Note 7 Share‑Based Compensation

Total share‑based compensation expense, which includes stock options and restricted shares, was $26.4 million, $31.9 million and $32.0 million for 2018, 2017 and 2016, respectively. Compensation expense related to awards of restricted shares totaled $26.0 million, $31.4 million and $31.3 million for 2018, 2017 and 2016, respectively, which is included in direct costs and general and administrative expenses in our consolidated statements of income (loss). 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 (“Performance Shares”) and the second, based on market conditions measured against a predetermined peer group (“TSR Shares”). The performance period for the awards granted in 2018 commenced on January 1, 2017 and ended December 31, 2017.

Stock Option Plans

As of December 31, 2018, 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 15.2 million and 6.8 million Nabors common shares remained available for grant as of December 31, 2018 and 2017, respectively. Of the common shares available for grant as of December 31, 2018, approximately 14.3 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, 2017	4,394	$	13.04
Granted	171		4.82
Exercised	—		—
Forfeited	(789)		19.28
Options outstanding as of December 31, 2018	3,776	$	11.36	2.03	years	$	—
Options exercisable as of December 31, 2018	3,759	$	11.35	2.01	years	$	—

During 2018, 2017 and 2016, respectively, we awarded options vesting over periods up to four years to purchase 171,124, 124,271 and 99,711 of our common shares to our employees, executive officers and directors.

The fair value of stock options granted during 2018, 2017 and 2016 was calculated using the Black‑Scholes option pricing model and the following weighted‑average assumptions:


	Year Ended December 31,
	2018		2017		2016
Weighted average fair value of options granted	$	1.75	$	2.86	$	3.52
Weighted average risk free interest rate		2.59%		1.85%		1.09%
Dividend yield		3.03%		2.94%		2.21%
Volatility (1)		57.11%		50.82%		45.69%
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, 2018, 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, 2017	34	$	5.21
Granted	171		1.75
Vested	(188)		2.07
Forfeited	—		—
Unvested as of December 31, 2018	17	$	5.21

The total intrinsic value of options exercised during 2017 and 2016 was $5.1 million and $0.3 million, respectively. There were no options exercised during 2018. The total fair value of options that vested during the years ended December 31, 2018, 2017 and 2016 was $0.4 million, $0.5 million and $1.9 million, respectively.

As of December 31, 2018, there was $0.04 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 less than one year.

Restricted Shares

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, 2018, 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, 2017	3,298	$	12.67
Granted	2,392		6.92
Vested	(1,290)		13.32
Forfeited	(788)		10.25
Unvested as of December 31, 2018	3,612	$	9.16

During 2018, 2017 and 2016, we awarded 2,392,486, 1,130,304 and 1,885,440 restricted shares, respectively, to our employees and directors. These awards had an aggregate value at their date of grant of $16.6 million, $14.5 million and $20.5 million, respectively, and were scheduled to vest over a period of up to four years. The fair value of restricted shares that vested during 2018, 2017 and 2016 was $8.7 million, $19.2 million and $13.5 million, respectively.

As of December 31, 2018, there was $22.7 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, 2018, 2017 and 2016, we awarded 1,009,948, 461,919 and 1,284,829 restricted shares, respectively, vesting over a period of three years to some of our executives. The Performance Share 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 $7.0 million, $7.1 million and $13.9 million, respectively.

The following table sets forth information regarding outstanding restricted shares based on performance conditions as of December 31, 2018:


		Weighted-Average
		Grant-Date Fair
Performance based restricted shares	Outstanding	Value
	(In thousands, except fair value)
Outstanding as of December 31, 2017	1,413	$	12.49
Granted	1,010		6.89
Vested	(677)		12.24
Outstanding as of December 31, 2018	1,746	$	9.35

Until shares are granted, our Performance Share awards are liability-classified awards. Our accrued liabilities included $2.2 million for such awards at December 31, 2018 for the performance period beginning January 1, 2018 through December 31, 2018 and $2.2 million for such awards at December 31, 2017 for the performance period beginning January 1, 2017 through December 31, 2017. The fair value of these awards that vested during the years ended December 31, 2018, 2017 and 2016 was $4.8 million, $7.1 million and $1.5 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 2018, 2017 and 2016, we granted awards for 1,058,158, 397,692 and 749,427 TSR 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 $5.1 million, $4.4 million and $4.2 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,
	2018		2017		2016

Risk free interest rate		2.02%		1.62%		1.41%
Expected volatility		57.00%		55.00%		52.00%
Closing stock price at grant date	$	6.87	$	16.81	$	8.64
Expected term (in years)		3.0		3.0		3.0

The following table sets forth information regarding outstanding restricted shares based on market conditions as of December 31, 2018:


		Weighted-Average
		Grant-Date Fair
Market based restricted shares	Outstanding	Value
	(In thousands, except fair value)
Outstanding as of December 31, 2017	1,692	$	7.89
Granted	1,058		4.77
Vested	(218)		8.67
Forfeited	(1,175)		5.86
Outstanding as of December 31, 2018	1,357	$	7.09

As of December 31, 2018, there was $4.9 million of total future compensation cost related to unvested TSR Share awards that are expected to vest.