Stock-based Compensation

General

Stock-based compensation expense during the first six months of 2015 and 2014 was $14.5 million and $9.4 million, respectively, and is included in general and administrative expense in the Condensed Consolidated Statement of Operations. Stock-based compensation expense in the second quarter of 2015 and 2014 was $8.6 million and $6.3 million, respectively.

During the first six months of 2015 and 2014, the Company recognized a $5.5 million and $20.4 million tax benefit related to the federal tax deduction in excess of book compensation cost for employee stock-based compensation, respectively. The Company is able to recognize this tax benefit only to the extent it reduces the Company’s income taxes payable.

Refer to Note 13 of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.

Restricted Stock Awards

During the first six months of 2015, 3,400 restricted stock awards were granted to employees with a weighted-average grant date per share value of $28.55. The fair value of restricted stock grants is based on the closing stock price on the grant date. The Company used an annual forfeiture rate assumption of 5.0% for purposes of recognizing stock-based compensation expense for restricted stock awards.

Restricted Stock Units

During the first six months of 2015, 47,320 restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date per unit value of $27.96. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.

Performance Share Awards

The performance period for the awards granted in 2015 commenced on January 1, 2015 and ends on December 31, 2017. The Company used an annual forfeiture rate assumption ranging from 0% to 5% for purposes of recognizing stock-based compensation expense for its performance share awards.

Performance Share Awards Based on Internal Performance Metrics

The fair value of performance award grants based on internal performance metrics is based on the closing stock price on the grant date and represents the right to receive up to 100% of the award in shares of common stock.

Employee Performance Share Awards. During the first six months of 2015, 349,780 Employee Performance Share Awards were granted at a grant date per share value of $27.71. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a three-year performance period. Based on the Company’s probability assessment at June 30, 2015, it is considered probable that the criteria for these awards will be met.

Hybrid Performance Share Awards. During the first six months of 2015, 194,947 Hybrid Performance Share Awards were granted at a grant date per share value of $27.71. The 2015 awards vest 25% on each of the first and second anniversary dates and 50% on the third anniversary, provided that the Company has $100 million or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited. Based on the Company’s probability assessment at June 30, 2015, it is considered probable that the criteria for these awards will be met.

Performance Share Awards Based on Market Conditions

These awards have both an equity and liability component, with the right to receive up to the first 100% of the award in shares of common stock and the right to receive up to an additional 100% of the value of the award in excess of the equity component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.

TSR Performance Share Awards. During the first six months of 2015, 292,421 TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a three-year performance period.

The following assumptions were used to determine the grant date fair value of the equity component (February 19, 2015) and the period-end fair value of the liability component of the TSR Performance Share Awards:



	Grant Date			June 30, 2015
Fair value per performance share award	$	19.29		$14.60 - $19.30
Assumptions:
Stock price volatility	32.3		%	25.6% - 29.0%
Risk free rate of return	1.0		%	0.1% - 0.8%
Expected dividend yield	0.3		%	0.3	%

Supplemental Employee Incentive Plan

The Company recognized stock-based compensation expense of $1.6 million for the three months ended June 30, 2014. Stock-based compensation (benefit) expense recognized in the second quarter of 2015 was immaterial. The Company recognized stock-based compensation (benefit) expense of $(0.1) million and $3.1 million for the six months ended June 30, 2015 and 2014, respectively, related to the Company’s Supplemental Employee Incentive Plan, which is included in general and administrative expense in the Condensed Consolidated Statement of Operations. Refer to Note 13 of the Notes to the Consolidated Financial Statements in the Form 10-K for additional information on the provisions of the Plan.

The following assumptions were used to determine the period-end fair value of the Supplemental Employee Incentive Plan IV liability using a Monte Carlo simulation model:



	June 30, 2015
Stock price volatility	30.3	%
Risk free rate of return	0.7	%
Annual salary increase rate	4.0	%
Annual turnover rate	4.6	%