Note 7 Share‑Based Compensation

Total share‑based compensation expense, which includes stock options and restricted shares, totaled $31.9 million, $32.0 million and $47.3 million for 2017, 2016 and 2015, respectively. Compensation expense related to awards of restricted shares totaled $31.4 million, $31.3 million and $37.0 million for 2017, 2016 and 2015, respectively, which is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). Additionally, we recognized $8.7 million of expense related to awards of restricted shares granted in connection with the closing of the CJES merger during 2015 which is included in other, net in our consolidated statement of income (loss) for the year ended December 31, 2015. Share-based compensation expense has been allocated to our various reportable segments. See Note 21—Segment Information.

In addition to the time-based restricted stock share-based awards, we provide two types of performance share awards: the first, based on our performance measured against pre-determined performance metrics and the second, based on market conditions measured against a predetermined peer group. The performance period for the awards granted in 2017 commenced on January 1, 2016 and ended December 31, 2016.

Stock Option Plans

As of December 31, 2017, we had several stock plans under which options to purchase our common shares could be granted to key officers, directors and managerial employees of Nabors and its subsidiaries. Options granted under the plans generally are at prices equal to the fair market value of the shares on the date of the grant. Options granted under the plans generally are exercisable in varying cumulative periodic installments after one year. In the case of certain key executives and directors, options granted may vest immediately on the grant date. Options granted under the plans cannot be exercised more than ten years from the date of grant. Options to purchase 6.8 million and 8.0 million Nabors common shares remained available for grant as of December 31, 2017 and 2016, respectively. Of the common shares available for grant as of December 31, 2017, approximately 5.7 million of these shares are also available for issuance in the form of restricted shares.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model which uses assumptions for the risk-free interest rate, volatility, dividend yield and the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the option. Expected volatilities are based on implied volatilities from traded options on Nabors’ common shares, historical volatility of Nabors’ common shares, and other factors. We use historical data to estimate the expected term of the options and employee terminations within the option-pricing model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the options represents the period of time that the options granted are expected to be outstanding.

Stock option transactions under our various stock-based employee compensation plans are presented below:


				Weighted-
		Weighted-		Average
		Average		Remaining		Aggregate
		Exercise		Contractual		Intrinsic
Options	Shares	Price		Term		Value
	(In thousands, except exercise price)
Options outstanding as of December 31, 2016	5,217	$	12.56
Granted	124		8.59
Exercised	(842)		9.85
Forfeited	(105)		9.43
Options outstanding as of December 31, 2017	4,394	$	13.04	2.81	years	$	—
Options exercisable as of December 31, 2017	4,360	$	13.03	2.77	years	$	—

During 2017, 2016 and 2015, respectively, we awarded options vesting over periods up to four years to purchase 124,271, 99,711 and 158,219 of our common shares to our employees, executive officers and directors.

The fair value of stock options granted during 2017, 2016 and 2015 was calculated using the Black‑Scholes option pricing model and the following weighted‑average assumptions:


	Year Ended December 31,
	2017		2016		2015
Weighted average fair value of options granted	$	2.86	$	3.52	$	4.40
Weighted average risk free interest rate		1.85%		1.09%		1.29%
Dividend yield		2.94%		2.21%		2.05%
Volatility (1)		50.82%		45.69%		50.01%
Expected life (in years)		4.0		4.0		4.0

(1)

Expected volatilities are based on implied volatilities from publicly traded options to purchase Nabors' common shares, historical volatility of Nabors' common shares and other factors.

A summary of our unvested stock options as of December 31, 2017, and the changes during the year then ended is presented below:


		Weighted-Average
		Grant-Date Fair
Unvested Stock Options	Outstanding	Value
	(In thousands, except fair value)
Unvested as of December 31, 2016	57	$	5.34
Granted	124		2.86
Vested	(147)		3.27
Forfeited	—		—
Unvested as of December 31, 2017	34	$	5.21

The total intrinsic value of options exercised during 2017, 2016 and 2015 was $5.1 million, $0.3 million and $0.8 million, respectively. The total fair value of options that vested during the years ended December 31, 2017, 2016 and 2015 was $0.5 million, $1.9 million and $1.9 million, respectively.

As of December 31, 2017, there was $0.1 million of total future compensation cost related to unvested options that are expected to vest. That cost is expected to be recognized over a weighted‑average period of approximately one year.

Restricted Stock

Our stock plans allow grants of restricted shares. Restricted shares are issued on the grant date, but cannot be sold or transferred. Restricted shares vest in varying periodic installments ranging up to five years.

A summary of our restricted shares as of December 31, 2017, and the changes during the year then ended, is presented below:


		Weighted-Average
		Grant-Date Fair
Restricted shares	Outstanding	Value
	(In thousands, except fair value)
Unvested as of December 31, 2016	3,885	$	13.41
Granted	1,130		12.84
Vested	(1,567)		14.65
Forfeited	(150)		12.33
Unvested as of December 31, 2017	3,298	$	12.67

During 2017, 2016 and 2015, we awarded 1,130,304, 1,885,440 and 2,546,801 restricted shares, respectively, to our employees and directors. These awards had an aggregate value at their date of grant of $14.5 million, $20.5 million and $34.8 million, respectively, and were scheduled to vest over a period of up to four years. The fair value of restricted shares that vested during 2017, 2016 and 2015 was $19.2 million, $13.5 million and $18.3 million, respectively.

As of December 31, 2017, there was $27.6 million of total future compensation cost related to unvested restricted share awards that are expected to vest. That cost is expected to be recognized over a weighted‑average period of approximately two years.

Restricted Shares Based on Performance Conditions

During the years ended December 31, 2017, 2016 and 2015, we awarded 461,919, 1,284,829 and 438,307 restricted shares, respectively, vesting over a period of three years to some of our executives. The performance awards granted were based upon achievement of specific financial or operational objectives. The number of shares granted was determined by the percentage of performance goals achieved during fiscal years 2017, 2016 and 2015, respectively. These awards had an aggregate fair value at their date of grant of $7.1 million, $13.9 million and $5.9 million, respectively.

The following table sets forth information regarding outstanding restricted shares based on performance conditions as of December 31, 2017:


		Weighted-Average
		Grant-Date Fair
Performance based restricted shares	Outstanding	Value
	(In thousands, except fair value)
Outstanding as of December 31, 2016	1,595	$	12.01
Granted	462		15.31
Vested	(644)		13.33
Outstanding as of December 31, 2017	1,413	$	12.49

Until shares are granted, our awards that are earned based on performance conditions are liability-classified awards. Our accrued liabilities included $2.2 million for such awards at December 31, 2017 for the performance period beginning January 1, 2017 through December 31, 2017 and $2.5 million for such awards at December 31, 2016 for the performance period beginning January 1, 2016 through December 31, 2016. The fair value of these awards that vested during the years ended December 31, 2017, 2016 and 2015 was $7.1 million, $1.5 million and $6.8 million, respectively. The fair value of these liability-classified awards are estimated at each reporting period, based on internal metrics and marked to market.

Restricted Shares Based on Market Conditions

During 2017, 2016 and 2015, we granted 397,692, 749,427 and 544,925 restricted shares, respectively, which are equity classified awards and will vest on our performance compared to our peer group over a three-year period. These awards had an aggregate fair value at their date of grant of $4.4 million, $4.2 million and $4.7 million, respectively, after consideration of all assumptions.

The grant date fair value of these awards was based on a Monte Carlo model, using the following assumptions:


		Year Ended December 31,
	2017		2016		2015

Risk free interest rate		1.62%		1.41%		1.18%
Expected volatility		55.00%		52.00%		50.00%
Closing stock price at grant date	$	16.81	$	8.64	$	12.98
Expected term (in years)		3.0		3.0		3.00

The following table sets forth information regarding outstanding restricted shares based on market conditions as of December 31, 2017:


		Weighted-Average
		Grant-Date Fair
Market based restricted shares	Outstanding	Value
	(In thousands, except fair value)
Outstanding as of December 31, 2016	1,690	$	7.94
Granted	398		11.16
Vested	(237)		11.40
Forfeited	(159)		11.40
Outstanding as of December 31, 2017	1,692	$	7.89

As of December 31, 2017, there was $4.4 million of total future compensation cost related to unvested performance share awards that are expected to vest.