that (a) any person becomes the beneficial owner of more than 35% of the total voting power of the stock of the Company (or its successor by merger, consolidation or purchase of all or substantially all of its assets) and (b) Mr. Williams’ ownership in the Company falls to less than 25% of the total voting power of the stock of the Company (or its successor by merger, consolidation or purchase of all or substantially all of its assets) or its parent entity and he does not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Company (or such successor) or its parent entity, or (2) the date of Mr. Williams’ death.

A “sale transaction” will be deemed to occur for purposes of the SWR Reward Plan on the date of any sale (to a party other than the Company or its affiliates) of (1) the Company’s well interest (which is the Company’s 22.5% working interest in the RS Windham C3 well) or its rights or benefits with respect to the well interest, or (2) all or substantially all of the Company’s assets.

The following table provides information about the deferred portion of bonuses under the SWR Reward Plan with respect to each of the Company’s named executive officers that would have been paid in fiscal 2008 but for the mandatory deferral feature of the arrangement.

	Nonqualified Deferred Compensation
							Aggregate		Aggregate
	Executive		Company		Aggregate		Withdrawal/		Balance
	Contributions		Contributions		Earnings		Distributions		at end of
Name	in 2008		in 2008(1)		in 2008(2)		in 2008		2008(3)
Clayton W. Williams, Jr.	$	—	$	—	$	—	$	—	$	—
L. Paul Latham	$	—	$	8,351	$	339	$	—	$	9,618
Mel G. Riggs	$	—	$	8,351	$	339	$	—	$	9,618
Patrick C. Reesby	$	—	$	—	$	—	$	—	$	—
Michael L. Pollard	$	—	$	4,002	$	162	$	—	$	4,609

(1)Amounts in this column reflect all contributions made by the Company in 2008. The amounts earned in 2008 that have been reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for 2008 are as follows: Mr. Latham - $2,426; Mr. Riggs - $2,426; and Mr. Pollard - $1,162. The remaining amounts were previously reported in prior years as follows: Mr. Latham - $5,925 and Mr. Riggs - $5,925.

(2)Earnings consist solely of interest on the deferred compensation at the designated rate of 4.83% per year.

(3)Amounts in this column that have previously been included in the Summary Compensation Table are as follows: Mr. Latham - $6,849 and Mr. Riggs - $6,849.

Potential Payments Upon Termination or Change in Control

The Company has not entered into employment agreements with any of its named executive officers, nor do its named executive officers participate in any severance arrangements.  Although options granted under the 1993 Stock Compensation Plan vest upon the occurrence of a change of control or a threatened change of control of the Company, all outstanding options are currently vested.  Unvested awards under the SWR Reward Plan will vest upon the occurrence of certain change in control events and, consequently, the aggregate balance disclosed in the Nonqualified Deferred Compensation table above will be payable to Messrs. Latham, Riggs and Pollard.  Otherwise, upon termination of employment or a change in control of the Company, none of the Company’s named executive officers will be entitled to any additional benefits.  In addition, unvested awards under the APO Reward Plan will also vest upon the occurrence of certain change in control events.

Director Compensation

Retainer and Fees

During 2008, compensation for non-employee directors consisted of an annual retainer fee of $10,000 plus a $7,500 fee for each Board meeting attended and a $1,000 fee for attending a committee meeting held on a day other than the same day of a Board meeting.  Compensation for non-employee directors is reviewed annually by the Compensation Committee.  No change in director compensation was made for the fiscal year 2008.  However, in May 2008, the Compensation Committee increased the annual retainer for non-employee directors from $10,000 to $25,000 effective January 1, 2009 in lieu of granting any additional stock options under the Outside Director Stock Option Plan.

29

As compensation for service on the Board during 2008, employee directors received an annual fee of $5,000 plus a $2,500 fee for each Board meeting attended.  Compensation paid to employee directors in 2008 is summarized under “ — Summary Compensation Table.”

Stock Option Awards

The Company maintains an Outside Directors Stock Option Plan in which only non-employee directors are eligible to participate.  A total of 86,300 shares of common stock has been authorized and reserved for issuance under the plan, subject to adjustments to reflect changes in capitalization resulting from stock splits, stock dividends and similar events.  Prior to 2009, the plan provided that an option for 1,000 shares of the Company’s common stock will be granted on January 1 of each calendar year to each outside director in office on that date which option would become fully vested and exercisable on July 1 of the calendar year of grant.  Messrs. Beard, Ford, Parker and Smith each received options under the plan covering 1,000 shares at an option price of $31.16 per share on January 1, 2008.  These options are currently exercisable, and expire in January 2018.  In May 2008, the Compensation Committee determined that effective January 1, 2009 non-employee directors would receive cash compensation in lieu of future grants of stock options.

Director Compensation Table

The table below summarizes the compensation paid to the Company’s non-employee directors for the fiscal year ended December 31, 2008.  Columns (c) and (e) through (g) have been deleted from the SEC-prescribed tabular format because the Company did not provide compensation to its directors in 2008 other than fees and option awards.

DIRECTOR COMPENSATION TABLE

Name	Fees Earned or Paid in Cash ($)		Option Awards ($)(1)		Total ($)
Stanley S. Beard	$	43,000	$	23,060	$	66,060
Ted Gray, Jr.	$	—	$	—	$	—
Davis L. Ford	$	50,500	$	23,060	$	73,560
Robert L. Parker	$	50,500	$	23,060	$	73,560
Jordan R. Smith	$	50,500	$	23,060	$	73,560

(1)Represents the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2008, in accordance with SFAS 123R. No forfeitures occurred during 2008. Amount shown is also the fair value of the Option Awards at the date of grant, computed in accordance with SFAS 123R. Assumptions regarding the valuation of Option Awards are set forth in footnote 9 to the Company’s audited financial statements for the fiscal year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2009.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

COMPENSATION COMMITTEE

Ted Gray, Jr., Chairman

Davis L. Ford

Robert L. Parker

Jordan R. Smith

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Compensation Committee Interlocks and Insider Participation

The Compensation Committee consists of Directors Gray, Ford, Parker and Smith.  None of these committee members has or had a relationship with the Company that is or was required to be disclosed under the rules of the SEC.

Advisory Vote on Selection of Independent Auditors

KPMG LLP served as the independent auditors for the Company and its wholly owned subsidiaries for 2008.  Representatives of KPMG LLP will be present at the annual meeting with the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.

The independent auditors for 2009 will be selected by the Audit Committee of the Board at an Audit Committee meeting following the 2009 annual meeting of shareholders.  KPMG LLP has begun certain work related to the 2009 audit as approved by the Audit Committee.  Information on independent auditor fees for the last two fiscal years can be found under “Fees to KPMG LLP” in this proxy statement.

Although federal securities laws and NASDAQ listing standards require that the Audit Committee be directly responsible for selecting and retaining the independent auditors, the Board is providing shareholders with the means to express their views on this important issue.  Although this vote is not binding, the Audit Committee will consider the results of the shareholder vote in deciding whether to renew the engagement of KPMG LLP for 2009.

The Audit Committee of the Board of Directors unanimously recommends a vote FOR the selection of KPMG LLP as the Company’s independent auditors for 2009.

Report of the Audit Committee

The following is the report of the Audit Committee with respect to the Company’s audited financial statements for the year ended December 31, 2008.

During most of 2008, the Audit Committee consisted of Messrs. Parker, Beard, Ford and Smith.  The Audit Committee acts pursuant to the Audit Committee Charter, as amended and restated in March 2004.  Each member of the Audit Committee qualifies as an “independent” director under current federal securities laws and NASDAQ corporate governance listing standards.

In March 2009, the Audit Committee reviewed and discussed the Company’s audited financial statements with management and representatives of KPMG LLP, the Company’s independent auditors.  Particular attention was paid to the selection, application and disclosure of the Company’s critical accounting policies.  The Audit Committee also discussed with KPMG LLP the matters required to be discussed by Statement of Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.  The Audit Committee received the written disclosures and the letter from KPMG LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with KPMG LLP their independence from the Company and management.  The Audit Committee considered whether the non-audit services provided by KPMG LLP are compatible with their independence.

Based on the review and discussions referred to above, the Audit Committee took the following actions:

·Ratified management’s selection, application and disclosure of critical accounting policies as set forth in the Company’s audited financial statements for the year ended December 31, 2008;

·Recommended to the Board of Directors that the Company’s audited financial statements be included in its Annual Report on Form 10-K for the year ended December 31, 2008; and

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·Reviewed the Audit Committee Charter, assessed the Charter for adequacy, and determined that the Charter, as stated, was adequate.

AUDIT COMMITTEE

Robert L. Parker, Chairman

Ted Gray, Jr.

Davis L. Ford

Jordan R. Smith

Fees to KPMG LLP

Audit Fees

KPMG LLP audited the effectiveness of the Company’s internal control over financial reporting and the consolidated financial statements of the Company for the years ended December 31, 2008 and 2007 and reviewed the consolidated financial statements for the interim quarters during 2008 and 2007.  For these services, the Company paid KPMG LLP $701,000 for 2008 and $675,000 for 2007.

Southwest Royalties, Inc., a wholly owned subsidiary of the Company, serves as Managing General Partner of 13 public and 10 private limited partnerships.  KPMG LLP audited the financial statements of the 13 public limited partnerships for the years ended December 31, 2008 and 2007 and reviewed the related quarterly interim financial statements.  For these services, the limited partnerships, in the aggregate, paid KPMG LLP $212,000 for 2008 and $200,000 for 2007.  KPMG LLP also audited the financial statements of the 10 private limited partnerships for the years ended December 31, 2008 and 2007.  For these services, the limited partnerships, in the aggregate, paid KPMG LLP $70,000 for 2008 and $67,500 for 2007.

Audit-Related Fees

The Company is the general partner of West Coast Energy Properties, L.P., referred to as WCEP, a partnership between a limited liability company owned by the Company and an affiliate of GE Energy Financial Services.  KPMG LLP audited the financial statements of WCEP for the years ended December 31, 2008 and 2007.  For those services, WCEP paid KPMG LLP $60,000 for 2008 and $60,000 for 2007.

Tax Fees

During 2008 and 2007, the Company incurred fees for professional services rendered by KPMG LLP totaling $24,481 and $22,135, respectively, for tax compliance services related primarily to WCEP.

All Other Fees

KPMG LLP did not provide any other services to the Company in 2008 or 2007.

Pre-Approval Policy and Procedures

The Audit Committee must give prior approval to any management request for any amount or type of service (audit, audit-related and tax services or, to the extent permitted by law, non-audit services) the Company’s independent auditor provides.  All audit, audit-related and tax services rendered by KPMG LLP in 2008 were approved by the Audit Committee before KPMG LLP was engaged for such services.  No services of any kind were approved pursuant to a waiver permitted pursuant to 17 CFR 210.2-01(c)(7)(i)(C) (Rule 2-01(c)(7)(i)(C) of Regulation S-X).  Review and approval of such services for 2008 occurred during the regularly scheduled meetings of the Audit Committee.

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the beneficial ownership of our common stock based upon 12,131,613 shares outstanding as of March 12, 2009, by:

·Each person who is the beneficial owner of five percent or more of the outstanding common stock (based upon copies of all Schedule 13Gs and 13Ds provided to the Company);

·Each director of the Company and each nominee for director;

·The named executive officers; and

·All officers and directors of the Company as a group.

Beneficial ownership is determined in accordance with the regulations of the SEC.  Under SEC regulations, persons who have power to vote or dispose of shares of common stock, either alone or jointly with others, are deemed to be beneficial owners.  Because the voting or dispositive power of certain shares listed in the following table is shared, the same securities in such cases are listed opposite more than one name in the table and the sharing of voting or dispositive power is described in the referenced footnote.  The total number of shares of common stock of the Company listed below for directors and executive officers as a group eliminates such duplication.  Unless otherwise noted, the persons and entities named below have sole voting and investment power with respect to the shares listed opposite each of their names.

Name	Amount and Nature of Beneficial Ownership		Percent of Class
The Williams Children’s Partnership, Ltd. (1)	3,035,467		25.0	%
CWPLCO, Inc. (1)	1,247,488		10.3	%
Clayton W. Williams, Jr. (1)	3,109,917	(2)	25.6	%
BlackRock, Inc.	1,106,113	(3)	9.1	%
40 East 52nd Street
New York, NY 10022
L. Paul Latham	3,035,564	(4)	25.0	%
Mel G. Riggs	9,390	(5)	*
Patrick C. Reesby	11,877	(6)	*
Michael L. Pollard	1,306	(7)	*
Davis L. Ford	15,631	(8)	*
Robert L. Parker	29,217	(8)	*
Jordan R. Smith	8,400	(8)	*
Ted Gray, Jr.	—	(8)	*
All officers and directors as a group (12 persons)	6,252,886	(9)	51.4	%

*Less than 1 percent of the shares outstanding.

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(1)The mailing address of The Williams Children’s Partnership, Ltd., CWPLCO, Inc. and Mr. Williams is Six Desta Drive, Suite 3000, Midland, Texas 79705.  The Williams Children’s Partnership, Ltd. is a family partnership comprised of Mr. Williams’ five adult children.  CWPLCO, Inc. is a wholly-owned subsidiary of a holding company owned 100% by Mr. Williams.  Mr. Williams holds voting and investment power over the shares held by CWPLCO, Inc.

(2)Consists of (a) an aggregate of 1,247,488 shares owned by CWPLCO, Inc. and beneficially owned by Mr. Williams due to Mr. Williams’ control of CWPLCO, Inc., (b) 1,771,219 shares owned by CW Stock Holdco L.P. and beneficially owned by Mr. Williams due to Mr. Williams’ control of CW Stock Holdco L.P., (c) 11,044 shares owned by Mr. Williams’ wife, (d) 588 shares owned by a trust of which Mrs. Williams is the trustee, (e) 17,229 shares held in the Company’s 401(k) Plan & Trust over which Mr. Williams exercises investment control, (f) 49,179 shares in trusts of which Mr. Williams is the Trustee, (g) 5,749 shares in a trust for the benefit of Mr. Williams of which Mrs. Williams is the Trustee, and (h) 7,421 shares owned by Mr. Williams’ grandchildren for which Mrs. Williams is custodian.

(3)Represents shares owned by clients of BlackRock, Inc.  BlackRock, Inc. disclaims beneficial ownership of all such shares.

(4)Consists of 97 shares held in the Company’s 401(k) Plan & Trust and 3,035,467 shares owned by Williams Children’s Partnership, Ltd. over which Mr. Latham exercises investment control.  Mr. Latham is the sole member of LPL/Williams GP, LLC, which is the general partner of Williams Children’s Partnership, Ltd.  Mr. Latham has a pecuniary interest in only 0.002% of the stock held by Williams Children’s Partnership, Ltd. and disclaims beneficial ownership of the remaining 99.998% of the stock.

(5)Consists of (a) 120 shares held in the Company’s 401(k) Plan & Trust over which Mr. Riggs exercises investment control, (b) 1,382 shares over which Mr. Riggs exercises control under a Power of Attorney and (c) the right to acquire beneficial ownership through options currently exercisable within 60 days to purchase 7,888 shares of common stock granted under the 1993 Stock Compensation Plan.

(6)Includes 3,783 shares held in the Company’s 401(k) Plan & Trust over which Mr. Reesby exercises investment control.

(7)Consists of 1,306 shares held in the Company’s 401(k) Plan & Trust over which Mr. Pollard exercises investment control.

(8)Includes the right to acquire beneficial ownership through options currently exercisable within 60 days to purchase shares of common stock granted under the Outside Directors Stock Option Plan, as follows:  Mr. Parker — 9,000 shares and Mr. Smith — 8,000 shares.

(9)Includes all rights of directors and executive officers to acquire beneficial ownership through options currently exercisable within 60 days to purchase shares of common stock granted under the Outside Directors Stock Option Plan and the 1993 Stock Compensation Plan.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company pursuant to the rules and regulations promulgated under Section 16(a) of the Securities Exchange Act of 1934 during and with respect to the Company’s last fiscal year and upon certain written representations received by the Company, the Company believes that all filing requirements applicable to officers, directors and 10% beneficial owners under Section 16(a) were satisfied.

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Certain Transactions and Relationships

The Audit Committee of the Board reviews, approves and monitors all transactions involving the Company and “related persons” (directors and executive officers or their immediate family members, or shareholders owning 5% or greater of the Company’s outstanding stock) in which the amount exceeds $120,000 and in which the related person has a direct or indirect material interest.  The Audit Committee will approve the transaction only if they determine that it is in the best interest of the Company.  While the Audit Committee has not adopted a formal policy for reviewing related party transactions, in considering the transaction, the Audit Committee will consider all relevant factors, including as applicable:

·The Company’s business rationale for entering into the transaction;

·The alternatives to entering into a related party transaction;

·Whether the transaction is on terms comparable to those available to third parties;

·The potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and

·The overall fairness of the transaction to the Company.

The Audit Committee will periodically monitor the transaction to ensure that there are no changed circumstances that would render it advisable for the Company to amend or terminate the transaction.

In the event a transaction arises that would require the review of the Audit Committee, management or the affected director or executive officer will bring the matter to the attention of the Chairman of the Audit Committee.  If a member of the Audit Committee is involved in the transaction, he will be recused from all discussions and decisions about the transaction.  Any such transaction must be approved in advance wherever practicable, and if not practicable, it must be ratified as promptly as practicable.  The Audit Committee will review the transactions annually to determine whether they continue to be in the Company’s best interest.

The Company and the Williams Entities are parties to an agreement, which we refer to as the Service Agreement, pursuant to which the Company furnishes services to, and receives services from, such entities.  Under the Service Agreement, the Company provides legal, computer, payroll and benefits administration, insurance administration, tax preparation services, tax planning services and general accounting services to the Williams Entities, as well as technical services with respect to the operation of certain oil and gas properties owned by the Williams Entities.  The Williams Entities provide business entertainment to or for the benefit of the Company.  The following table summarizes the charges to and from the Williams Entities for the year ended December 31, 2008.

	2008
	(In thousands)
Amounts received from the Williams Entities:
Service Agreement:
Services	$	581
Insurance premiums and benefits	868
Reimbursed expenses	467
	$	1,916
Amounts paid to the Williams Entities:
Rent(1)	$	807
Service Agreement
Business entertainment(2)	91
Reimbursed expenses	197
	$	1,095

(1)Rent amounts were paid to ClayDesta Buildings, L.P., a Texas limited partnership referred to as CDBLP, of which the Company owns 31.9% and affiliates of the Company own 23.3%.  A Williams Entity provides property management services to the buildings owned and operated by CDBLP.  In 2008, CDBLP paid the Williams Entity approximately $304,000 in fees for these services, including approximately $107,000 in leasing commissions.

(2)Consists of hunting and fishing rights pertaining to land owned by affiliates of Mr. Williams.

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Mr. Williams is the father-in-law of Gregory S. Welborn, who serves as Vice President — Land for the Company.  Because Mr. Welborn is an “immediate family member” of Mr. Williams under SEC regulations, Mr. Welborn’s employment by the Company may be deemed to be a transaction with a related person.  In 2008, the total compensation paid by the Company to Mr. Welborn, consisting of base salary, bonuses, long-term incentive compensation, perquisities and other compensation, was $212,364.

Shareholder Proposals

In accordance with the Company’s bylaws, a shareholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such shareholder has given timely notice to the Secretary of the Company in proper written form of their intent to make such nomination or nominations or to propose such business.    To be timely, such shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 120 calendar days in advance of the date of the Company’s proxy statement released to shareholders in connection with the previous year’s annual meeting of shareholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year’s proxy statement, notice by the shareholder to be timely must be received a reasonable time before the solicitation is made.  To be in proper form, a shareholder’s notice must contain the information and comply with the other requirements set forth in the Company’s bylaws.

In particular, shareholder proposals will be eligible for consideration for inclusion in the Company’s proxy statement and form of proxy relating to our 2010 annual meeting of shareholders only if such proposals are received by the Secretary of the Company no later than November 27, 2009.  Such proposals should be directed to Clayton Williams Energy, Inc., Six Desta Drive, Suite 6500, Midland, Texas 79705, Attention:  Mel G. Riggs.  Such proposals must comply with the applicable regulations of the SEC.  Notice to the Company of all other shareholder proposals not intended for inclusion in the Company’s proxy statement will not be considered as business to come before our 2010 annual meeting unless received at the address above on or before February 9, 2010; provided, that if the date of our 2010 annual meeting is more than 30 days before or after May 6, 2010 (the one year anniversary of our 2009 annual meeting, then the proposal must be received by us at the address above no earlier than the 120th day prior to our 2010 annual meeting and no later than the 90th day prior to our 2010 annual meeting.

Under our bylaws, the chairman of the annual meeting of shareholders shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure.

Other Business

As of the date of this proxy statement, the Board knows of no business or nominees to come before the annual meeting other than the proposals described above in this proxy statement.  If, however, other matters properly come before the meeting, it is the intention of the management proxy holders to vote in accordance with their best judgment in the interest of the Company.

	By order of the Board of Directors,
	Mel G. Riggs
	Secretary
Dated: March 24, 2009

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THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: Signature (Joint Owners) Signature [PLEASE SIGN WITHIN BOX] Date Date CLAYTON WILLIAMS ENERGY, INC. CLAYW1 VOTE BY INTERNET - www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time on May 5, 2009. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS If you would like to reduce the costs incurred by Clayton Williams Energy, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time on May 5, 2009. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Clayton Williams Energy, Inc., c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. CLAYTON WILLIAMS ENERGY, INC. SIX DESTA DRIVE SUITE 6500 MIDLAND, TX 79705-9963 To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below. For Against Abstain 2. Advisory vote on the selection of KPMG LLP as independent auditors for 2009. WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DIRECTED. IF NO INSTRUCTION IS INDICATED, IT WILL BE VOTED “FOR” ALL NOMINEES IN ITEM 1, “FOR” ITEM 2, AND WITH AND IN ACCORDANCE WITH THE PROXIES DISCRETION ON ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING. For All Withhold All For All Except 01) Ted Gray, Jr. 02) Mel G. Riggs The Board of Directors Recommends a Vote “FOR” Items 1 and 2. 1. Election of two directors: Nominees: Vote on Proposal MATERIALS ELECTION As of July 1, 2007, SEC rules permit companies to send you a Notice that proxy information is available on the Internet, instead of mailing you a complete set of materials. Check the box to the right if you want to receive a complete set of future proxy materials by mail, at no cost to you. If you do not take action you may receive only a Notice. Please sign exactly as the name or names appear(s) in this proxy. If the stock is issued in the name of two or more persons, all of them should sign the proxy. A proxy executed by a corporation should be signed in its name by an authorized officer. Executors, administrators and trustees so indicate when signing.

This proxy is solicited by the Board of Directors for use at the Annual Meeting on May 6, 2009. The undersigned appoints L. Paul Latham and Mel G. Riggs, or either of them, with full power to act without the other, as proxies with full power of substitution, to represent and to vote on behalf of the undersigned all the shares of common stock of Clayton Williams Energy, Inc. which the undersigned is entitled to vote at the Annual Meeting of Shareholders to be held at the ClayDesta Conference Center, Six Desta Drive, Suite 6550, Midland, Texas on May 6, 2009 at 11:00 a.m., local time or at any adjournment or postponement thereof upon the matters set forth in this proxy and described in the Proxy Statement and upon other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. The undersigned hereby revokes all proxies previously given by the undersigned to vote at the Annual Meeting or any adjournment or postponement thereof. Should the undersigned be present and choose to vote at the Annual Meeting, and once the Company’s Corporate Secretary is notified of the decision to terminate this proxy, then the power of the proxies will be terminated. The undersigned acknowledges receipt from the Company, prior to the execution of the Proxy, a Notice of Annual Meeting, and Proxy Statement dated March 24, 2009 and a 2008 Annual Report. CLAYTON WILLIAMS ENERGY, INC. ANNUAL MEETING OF SHAREHOLDERS Wednesday, May 6, 2009 11:00 A.M. CLAYDESTA CONFERENCE CENTER Six Desta Drive, Suite 6550 Midland, Texas 79705-9963 For meeting directions, please call 432-688-3419 PLEASE ACT PROMPTLY SIGN, DATE & MAIL YOUR PROXY CARD TODAY See reverse for voting instructions. Clayton Williams Energy, Inc. Six Desta Drive, Suite 6500 Midland, Texas 79705-9963 proxy CLAYW1 Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting: The Combined Proxy Statement, Annual Report and Notice of Annual Meeting are available at www.proxyvote.com.