STOCK-BASED COMPENSATION AND WARRANTS

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

The Company maintains its 2018 Equity Incentive Plan (the “2018 Plan”) for making equity-based awards to employees, directors and other eligible persons. As of December 31, 2022, there were 459,580 shares available for future awards under the 2018 Plan.

The Company recognizes the fair value of stock-based compensation awards expected to vest over the requisite service period as a charge against earnings, net of amounts capitalized. The Company’s stock-based compensation awards are accounted for as equity instruments and are included in the “General and administrative expenses” line item in the statements of operations. The Company capitalizes a portion of stock-based compensation for employees who are directly involved in the acquisition of oil and natural gas properties into the full cost pool. Capitalized stock-based compensation is included in the “Oil and natural gas properties” line item in the balance sheet.

The 2018 Plan award types are summarized as follows:

Restricted Stock Awards

The Company issues restricted stock awards (“RSAs”) subject to various vesting conditions as compensation to executive officers, employees and directors of the Company. RSAs issued to employees and executive officers generally vest over three years, provided that any performance and/or market conditions are also met. RSAs issued to directors generally vest over one year, provided that any performance and/or market conditions are also met. For RSAs subject to service and/or performance vesting conditions, the grant-date fair value is established based on the closing price of the Company’s common stock on such date. Stock-based compensation expense for awards subject to only service conditions is recognized on a straight-line basis over the service period. Stock-based compensation expense for awards with both service and performance conditions is recognized on a graded basis only if it is probable that the performance condition will be achieved. The Company accounts for forfeitures of awards granted under these plans as they occur in determining stock-based compensation expense.

For awards subject to a market condition, the grant-date fair value is estimated using a Monte Carlo valuation model. The Company recognizes stock-based compensation expense for awards subject to market-based vesting conditions regardless of whether it becomes probable that these conditions will be achieved or not, and stock-based compensation expense for any such awards is not reversed if vesting does not actually occur. The Monte Carlo model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility is calculated based on the historical volatility and implied volatility of the Company’s common stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period.

During 2022, 2021 and 2020, 125,789, 339,653 and 460,382 shares, respectively, of service-based RSAs were granted to executive officers, employees and directors under the 2018 Equity Plan. The weighted average grant date fair value of service-based RSAs was $26.34 per share, $16.45 per share and $9.15 per share for the years ended December 31, 2022, 2021, and 2020, respectively.

The following table reflects the outstanding RSAs and activity related thereto for the year ended December 31, 2022:


	Service-based Awards			Service, Performance, and Market-based Awards
	Number of Shares	Weighted-average Grant Date Fair Value			Number of Shares	Weighted-average Grant Date Fair Value
Outstanding at December 31, 2021	420,122	$	13.68		18,600	$	9.80
Shares granted	125,789	26.34			—	—
Shares forfeited	(2,615)	9.99
Shares vested	(226,963)	16.88			(18,600)	9.80
Outstanding at December 31, 2022	316,333	$	16.39		—	$	—

At December 31, 2022, there was $3.3 million of total unrecognized compensation expense related to unvested RSAs. That cost is expected to be recognized over a weighted average period of 0.62 years. For the years ended December 31, 2022, 2021 and 2020, the total fair value of the Company’s restricted stock awards vested was $4.6 million, $1.8 million and $2.7 million, respectively.

Performance Equity Awards

In April 2022, the Company granted performance equity awards under its 2022 executive compensation program to certain executive officers. The awards are subject to a market condition, which is based on a comparison of the Company versus a defined peer group with respect to total shareholder return (“TSR”) based on the last 20 trading days of 2022 compared to the same period of 2021. Depending on the Company’s TSR relative to the defined peer group, the award recipients in the aggregate will earn between zero and $2.4 million in the form of awards expected to be settled in restricted shares of the Company’s common stock with service-based vesting over three years beginning in 2023.

The Company used a Monte Carlo simulation model, described above, to estimate the fair value of the awards based on the expected outcome of the Company’s TSR relative to the defined peer group using key valuation assumptions. The assumptions used for the Monte Carlo model were as follows:


	2022
Risk-free interest rate	1.69		%
Dividend yield	2.40		%
Expected volatility	56.94		%
Company’s closing stock price on grant date	$	24.98

The maximum value of the awards issuable if all participants earned the maximum award would total $2.4 million. For the year ended December 31, 2022, the Company recorded $0.5 million of compensation expense in connection with these performance awards.

Warrants

In April 2021, the Company issued common stock warrants as a part of the Reliance Acquisition as purchase consideration. These warrants gave holders the right to purchase 3,250,000 shares of the Company’s common stock at an exercise price equal to $14.00 per share (subject to certain anti-dilution adjustments), had a total fair value of $30.5 million at issuance, and were generally exercisable from June 30, 2021 until April 1, 2028. The fair value of the warrants at issuance was determined by utilizing an Option Pricing Model, which used the market value of the Company’s common stock on the issue date, an exercise price of $14.00, an implied volatility of 80% and a risk-free rate of 1.34%. In June 2022, the Company issued 2,322,690 shares of common stock in exchange for the surrender and cancellation of all such warrants originally issued by the Company at closing of the Reliance Acquisition, which immediately prior to their cancellation were exercisable (due to anti-dilution adjustments) for an aggregate of 3,294,092 shares of common stock at an exercise price of $13.81 per share. Neither the Company nor the holder paid any cash consideration in the transaction.

In January 2022, the Company issued common stock warrants as a part of the Veritas Acquisition as purchase consideration. These warrants gave holders the right to purchase 1,939,998 shares of the Company’s common stock at an exercise price equal to $28.30 per share (subject to certain anti-dilution adjustments), had a total fair value of $17.9 million at issuance, and are generally exercisable from April 27, 2022 until January 27, 2029. The fair value of the warrants at issuance was determined by

utilizing an Option Pricing Model, which used the market value of the Company’s common stock on the issue date, an exercise price of $28.30, an implied volatility of 60%, a risk-free rate of 2.14% and an implied dividend yield of 3.00%.

The following table reflects the outstanding warrants and activity related thereto for the year ended December 31, 2022:


	Reliance			Veritas
	Warrants	Weighted-average Exercise Price		Warrants	Weighted-average Exercise Price
Outstanding at December 31, 2021	3,276,582	$	13.89	—	$	—
Issued	—	—		1,939,998	28.30
Anti-Dilution Adjustments for Common Stock Dividends	17,510	13.81		56,831	27.49
Exercised	—	—		—	—
Cancelled	(3,294,092)	—		—	—
Expired	—	—		—	—
Outstanding at December 31, 2022	—	$	—	1,996,829	$	27.49