STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

In 2019, our stockholders approved the California Resources Corporation Long-Term Incentive Plan (the Plan), which provides for the issuance of stock, incentive and non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, stock bonuses, performance-based awards and other awards to executives, employees and non-employee directors. The maximum number of authorized shares of our common stock that may be issued pursuant to our long-term incentive plan is 7.3 million shares. As of December 31, 2019, 4.7 million shares were issued or reserved under the Plan and 2.6 million shares were available for future issuance of awards under the Plan. Our incentive compensation program is administered by the Compensation Committee of our Board of Directors.

Shares of our common stock may be withheld by us in satisfaction of tax withholding obligations arising upon the exercise of stock options or the vesting of restricted stock units. Further, shares of our common stock may be withheld by us in payment of the exercise price of employee stock options, which also count against the authorized shares specified above.

We recognized the following compensation expense for stock-based awards for the years ended December 31, 2019, 2018 and 2017 in our consolidated statements of operations:



	2019		2018		2017
	(in millions)
General and administrative expenses	$	25	$	36	$	23
Production costs	7		9		6
Total stock-based compensation expense	$	32	$	45	$	29

For the years ended December 31, 2019, 2018 and 2017, we did not recognize any income tax benefit related to our stock-based compensation. For the years ended December 31, 2019, 2018 and 2017, we made cash payments of $25 million, $24 million and $6 million for the cash-settled portion of our awards, respectively.

As of December 31, 2019, the unrecognized compensation expense for all our unvested stock-based incentive awards was $26 million, based on the year-end value of our common stock. This expense is expected to be recognized over a weighted-average period of two years.

Restricted Stock

Executives and other employees are granted restricted stock units (RSUs), which are in the form of, or equivalent in value to, actual shares of our common stock. RSUs are service based and, depending on the terms of the awards, are settled in cash or stock at the time of vesting. The awards either vest ratably over three years, with one third of the granted units becoming vested on the day before each anniversary date following the date of grant, or vest entirely at the end of three years. Our RSUs have nonforfeitable dividend rights, and any dividends or dividend equivalents declared during the vesting period are paid as declared.

For cash- and stock-settled RSUs, compensation value is initially measured on the grant date using the quoted market price of our common stock. Compensation expense for cash-settled RSUs is adjusted on a monthly basis for the cumulative change in the value of the underlying stock. Compensation expense for the stock-settled RSUs is recognized on a straight-line basis over the requisite service periods, adjusted for actual forfeitures.

The following summarizes our restricted stock activity for the year ended December 31, 2019:



	Stock-Settled				Cash-Settled
	Number of Units (in thousands)		Weighted-Average Grant-Date Fair Value		Number of Units (in thousands)
Unvested at January 1	819		$	17.36	2,636
Granted^(a)	171		$	21.71	1,511
Vested	(409	)	$	19.20	(1,391	)
Forfeited	(27	)	$	13.48	(471	)
Unvested at December 31	554		$	17.54	2,285

Performance Stock

Our performance stock units (PSUs) granted in 2019 and 2018 are restricted stock awards with performance targets. The PSUs granted in 2019 are based 50% on achievement of specified cumulative VCI results and 50% on total stockholder return relative to a selected peer group of companies over a three-year period, with payouts ranging from 0% to 200% of the target award. The awards are paid 50% in stock and 50% in cash up to target. Amounts over target are paid in cash. These awards accrue dividend equivalents as dividends are declared during the vesting period, which are paid upon certification for the number of vested units.

The PSUs granted in 2018 are based 50% on achievement of specified cumulative VCI results and 50% on the change in CRC combined production costs compared to the change in production costs of a selected peer group of companies over a three-year period, with payouts ranging from 0% to 200% of the target award. The awards are paid 60% in stock and 40% in cash up to target. Amounts over target are paid in cash. These awards accrue dividend equivalents as dividends are declared during the vesting period, which are paid upon certification for the number of vested units.

Compensation expense is adjusted quarterly, on a cumulative basis, for any changes in the number of share equivalents expected to be paid based on the relevant performance criteria.

The following summarizes our PSU activity for the year ended December 31, 2019:



	Stock-Settled				Cash-Settled
	Number of Awards (in thousands)		Weighted-Average Grant-Date Fair Value		Number of Units (in thousands)
Unvested at January 1	294		$	18.34	196
Granted	214		$	21.71	214
Vested	—		$	—	—
Forfeited	(11	)	$	20.19	(9	)
Unvested at December 31	497		$	19.75	401

Stock Options

We grant stock options to certain executives under our long-term incentive plan. The options permit the purchase of our common stock at exercise prices no less than the fair market value of the stock on the date the options were granted, with the majority of options being granted at 10% above fair market value. The options have terms of seven years and vest ratably over three years, with one third of the granted options becoming exercisable on the day before each anniversary date following the date of grant, subject to certain restrictions including continued employment. No stock options were granted during 2017 and 2016.

Fair value is measured on the grant date using the Black-Scholes option valuation model and expensed on a straight-line basis over the vesting period. The model uses various assumptions, based on management's estimates at the time of grant, which impact the calculation of fair value and ultimately the amount of expense recognized over the vesting period of the award. Expected life is calculated based on the simplified method and represents the period of time that options granted are expected to be held prior to exercise. For options granted in 2019 and 2018, volatility was based on the average historical volatility of our stock. For options granted in 2015 and 2014, volatility was based on the average volatility of the stocks of a select group of peer companies in the absence of adequate stock price history of our common stock at the time of grant. The risk-free interest rate is the implied yield available on zero-coupon U.S. Treasury notes at the grant date with a remaining term approximating the expected life. The dividend yield is the expected annual dividend yield over the expected life, expressed as a percentage of the stock price on the grant date. Of the required assumptions, the expected life of the stock option award and the expected volatility have the most significant impact on the fair value calculation.

The grant date assumptions used in the Black-Scholes valuation for options granted during 2019, 2018, 2015 and 2014 were as follows:



	2019			2018			2015			2014
Exercise price per share	$	23.88		$	20.17		$	42.00		$	81.10
Expected life (in years)	4.5			4.5			4.5			4.5
Expected volatility	78.26		%	69.85		%	44.7		%	35.4		%
Risk-free interest rate	2.47		%	2.63		%	1.56		%	1.40		%
Dividend yield	—		%	—		%	0.95		%	0.50		%
Grant-date fair value of stock option awards	$	12.95		$	10.02		$	15.00		$	19.80

The following table summarizes our option activity during the year ended December 31, 2019:



	Options (in thousands)		Weighted-Average Exercise Price		Weighted-Average Grant-Date Fair Value		Aggregate Intrinsic Value
Beginning balance, January 1	1,287		$	62.82	$	17.22	$	—
Granted	144		$	23.88	$	12.95	$	—
Exercised	(1	)	$	20.17	$	10.02	$	—
Expired or Canceled	(3	)	$	22.28	$	11.69	$	—
Ending balance, December 31	1,427		$	59.00	$	16.81	$	—
Exercisable at December 31	1,174		$	66.91	$	17.92	$	—

Stock Awards

In 2019, we granted approximately 79,000 shares of stock to our non-employee directors as the equity-portion of their 2019 compensation.

Employee Stock Purchase Plan

Effective January 1, 2015, we adopted the stockholder-approved California Resources Corporation 2014 Employee Stock Purchase Plan (ESPP), which was subsequently amended in May 2016 and May 2018. The ESPP provides our employees the ability to purchase shares of our common stock at a price equal to 85% of the closing price of a share of our common stock as of the first or last day of each offering period (a fiscal quarter), whichever amount is less.

The maximum number of authorized shares of our common stock that may be issued pursuant to the ESPP is 1.5 million shares, subject to adjustment pursuant to the terms of the ESPP. In addition, participants in the ESPP are subject to certain limits on the number of shares that can be purchased in any given year and during any given offering period. As of December 31, 2019, 1.0 million shares were issued under our ESPP and 0.5 million shares were available for future issuance. For the year ended December 31, 2019, we issued approximately 0.2 million shares of common stock in connection with our ESPP.