Note 7 - Compensation Plans

Cash Bonus Plan

During the first six months of 2012 and 2011, the Company paid $24.0 million and $21.6 million for cash bonuses earned in the 2011 and 2010 performance years, respectively. The general and administrative expense and exploration expense line items in the accompanying statements of operations include $4.6 million and $3.7 million of accrued cash bonus plan expense attributable to the three-month periods ended June 30, 2012, and 2011, respectively, and $9.3 million and $7.5 million for the six-month periods ended June 30, 2012, and 2011, respectively, related to the respective performance year.

Restricted Stock Units Under the Equity Incentive Compensation Plan

The Company grants Restricted Stock Units (“RSUs”) as part of its long-term equity compensation program. Each RSU represents a right to one share of the Company’s common stock to be delivered upon settlement of the award at the end of the specified vesting period. RSUs are recognized as general and administrative expense and exploration expense over the vesting period of the award.

Total expense recorded for RSUs for the three-month periods ended June 30, 2012, and 2011, was $1.4 million and $985,000, respectively, and $2.6 million and $2.0 million for the six-month periods ended June 30, 2012, and 2011, respectively. As of June 30, 2012, there was $4.9 million of total unrecognized compensation expense related to unvested RSU awards, which is being amortized through 2014. There have been no material changes to outstanding and non-vested RSUs during the six months ended June 30, 2012.

Subsequent to June 30, 2012, the Company granted 365,787 RSUs as part of its regular annual long-term equity compensation program. These RSUs will vest 1/3^rd on each of the next three anniversary dates of the grant. Also subsequent to June 30, 2012, the Company settled 160,484 RSUs that related to awards granted in previous years by issuing a net 111,123 shares of the Company’s common stock in accordance with the terms of the RSU awards. The remaining 49,361 shares were withheld to satisfy income and payroll tax withholding obligations that arose upon delivery of the shares underlying those RSUs.

Performance Stock Units Under the Equity Incentive Compensation Plan

The Company also grants Performance Share Units as part of its long-term equity compensation program. Performance Stock Units are structurally the same as the previously granted Performance Share Awards (collectively known as “Performance Share Units” or “PSUs”). The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on the Company’s performance over a three-year measurement period. The performance criteria for the PSUs are based on a combination of the Company’s annualized total shareholder return (“TSR”) for the measurement period and the relative measure of the Company’s TSR compared with the annualized TSRs of a group of peer companies for the measurement period. PSUs are recognized as general and administrative expense and exploration expense over the vesting period of the award.

Total expense recorded for PSUs for the three-month periods ended June 30, 2012, and 2011, was $5.2 million and $4.1 million, respectively, and $8.1 million and $8.4 million for the six-month periods ended June 30, 2012, and 2011, respectively. As of June 30, 2012, there was $16.5 million of total unrecognized compensation expense related to unvested PSUs to be amortized through 2014. There have been no material changes to outstanding and non-vested PSUs during the six months ended June 30, 2012.

Subsequent to June 30, 2012, the Company granted 314,853 PSUs as part of its regular annual long-term equity compensation program. These PSUs will vest 1/3^rd on each of the next three anniversary dates of the grant. Also subsequent to June 30, 2012, the Company settled 609,714 PSUs that were granted in 2009 and earned a two times multiplier by issuing a net 812,562 shares of the Company’s common stock in accordance with the terms of the PSU awards. There were 406,866 shares withheld to satisfy income and payroll tax withholding obligations that arose upon delivery of the shares underlying those PSUs.

Stock Option Grants Under the Equity Incentive Compensation Plan

A summary of activity associated with the Company’s Stock Option Plan for the six months ended June 30, 2012, is presented in the following table:



	Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)

Outstanding, at beginning of year	508,214		$	13.86	$	30,109
Exercised	(108,299	)	$	12.36	$	6,667
Forfeited	—		$	—
Outstanding, at end of quarter	399,915		$	14.26	$	13,937
Vested and exercisable, at end of quarter	399,915		$	14.26	$	13,937

As of June 30, 2012, there was no unrecognized compensation expense related to stock option awards.

Director Shares

During the six months ended June 30, 2012, and 2011, the Company issued 26,500 and 21,568 shares, respectively, of the Company’s common stock from treasury to the Company’s non-employee directors, under the Company’s Equity Incentive Compensation Plan. The Company recorded $1.1 million and $1.0 million of compensation expense related to these awards for both the three and six months ended June 30, 2012, and 2011, respectively. The Company appointed a new non-employee director on July 16, 2012, and granted him 3,986 shares of the Company’s common stock from treasury, as a pro-rata share of the Company’s annual director compensation. All shares of common stock issued to the Company’s non-employee directors are earned over a one-year service period.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, without accruing in excess of $25,000 in value from purchases for each calendar year. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on the first or last day of the purchase period, and shares issued under the ESPP have no restriction period. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Company had 1.3 million shares available for issuance under the ESPP as of June 30, 2012. There were 37,124 and 22,373 shares issued under the ESPP during the second quarters of 2012 and 2011, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

Net Profits Interest Bonus Plan

Cash payments made or accrued under the Net Profits Interest Bonus Plan (“Net Profits Plan”) that have been recorded as either general and administrative expense or exploration expense are presented in the table below:



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
General and administrative expense	$	3,682	$	5,261	$	8,094	$	10,591
Exploration expense	493		585		1,018		1,062
Total	$	4,175	$	5,846	$	9,112	$	11,653

Additionally, the Company accrued or made cash payments under the Net Profits Plan of $1.4 million and $2.0 million for the three-month periods ended June 30, 2012, and 2011, respectively, and $1.7 million and $6.3 million for the six-month periods ended June 30, 2012, and 2011, respectively, as a result of divestiture proceeds. These cash payments are accounted for as a reduction in the gain (loss) on divestiture activity in the accompanying statements of operations.

The Company records changes in the present value of estimated future payments under the Net Profits Plan as a separate line item in the accompanying statements of operations. The change in the estimated liability is recorded as a non-cash expense or benefit in the current period. The amount recorded as an expense or benefit associated with the change in the estimated liability is not allocated to general and administrative expense or exploration expense because it is associated with the future net cash flows from oil and gas properties in the respective pools rather than results being realized through current period production. If the Company allocated the change in liability to these specific functional line items, based on the current allocation of actual distributions made by the Company, such expenses or benefits would predominately be allocated to general and administrative expense. The amount that would be allocated to exploration expense is minimal in comparison. Over time, less of the amount distributed relates to prospective exploration efforts as more of the amount distributed is paid to employees that have terminated employment and do not provide ongoing exploration support to the Company.