3. Stock-based Compensation

The Company uses share-based payments to compensate employees and non-employee directors. The Company recognizes the cost of share-based payments under the fair-value-based method. Share-based awards consist of equity instruments in the form of stock options, restricted stock or restricted stock units that have included service conditions and, in certain cases, performance conditions. The Company’s share-based awards also include share-settled performance unit awards. Share-settled performance unit awards are accounted for as equity awards. The Company issues shares of common stock when vested stock options are exercised, when restricted stock is granted and when restricted stock units and share-settled performance unit awards vest.

The Patterson-UTI Energy, Inc. 2014 Long-Term Incentive Plan (the “2014 Plan”) was originally approved by the Company’s stockholders effective as of April 17, 2014. On June 29, 2017, the Company’s stockholders approved the amendment and restatement of the 2014 Plan (the “Amended and Restated Plan”) to increase the number of shares available for future issuance under the plan to 10,049,156 shares. The aggregate number of shares of Common Stock authorized for grant under the Amended and Restated Plan is 18.9 million, which includes the 9.1 million shares previously authorized under the 2014 Plan.

Stock Options — The Company estimates the grant date fair values of stock options using the Black-Scholes-Merton valuation model. Volatility assumptions are based on the historic volatility of the Company’s common stock over the most recent period equal to the expected term of the options as of the date such options are granted. The expected term assumptions are based on the Company’s experience with respect to employee stock option activity. Dividend yield assumptions are based on the expected dividends at the time the options are granted. The risk-free interest rate assumptions are determined by reference to United States Treasury yields. No options were granted in the three or six months ended June 30, 2017. Weighted-average assumptions used to estimate the grant date fair values for stock options granted for the three and six month periods ended June 30, 2016 follow:

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2016			2016
Volatility		34.87	%		35.13	%
Expected term (in years)		5.00			5.00
Dividend yield		2.16	%		2.19	%
Risk-free interest rate		1.40	%		1.42	%

Stock option activity from January 1, 2017 to June 30, 2017 follows:

				Weighted
				Average
	Underlying			Exercise Price
	Shares			Per Share
Outstanding at January 1, 2017		6,687,150		$	20.68
Exercised		(10,000	)	$	22.29
Expired		(600,000	)	$	24.17
Outstanding at June 30, 2017		6,077,150		$	20.34
Exercisable at June 30, 2017		5,271,650		$	20.53

Restricted Stock — For all restricted stock awards made to date, shares of common stock were issued when the awards were made. Non-vested shares are subject to forfeiture for failure to fulfill service conditions and, in certain cases, performance conditions. Non-forfeitable dividends are paid on non-vested shares of restricted stock. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock activity from January 1, 2017 to June 30, 2017 follows:

				Weighted
				Average Grant
				Date Fair Value
	Shares			Per Share
Non-vested restricted stock outstanding at January 1, 2017		1,427,455		$	22.26
Granted		890,904		$	21.78
Vested		(674,852	)	$	23.94
Forfeited		(14,853	)	$	22.92
Non-vested restricted stock outstanding at June 30, 2017		1,628,654		$	21.30

Restricted Stock Units — For all restricted stock unit awards made to date, shares of common stock are not issued until the units vest. Restricted stock units are subject to forfeiture for failure to fulfill service conditions. Non-forfeitable cash dividend equivalents are paid on certain non-vested restricted stock units. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock unit activity from January 1, 2017 to June 30, 2017 follows:

				Weighted
				Average Grant
				Date Fair Value
	Shares			Per Share
Non-vested restricted stock units outstanding at January 1, 2017		191,655		$	19.85
Assumed (1)		505,551		$	22.45
Vested		(34,189	)	$	24.35
Forfeited		(17,781	)	$	22.27
Non-vested restricted stock units outstanding at June 30, 2017		645,236		$	21.58

(1)

Restricted stock unit awards under the Seventy Seven Energy Inc. 2016 Omnibus Incentive Plan, which was adopted, assumed, amended and renamed by the Company in connection with the SSE merger. No additional awards will be made under this plan.

Performance Unit Awards. The Company has granted stock-settled performance unit awards to certain executive officers (the “Performance Units”) on an annual basis since 2010. The Performance Units provide for the recipients to receive a grant of shares of common stock upon the achievement of certain performance goals during a specified period established by the Compensation Committee. The performance period for the Performance Units is the three-year period commencing on April 1 of the year of grant, except that for the Performance Units granted in 2013 the performance period was extended pursuant to its terms, as described below, and for the Performance Units granted in 2017 the three-year performance period commenced on May 1.

The performance goals for the Performance Units are tied to the Company’s total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee. These goals are considered to be market conditions under the relevant accounting standards and the market conditions were factored into the determination of the fair value of the respective Performance Units. Generally, the recipients will receive a target number of shares if the Company’s total shareholder return during the performance period, when compared to the peer group, is at the 50^th percentile. If the Company’s total shareholder return during the performance period, when compared to the peer group, is at the 75^th percentile or higher, then the recipients will receive two times the target number of shares. If the Company’s total shareholder return during the performance period, when compared to the peer group, is at the 25^th percentile, then the recipients will only receive one-half of the target number of shares. If the Company’s total shareholder return during the performance period, when compared to the peer group, is between the 25^th and 75^th percentile, then the shares to be received by the recipients will be determined on a pro-rata basis.

For the Performance Units awarded prior to 2016, there is no payout unless the Company’s total shareholder return is positive and, when compared to the peer group, is at or above the 25^thpercentile. In respect of the 2013 Performance Units, for which the performance period ended March 31, 2016, the Company’s total shareholder return for the performance period was negative, the Company’s total shareholder return for the performance period when compared to the peer group was above the 75^th percentile, and there was no payout; provided, however, that pursuant to the terms of those 2013 awards, if, during the two-year period ending March 31, 2018, the Company’s total shareholder return for any 30 consecutive day period equals or exceeds 18 percent on an annualized basis from April 1, 2013 through the last day of such 30 consecutive day period, and the recipient is actively employed by the Company through the last day of the extended performance period, then the Company will issue to the recipient the number of shares equal to the amount the recipient would have been entitled to receive had the Company’s total shareholder return been positive during the initial three-year performance period.

For the Performance Units granted in April 2016, if the Company’s total shareholder return is negative, and, when compared to the peer group is at or above the 25th percentile, then the recipients will receive one-half of the number of shares they would have received had the Company’s total shareholder return been positive. For the Performance Units granted in May 2017, the payout is based on relative performance and does not have an absolute performance requirement.

The total target number of shares with respect to the Performance Units for the awards in 2013-2017 is set forth below:

	2017		2016		2015		2014		2013
	Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards
Target number of shares		186,198		185,000		190,600		154,000		236,500

Because the performance units are stock-settled awards, they are accounted for as equity awards and measured at fair value on the date of grant using a Monte Carlo simulation model. The fair value of the Performance Units is set forth below (in thousands):

	2017		2016		2015		2014		2013
	Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards
Fair value at date of grant	$	5,780	$	3,854	$	4,052	$	5,388	$	5,564

These fair value amounts are charged to expense on a straight-line basis over the performance period. Compensation expense associated with the Performance Units is shown below (in thousands):

	2017		2016		2015		2014		2013
	Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards
Three months ended June 30, 2017	$	321	$	321	$	338	NA		NA
Three months ended June 30, 2016	NA		$	321	$	338	$	449	NA
Six months ended June 30, 2017	$	321	$	642	$	675	$	449	NA
Six months ended June 30, 2016	NA		$	321	$	675	$	898	$	464