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Compensation Plans

6 Months Ended

Jun. 30, 2011

Note 8 - Compensation Plans

Cash Bonus Plan

During the first quarters of 2011 and 2010, the Company paid $21.6 million and $7.7 million for cash bonuses earned in the 2010 and 2009 performance years, respectively. Within the general and administrative expense and exploration expense line items in the accompanying statements of operations was $3.7 million and $2.9 million of accrued cash bonus plan expense related to the specific performance year for the three-month periods ended June 30, 2011, and 2010, respectively, and $7.5 million and $6.0 million for the six-month periods ended June 30, 2011, and 2010, respectively.

Performance Share Awards Under the Equity Incentive Compensation Plan

PSAs are the primary form of long-term equity incentive compensation for the Company. The PSA factor is based on the Company’s performance after completion of a three-year performance period. The performance criteria for the PSAs are based on a combination of the Company’s annualized total shareholder return (“TSR”) for the performance period and the relative measure of the Company’s TSR compared with the annualized TSR of an index comprised of certain peer companies for the performance period. In addition, there are separate employment service vesting provisions. PSAs are recognized as general and administrative and exploration expense over the vesting period of the award.

Total stock-based compensation expense related to PSAs for the three-month periods ended June 30, 2011, and 2010, was $4.1 million and $3.8 million, respectively, and $8.4 million and $7.4 million for the six-month periods ended June 30, 2011, and 2010, respectively. As of June 30, 2011, there was $13.6 million of total unrecognized compensation expense related to unvested PSAs that is being amortized through 2013.

A summary of the status and activity of PSAs for the six-month period ended June 30, 2011, is presented in the following table:

			Weighted-
			Average Grant-
	PSAs		Date Fair Value
Non-vested, at January 1, 2011	1,110,666		$	39.48
Granted	—		$	—
Vested (1)	(7,682	)	$	36.69
Forfeited	(23,289	)	$	39.41
Non-vested, at June 30, 2011	1,079,695		$	39.50

(1) The number of awards vested assumes a multiplier of one. The final number of shares vested may vary depending on the ending three-year multiplier, which ranges from zero to two.

Subsequent to June 30, 2011, the Company granted 234,308 Performance Stock Units (“PSUs”), which are structurally the same as previously granted PSAs, as part of its regular annual compensation process. These PSUs will vest 1/7th on July 1, 2012, 2/7ths on July 1, 2013, and 4/7ths on July 1, 2014. Also subsequent to June 30, 2011, the Company settled 305,351 PSAs that relate to awards granted in 2008 through the issuance of shares of the Company’s common stock in accordance with the terms of the PSA awards.

Restricted Stock Units Under the Equity Incentive Compensation Plan

An RSU represents a right to receive one share of the Company’s common stock to be delivered upon settlement of the RSU when it vests. Total RSU compensation expense for the three-month periods ended June 30, 2011, and 2010, was $985,000 and $1.7 million, respectively, and $2.0 million and $3.5 million for the six-month periods ended June 30, 2011, and 2010, respectively. As of June 30, 2011, there was $4.5 million of total unrecognized compensation expense related to unvested RSU awards that is being amortized through 2013.

During the first half of 2011, the Company settled 27,714 RSUs that relate to awards granted in 2008 through the issuance of shares of the Company’s common stock in accordance with the terms of the RSU awards. As a result, the Company issued a net of 18,836 shares of common stock associated with these grants. The remaining 8,878 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those RSUs.

A summary of the status and activity of RSUs for the six-month period ended June 30, 2011, is presented in the following table:

			Weighted-Average
			Grant-Date
	RSUs		Fair Value
Non-vested, at January 1, 2011	333,359		$	31.16
Granted	8,287		$	60.33
Vested	(27,714	)	$	37.84
Forfeited	(6,638	)	$	29.88
Non-vested, at June 30, 2011	307,294		$	31.37

Subsequent to June 30, 2011, the Company granted 78,165 RSUs, as part of its regular annual compensation process. These RSUs will vest 1/7th on July 1, 2012, 2/7ths on July 1, 2013, and 4/7ths on July 1, 2014. Also subsequent to June 30, 2011, the Company settled 77,602 RSUs that relate to awards granted in 2010 and 2009 through the issuance of shares of the Company’s common stock in accordance with the terms of the RSU awards.

Stock Option Grants Under Prior Stock Option Plans

The following table summarizes stock option activity for the six months ended June 30, 2011:

			Weighted-
			Average		Aggregate
	Options		Exercise Price		Intrinsic Value

Outstanding, January 1, 2011	920,765		$	13.11	$	42,192,057
Exercised	(310,412	)	$	12.26
Forfeited	—		$	—
Outstanding, June 30, 2011	610,353		$	13.54	$	36,586,971
Vested and exercisable, June 30, 2011	610,353		$	13.54	$	36,586,971

As of June 30, 2011, there was no unrecognized compensation expense related to stock option awards.

Director Shares

During the six months ended June 30, 2011, and 2010, the Company issued 21,568 and 24,258 shares, respectively, of the Company’s common stock from treasury to the Company’s non-employee directors. The shares were issued pursuant to the Company’s Equity Incentive Compensation Plan. The Company recorded $1.0 million and $690,000 of compensation expense for the three-month periods ended June 30, 2011, and 2010, respectively, and $1.0 million and $715,000 for the six-month periods ended June 30, 2011, and 2010, respectively.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (the “ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation. 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. Shares issued under the ESPP, on or after July 1, 2011, have no restriction period. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Company has set aside 2,000,000 shares of its common stock to be available for issuance under the ESPP, of which 1,392,954 shares are available for issuance as of June 30, 2011. There were 22,373 and 27,456 shares issued under the ESPP during the first half of 2011 and 2010, respectively, with a six month restriction period. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

Net Profits Plan

Under the Company’s Net Profits Plan, all oil and gas wells that were completed or acquired during a year were designated within a specific pool. Key employees recommended by senior management and designated as participants by the Compensation Committee of the Company’s Board of Directors (“Board”) and employed by the Company on the last day of that year became entitled to payments under the Net Profits Plan after the Company had received net cash flows returning 100 percent of all costs associated with that pool. Thereafter, ten percent of future net cash flows generated by the pool are allocated among the participants and distributed at least annually. The portion of net cash flows from a pool to be allocated among the participants increases to 20 percent after the Company has recovered 200 percent of the total costs for the pool, including payments made under the Net Profits Plan at the ten percent level. In December 2007, the Board discontinued the creation of new pools under the Net Profits Plan. As a result, the 2007 Net Profits Plan pool was the last pool established by the Company.

Cash payments made or accrued under the Net Profits Plan that have been recorded as either general and administrative expense or exploration expense are detailed in the table below:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
	(in thousands)
General and administrative expense	$	5,261	$	5,381	$	10,591	$	12,315
Exploration expense	585		667		1,062		1,258
Total	$	5,846	$	6,048	$	11,653	$	13,573

Additionally, the Company accrued or made cash payments under the Net Profits Plan of $2.0 million and $1.9 million for the three months ended June 30, 2011, and 2010, respectively, and $6.3 million and $20.1 million for the six months ended June 30, 2011, and 2010, respectively, as a result of divestiture proceeds. The cash payments are accounted for as a reduction of the gain 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 did allocate 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 benefit would predominately be allocated to general and administrative expense. The amount that would be allocated to exploration expense is minimal in comparison. As time progresses, less of the distributions relate to prospective exploration efforts as more of the distributions are made to employees that have terminated employment and do not provide ongoing exploration support to the Company.