Stock-Based Compensation

General

Stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016 was $33.1 million, $34.0 million and $26.0 million, respectively, and is included in general and administrative expense in the Consolidated Statement of Operations.

For the year ended December 31, 2018 and 2017, the Company recorded an increase to tax expense of $0.3 million and $3.0 million, respectively, in the Consolidated Statement of Operations as a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for awards that vested during the period.

Prior to the adoption of ASU No. 2016-09, windfall tax benefits were recorded in additional paid in capital in the Consolidated Balance Sheet and tax shortfalls reduced additional paid in capital to the extent they offset previously recorded windfall tax benefits. For the year ended December 31, 2016, the Company recorded a tax deficiency of $2.1 million, resulting in a reduction of the Company's windfall tax benefit that was recorded in additional paid in capital in the Consolidated Balance Sheet. The tax deficiency was a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for certain awards that vested during the period.

Restricted Stock Awards

Restricted stock awards are granted from time to time to employees of the Company. The fair value of restricted stock grants is based on the closing stock price on the grant date. Restricted stock awards generally vest either at the end of a three year service period or on a graded or graduated vesting basis at each anniversary date over a three or four year service period.

For awards that vest at the end of the service period, expense is recognized ratably using a straight-line approach over the service period. Under the graded or graduated approach, the Company recognizes compensation cost ratably over the requisite service period, as applicable, for each separately vesting tranche as though the awards are, in substance, multiple awards. For most restricted stock awards, vesting is dependent upon the employees' continued service with the Company, with the exception of employment termination due to death, disability or retirement. If included in the grant award, the Company accelerates the vesting period for retirement-eligible employees for purposes of recognizing compensation expense in accordance with the vesting provisions of the Company's stock-based compensation programs.

The Company used an annual forfeiture rate assumption of five percent to six percent for purposes of recognizing stock-based compensation expense for restricted stock awards. The annual forfeiture rates were based on the Company's actual forfeiture history for this type of award to various employee groups.

The following table is a summary of restricted stock award activity:



	Year Ended December 31,
	2018				2017				2016
	Shares		Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share
Outstanding at beginning of period	161,450		$	28.00	43,175		$	33.87	49,825		$	33.76
Granted	—		—		158,500		28.05		—		—
Vested	(7,157	)	25.17		(40,225	)	34.49		(6,650	)	33.02
Forfeited	(4,000	)	28.45		—		—		—		—
Outstanding at end of period⁽¹⁾⁽²⁾	150,293		$	28.12	161,450		$	28.00	43,175		$	33.87

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(1)	As of December 31, 2018, the aggregate intrinsic value was $3.4 million and was calculated by multiplying the closing market price of the Company's stock on December 31, 2018 by the number of non-vested restricted stock awards outstanding.


(2)	As of December 31, 2018, the weighted average remaining contractual term of non-vested restricted stock awards outstanding was 0.4 years.

Compensation expense recorded for all restricted stock awards for the years ended December 31, 2018, 2017 and 2016 was $2.8 million, $0.5 million and $0.4 million, respectively. Unamortized expense as of December 31, 2018 for all outstanding restricted stock awards was $1.1 million and will be recognized over the next 0.5 years.

The total fair value of restricted stock awards that vested during 2018, 2017 and 2016 was $0.2 million, $0.9 million and $0.2 million, respectively.

Restricted Stock Units

Restricted stock units are granted from time to time to non-employee directors of the Company. The fair value of the restricted stock units is based on the closing stock price on the grant date. These units vest immediately and compensation expense is recorded immediately. Restricted stock units are issued when the director ceases to be a director of the Company.

The following table is a summary of restricted stock unit activity:



	Year Ended December 31,
	2018			2017			2016
	Shares	Weighted- Average Grant Date Fair Value per Share		Shares	Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share
Outstanding at beginning of period	407,563	$	16.17	348,538	$	15.01	425,438		$	13.81
Granted and fully vested	82,852	23.47		59,025	23.04		69,302		20.62
Issued	—	—		—	—		(146,202	)	14.17
Forfeited	—	—		—	—		—		—
Outstanding at end of period⁽¹⁾⁽²⁾	490,415	$	17.41	407,563	$	16.17	348,538		$	15.01

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(1)	As of December 31, 2018, the aggregate intrinsic value was $11.0 million and was calculated by multiplying the closing market price of the Company's stock on December 31, 2018 by the number of outstanding restricted stock units.


(2)	Due to the immediate vesting of the units and the unknown term of each director, the weighted-average remaining contractual term in years has not been provided.

Compensation expense recorded for all restricted stock units for the year ended December 31, 2018, 2017 and 2016 was $1.9 million, $1.4 million and $1.4 million, respectively, which reflects the total fair value of these units.

Stock Appreciation Rights

Stock appreciation rights (SARs) allow the employee to receive any intrinsic value over the grant date market price that may result from the price appreciation of the common shares granted. All of these awards have graded-vesting features and vest over a service period of three years, with one-third of the award becoming exercisable each year on the anniversary date of the grant and have a contractual term of seven years. The Company no longer grants SARs to employees.

The following table is a summary of SAR activity:



	Year Ended December 31,
	2018				2017				2016
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Outstanding at beginning of period	57,144		$	17.59	483,286		$	13.04	558,546		$	12.52
Granted	—		—		—		—		—		—
Exercised	(57,144	)	17.59		(426,142	)	12.43		(75,260	)	9.19
Forfeited or expired	—		—		—		—		—		—
Outstanding at end of period⁽¹⁾	—		$	—	57,144		$	17.59	483,286		$	13.04
Exercisable at end of period⁽²⁾	—		$	—	57,144		$	17.59	483,286		$	13.04

The expected term was derived by reviewing minimum and maximum expected term outputs from the Black-Scholes model based on award type and employee type. This term represents the period of time that awards granted are expected to be outstanding. The stock price volatility was calculated using historical closing stock price data for the Company for the period associated with the expected term through the grant date of each award. The risk free rate of return percentages are based on the continuously compounded equivalent of the U.S. Treasury within the expected term as measured on the grant date. The expected dividend percentage assumes that the Company will continue to pay a consistent level of dividend each quarter.

Performance Share Awards

The Company grants three types of performance share awards: two based on performance conditions measured against the Company's internal performance metrics (Employee Performance Share Awards and Hybrid Performance Share Awards) and one based on market conditions measured based on the Company's performance relative to a predetermined peer group (TSR Performance Share Awards). The performance period for these awards commences on January 1 of the respective year in which the award was granted and extends over a three-year performance period. For all performance share awards, the Company used an annual forfeiture rate assumption ranging from zero percent to six percent 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 share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to 100 percent of the award in shares of common stock.

Employee Performance Share Awards. The Employee Performance Share Awards vest at the end of the three-year performance period. An employee will earn one-third of the award for each of the three performance metrics that the Company meets. These 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 December 31, 2018, it is considered probable that all of the criteria for these awards will be met.

The following table is a summary of activity for Employee Performance Share Awards:



	Year Ended December 31,
	2018				2017				2016
	Shares		Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share
Outstanding at beginning of period	1,095,970		$	23.31	993,530		$	27.26	925,590		$	30.23
Granted	531,670		23.25		406,460		22.60		435,990		20.49
Issued and fully vested	(315,970	)	27.71		(225,780	)	39.43		(340,960	)	26.62
Forfeited	(31,649	)	22.33		(78,240	)	23.20		(27,090	)	27.77
Outstanding at end of period	1,280,021		$	22.22	1,095,970		$	23.31	993,530		$	27.26

Hybrid Performance Share Awards. The Hybrid Performance Share Awards have a three-year graded performance period. The awards vest 25 percent on each of the first and second anniversary dates and 50 percent 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 December 31, 2018, it is considered probable that the criteria for these awards will be met.

The following table is a summary of activity for the Hybrid Performance Share Awards:



	Year Ended December 31,
	2018				2017				2016
	Shares		Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share		Shares		Weighted- Average Grant Date Fair Value per Share
Outstanding at beginning of period	574,354		$	22.72	479,784		$	25.12	372,385		$	30.37
Granted	321,720		23.25		272,920		22.60		271,938		20.49
Issued and fully vested	(233,686	)	24.12		(178,350	)	29.01		(164,539	)	29.34
Forfeited	—		—		—		—		—		—
Outstanding at end of period	662,388		$	22.48	574,354		$	22.72	479,784		$	25.12

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 percent of the award in shares of common stock and the right to receive up to an additional 100 percent 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. The TSR Performance Share Awards granted 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 table is a summary of activity for the TSR Performance Share Awards:



	Year Ended December 31,
	2018				2017				2016
	Shares		Weighted- Average Grant Date Fair Value per Share⁽¹⁾		Shares		Weighted- Average Grant Date Fair Value per Share⁽¹⁾		Shares		Weighted- Average Grant Date Fair Value per Share⁽¹⁾
Outstanding at beginning of period	1,109,708		$	19.23	885,213		$	21.62	732,286		$	23.82
Granted	482,581		19.92		409,380		19.85		407,907		18.57
Issued and fully vested	(292,421	)	19.29		(157,147	)	32.04		(254,980	)	23.06
Forfeited	—		—		(27,738	)	32.04		—		—
Outstanding at end of period	1,299,868		$	19.47	1,109,708		$	19.23	885,213		$	21.62

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(1)	The grant date fair value figures in this table represent the fair value of the equity component of the performance share awards.

The current portion of the liability, included in accrued liabilities in the Consolidated Balance Sheet at December 31, 2018 and 2017 was $5.0 million and $3.3 million, respectively. The non-current portion of the liability for the TSR Performance Share Awards, included in other liabilities in the Consolidated Balance Sheet at December 31, 2018 and 2017, was $7.9 million and $6.6 million, respectively. The Company made cash payments during the years ended December 31, 2018 and 2016 of $3.3 million and $1.8 million, respectively. There were no cash payments made during the year ended December 31, 2017.

The following assumptions were used to determine the grant date fair value of the equity component of the TSR Performance Share Awards for the respective periods:



	Year Ended December 31,
	2018			2017			2016
Fair value per performance share award granted during the period	$	19.92		$	19.85		$	18.57
Assumptions
Stock price volatility	37.3		%	37.8		%	34.4		%
Risk free rate of return	2.4		%	1.4		%	0.9		%

The following assumptions were used to determine the fair value of the liability component of the TSR Performance Share Awards for the respective periods:



	December 31,
	2018	2017	2016
Fair value per performance share award at the end of the period	$15.15 - $20.12	$13.23 - $21.64	$5.59 - $7.10
Assumptions
Stock price volatility	29.9% - 31.1%	29.1% - 36.7%	40.4% - 43.0%
Risk free rate of return	2.5% - 2.6%	1.8% - 1.9%	0.9% - 1.2%

The stock price volatility was calculated using historical closing stock price data for the Company for the period associated with the expected term through the grant date of each award. The risk free rate of return percentages are based on the continuously compounded equivalent of the U.S. Treasury within the expected term as measured on the grant date. The expected dividend percentage assumes that the Company will continue to pay a consistent level of dividend each quarter.

Other Information

Compensation expense recorded for both the equity and liability components of all performance share awards for the years ended December 31, 2018, 2017 and 2016 was $30.6 million, $29.1 million and $21.3 million, respectively. Total unamortized compensation expense related to the equity component of performance shares at December 31, 2018 was $24.7 million and will be recognized over the next 0.9 years.

As of December 31, 2018, the aggregate intrinsic value for all performance share awards was $72.5 million and was calculated by multiplying the closing market price of the Company's stock on December 31, 2018 by the number of unvested performance share awards outstanding. As of December 31, 2018, the weighted average remaining contractual term of unvested performance share awards outstanding was approximately 1.2 years

On December 31, 2018, the performance period ended for two types of performance share awards that were granted in 2016. For the Employee Performance Share Awards, the calculation of the three-year average of the three internal performance metrics was completed in the first quarter of 2019 and was certified by the Compensation Committee in February 2019. As the Company achieved the three performance metrics, 389,920 shares with a grant date fair value of $7.9 million were issued in February 2019. For the TSR Performance Share Awards, 407,907 shares with a grant date fair value of $7.6 million were issued in January 2019 based on the Company's ranking relative to a predetermined peer group. Cash payments associated with these awards in the amount of $5.0 million were also made in January 2019 due to the Company's ranking relative to the peer group. The calculation of the award payout was certified by the Compensation Committee on January 3, 2019.

Deferred Performance Shares

As of December 31, 2018, 495,774 shares of the Company's common stock representing vested performance share awards were deferred into the deferred compensation plan. During 2018, no shares were sold out of the plan. During 2018, a decrease to the deferred compensation liability of $3.1 million was recognized, which represents the increase in the closing price of the Company's shares held in the trust during the period. The decrease in compensation expense was included in general and administrative expense in the Consolidated Statement of Operations.