11. STOCK-BASED COMPENSATION

Stock-based compensation expense during the first six months of 2013 and 2012 was $28.7 million and $13.1 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 2013 and 2012 was $10.0 million and $11.4 million, respectively.

Restricted Stock Awards

During the first six months of 2013, 2,050 restricted stock awards were granted to employees with a weighted-average grant date per share value of $68.87. The fair value of restricted stock grants is based on the average of the high and low stock price on the grant date. The Company used an annual forfeiture rate assumption of 6.0% for purposes of recognizing stock-based compensation expense for restricted stock awards.

Restricted Stock Units

During the first six months of 2013, 23,576 restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date per unit value of $53.75. The fair value of these units is measured based on the average of the high and low stock price on grant date and compensation expense is recorded immediately. These units immediately vest and will be issued when the director ceases to be a director of the Company.

Performance Share Awards

During the first six months of 2013, three types of performance share awards were granted to employees for a total of 402,250 performance shares, which included 274,760 performance share awards based on performance conditions measured against the Company’s internal performance metrics and 127,490 performance share awards based on market conditions. The Company used an annual forfeiture rate assumption ranging from 0% to 6% for purposes of recognizing stock-based compensation expense for all performance share awards. The performance period for the awards granted in 2013 commenced on January 1, 2013 and ends on December 31, 2015. Refer to Note 12 of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of performance share awards.

Awards Based on Performance Conditions. The performance awards based on internal metrics had a grant date per share value of $53.23, which is based on the average of the high and low stock price on the grant date. These awards represent the right to receive up to 100% of the award in shares of common stock. Of the 274,760 performance awards based on internal metrics, 84,990 shares have a three-year graded performance period. For these shares, 25% of the shares vest on each of the first and second anniversary dates following the date of the grant and 50% of the shares vest on the third anniversary date following the date of the grant, provided that the Company has $100 million or more of operating cash flow for the year preceding the vesting date. If the Company does not meet this metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.

For the remaining 189,770 performance awards, the actual number of shares issued at the end of the performance period will be determined based on the Company’s performance against three performance criteria set by the Company’s Compensation Committee. An employee will earn one-third of the award granted for each internal performance metric that the Company meets at the end of the performance period. These performance criteria are based on the Company’s average production, average finding costs and average reserve replacement over the three-year performance period.

Based on the Company’s probability assessment at June 30, 2013, it is considered probable that the criteria for the performance awards based on performance conditions will be met.

Awards Based on Market Conditions. The 127,490 performance shares based on market conditions are earned, or not earned, based on the comparative performance of the Company’s common stock measured against fifteen other companies in the Company’s peer group over a three-year performance period. These performance shares have both an equity and liability component. The equity portion of the 2013 awards was valued on the grant date (February 21, 2013) and was not marked to market. The liability portion of the awards was valued as of June 30, 2013 on a mark-to-market basis.

The following assumptions were used to determine the grant date fair value of the equity component and the period-end fair value of the liability component of the Company’s performance share awards based on market conditions using a Monte Carlo model:

	Grant Date		June 30, 2013

Value per Share	$	46.12	$46.09 - $70.96
Assumptions:
Stock Price Volatility	43.8%		31.6% - 43.1%
Risk Free Rate of Return	0.4%		0.1% - 0.5%
Expected Dividend Yield	0.2%		0.1%

Supplemental Employee Incentive Plan

On May 1, 2012, the Company’s Board of Directors adopted a new Supplemental Employee Incentive Plan (“Plan”) to replace the previously adopted supplemental employee incentive plan that expired on June 30, 2012. For further information regarding the terms of the Plan, refer to Note 12 of the Notes to the Consolidated Financial Statements in the Form 10-K. The Company recognized stock-based compensation expense of $1.7 million and $5.1 million for the three and six months ended June 30, 2013, respectively, which is included in general and administrative expense in the Condensed Consolidated Statement of Operations.

On February 11, 2013, the Company achieved the price goal of $50 per share prior to the interim trigger date. Accordingly, a total distribution of approximately $6.8 million was made to the Company’s eligible employees under the Plan, of which 25% of the total distribution, or $1.7 million, was paid in February 2013 and the remaining 75%, or $5.1 million, is deferred until August 2014 in accordance with the Plan.