(3) Share-Based Compensation

We have various types of share-based compensation plans. Refer to our definitive proxy statement for our annual meeting of shareholders filed with the SEC on April 2, 2014, as well as Note 6 of our consolidated financial statements in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, for additional information related to these share-based compensation plans. We follow guidance contained in FASB ASC 718 to account for share-based compensation.

We receive a tax deduction for certain stock option exercises during the period the stock options are exercised, generally for the excess of the market value on the exercise date over the exercise price of the stock option awards. We receive an additional tax deduction when restricted stock awards vest at a higher value than the value used to recognize compensation expense at the date of grant. In accordance with guidance contained in FASB ASC 718, we are required to report excess tax benefits from the award of equity instruments as financing cash flows. For the three and nine months ended September 30, 2014, we recognized an income tax shortfall in earnings of $0.2 million and $2.1 million, respectively, primarily related to restricted stock awards that vested at a price lower than the grant date fair value. For the three and nine months ended September 30, 2013, we did not recognize any material excess tax benefit or shortfall in earnings. There were no stock option exercises for the nine months ended September 30, 2014 and 2013.

Share-based compensation expense for awards issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying condensed consolidated statements of operations, was $1.7 million and $2.2 million for the three months ended September 30, 2014 and 2013, respectively and $5.1 million and $7.8 million for the nine months ended September 30, 2014 and 2013, respectively. Share-based compensation recorded in lease operating cost was $0.1 million for the three months ended September 30, 2014 and 2013 and was $0.2 million for the nine months ended September 30, 2014 and 2013, respectively. We also capitalized $0.9 million and $1.2 million of share-based compensation for the three months ended September 30, 2014 and 2013, respectively, and capitalized $2.9 million and $4.4 million for the nine months ended September 30, 2014 and 2013, respectively. We view stock option awards and restricted stock awards with graded vesting as single awards with an expected life equal to the average expected life of component awards and amortize the awards on a straight-line basis over the life of the awards.

Stock Option Awards

We use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards. During the nine months ended September 30, 2014 and 2013 we did not grant any stock option awards.

At September 30, 2014, we had $0.2 million of unrecognized compensation cost related to stock option awards, which is expected to be recognized over a weighted-average period of 0.4 years. The following table represents stock option award activity for the nine months ended September 30, 2014:



	Shares	Wtd. Avg. Exercise Price
Options outstanding, beginning of period	1,488,314	$	33.38
Options granted	—	$	—
Options canceled	(90,527)	$	25.20
Options exercised	—	$	—
Options outstanding, end of period	1,397,787	$	33.88
Options exercisable, end of period	1,295,616	$	33.98

Our stock option awards outstanding and exercisable at September 30, 2014 were out of the money and therefore had no aggregate intrinsic value. At September 30, 2014, the weighted average contract life of stock option awards outstanding was 4.8 years and the weighted average contract life of stock option awards exercisable was 4.6 years. There were no stock option exercises for the nine months ended September 30, 2014 and 2013.

Restricted Stock Awards

The plans, as described in Note 6 of our consolidated financial statements in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, allow for the issuance of restricted stock awards that generally may not be sold or otherwise transferred until certain restrictions have lapsed. The unrecognized compensation cost related to these awards is expected to be expensed over the period the restrictions lapse (generally one to three years).

The compensation expense for these awards was determined based on the closing market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest. As of September 30, 2014, we had unrecognized compensation expense of $12.4 million related to restricted stock awards which is expected to be recognized over a weighted-average period of 1.7 years. The grant date fair value of shares vested during the nine months ended September 30, 2014 was $10.6 million.

The following table represents restricted stock award activity for the nine months ended September 30, 2014:



	Shares		Wtd. Avg. Grant Price
Restricted shares outstanding, beginning of period	1,267,110		$	21.54
Restricted shares granted	743,150		$	11.58
Restricted shares canceled	(139,973	)	$	15.16
Restricted shares vested	(308,825	)	$	34.27
Restricted shares outstanding, end of period	1,561,462		$	14.85

Performance-Based Restricted Stock Units

For the nine months ended September 30, 2014 and 2013, the Company granted 185,250 and 189,700 units, respectively, of performance-based restricted stock units containing predetermined market and performance conditions with a cliff vesting period of 3.1 years. These units were granted at 100% of target payout while the conditions of the grants allow for a payout ranging between no payout and 200% of target.

The compensation expense for the market condition is based on the per unit grant date valuation using a Monte-Carlo simulation. The performance condition is remeasured quarterly and compensation expense is recorded based on the closing market price of our stock per unit on the grant date multiplied by the expected payout level. The payout level is calculated based on actual performance achieved during the performance period compared to a defined peer group.

As of September 30, 2014, we had unrecognized compensation expense of $2.8 million related to our restricted stock units which is expected to be recognized over a weighted-average period of 2.0 years. No shares vested during the nine months ended September 30, 2014 and 2013. The weighted average grant date fair value for the restricted stock units granted during the nine months ended September 30, 2014 and 2013 was $11.68 and $15.01 per unit, respectively.

The following table represents restricted stock unit activity for the nine months ended September 30, 2014:



	Shares	Wtd. Avg. Grant Price
Restricted stock units outstanding, beginning of period	189,700	$	15.01
Restricted stock units granted	185,250	$	11.68
Restricted stock units canceled	—	$	—
Restricted stock units vested	—	$	—
Restricted stock units outstanding, end of period	374,950	$	13.36