STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2022

Share-Based Payment Arrangement [Abstract]

Long Term Incentive Plans

In April 2017, the Company adopted the 2017 Long Term Incentive Plan (“2017 LTIP”), which provides for the issuance of restricted stock units, performance stock units, and stock options, and reserved 2,467,430 shares of common stock. In June 2021, the Company adopted the 2021 Long Term Incentive Plan (“2021 LTIP”), which reserved an incremental 700,000 shares of common stock to those previously reserved under the 2017 LTIP. Finally, pursuant to the Extraction Merger Agreement, Civitas assumed the Extraction Equity Plan, which reserved 3,305,080 shares of common stock now issuable by Civitas. The 2017 LTIP, 2021 LTIP, and Extraction Equity Plan are collectively referred to herein as the “LTIP”.

In November 2021, the Company adopted a non-employee director compensation program (the “Director Compensation Program”), which provides that non-employee directors will receive grants of deferred stock units (“DSUs”). In connection with the adoption of the Director Compensation Program, the Company adopted a First Amendment to the 2021 LTIP that, among other things, allows the Company to determine whether dividend rights granted pursuant to the LTIP should be reinvested, paid currently or paid in accordance with the terms of an associated award.

The Company records compensation expense associated with the issuance of awards under the LTIP based on the fair value of the awards as of the date of grant within general and administrative expense. The following table outlines the compensation expense recorded by type of award (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Restricted and deferred stock units	$	3,917	$	1,746	$	9,182	$	3,067
Performance stock units	2,218		449		5,043		740

Total stock-based compensation	$	6,135	$	2,195	$	14,225	$	3,807

As of June 30, 2022, unrecognized compensation expense related to the awards granted under the LTIP will be amortized through the relevant periods as follows (in thousands):


	Unrecognized Compensation Expense		Final Year of Recognition
Restricted and deferred stock units	$	23,595	2025
Performance stock units	18,951		2024
Total unrecognized stock-based compensation	$	42,546

Restricted Stock Units (“RSUs”) and Deferred Stock Units

The Company typically grants RSUs to officers, directors, and employees and DSUs to directors as part of its LTIP. Each RSU and DSU represents a right to receive one share of the Company's common stock upon settlement of the award at the end of the specified vesting period.

RSUs generally vest and settle either over a (i) one-year vesting period, with the entire grant vesting and settling on the anniversary date or (ii) three-year vesting period, with one-third of the total grant vesting and settling on each anniversary date. DSUs generally vest in quarterly installments over a one-year period following the grant date. DSUs are settled in shares of the Company's common stock upon the director’s separation of service from the Board. The Company records compensation expense associated with the issuance of RSUs and DSUs on a straight-line basis over the vesting period based on the fair value of the awards as of the date of grant within general and administrative expense. The fair value of RSUs and DSUs is equal to the closing price of the Company’s common stock on the date of the grant.

A summary of the status and activity of non-vested RSUs and DSUs for the six months ended June 30, 2022 is presented below:


	RSUs and DSUs	Weighted-Average Grant-Date Fair Value
Non-vested, beginning of year	815,062	$	42.18
Granted	492,002	50.24
Vested	(574,865)	42.80
Forfeited	(30,399)	41.15
Non-vested, end of year	701,800	$	47.36

The fair value of the RSUs and DSUs granted under the LTIP during the six months ended June 30, 2022 was $24.7 million.

Performance Stock Units (“PSUs”)

The Company grants PSUs to officers as part of its LTIP. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs granted and is determined based on performance achievement against certain criteria over a three-year performance period. PSUs generally vest and settle on the third anniversary of the date of the grant.

Performance achievement is determined based on one to two criteria. The first criterion is based on either, or a combination of, the Company’s absolute and relative total shareholder return (“TSR”) over the performance period. Absolute TSR is determined based upon the performance of the Company's common stock over the performance period relative to the price of the Company's common stock at the grant date. For awards with a relative TSR component, the Company's absolute TSR is compared with the absolute TSRs of a group of peer companies over the performance period. The absolute TSR for the Company and each of the peer companies is determined by dividing (A) (i) the volume-weighted average share price for the last 30 trading days of the performance period, minus (ii) the volume-weighted average share price for the 30 trading days preceding the beginning of the performance period, plus (iii) dividends paid by (B) the volume-weighted average share price for the 30 trading days preceding the beginning of the performance period. The second criterion, if applicable, is based on the Company's annual return on average capital employed (“ROCE”) for each year during the three-year performance period.

The total number of PSUs granted under the LTIP was split as follows for the relevant grant years:


	2022		2021		2020
TSR	100	%	100	%	67	%
ROCE	—	%	—	%	33	%

As the 2020 PSUs depend on a performance-based settlement criterion, compensation expense may be adjusted in future periods as the number of units expected to vest increases or decreases based on the Company’s expected ROCE performance.

Of the grant-date fair value, the portion of the PSUs tied to TSR performance required a stochastic process method using a Brownian Motion simulation. A stochastic process is a mathematically defined equation that can create a series of outcomes over time. These outcomes are not deterministic in nature, which means that by iterating the equations multiple times, different results will be obtained for those iterations. In the case of the PSUs tied to TSR performance, the Company could not predict with certainty the path its stock price or the stock prices of its peers would take over the performance period. By using a stochastic simulation, the Company created multiple prospective stock pathways, statistically analyzed these simulations, and ultimately made inferences regarding the most likely path the stock price would take. As such, because future stock prices are stochastic, or probabilistic with some direction in nature, the stochastic method, specifically the Brownian Motion Model, was deemed an appropriate method by which to determine the fair value of the portion of the PSUs tied to TSR performance. Significant assumptions used in this simulation include the Company’s expected volatility, risk-free interest rate based on U.S. Treasury yield curve rates with maturities consistent with the performance period, as well as the volatilities for each of the Company’s peers.

A summary of the status and activity of non-vested PSUs for the six months ended June 30, 2022 is presented below:


	PSUs (1)	Weighted-Average Grant-Date Fair Value
Non-vested, beginning of year	319,367	$	57.58
Granted	199,317	64.23
Vested	(91,523)	32.49

Expired	(41,955)	22.77
Non-vested, end of year	385,206	$	70.77

___________________________

(1)The number of awards assumes that the associated performance condition is met at the target amount (multiplier of one). The final number of shares of the Company’s common stock issued may vary depending on the performance multiplier, which ranges from zero to two, depending on the level of satisfaction of the performance condition.

The fair value of the PSUs granted under the LTIP during the six months ended June 30, 2022 was $12.8 million.

The PSUs tied to TSR performance granted in 2019 vested as of December 31, 2021 and were released during the three months ended March 31, 2022 with a 200% distribution of shares to the recipients. The PSUs tied to ROCE performance granted in 2019 expired, with zero distribution of shares to the recipients.

Stock Options

The LTIP allows for the issuance of stock options to the Company's employees at the sole discretion of the Board. Options expire ten years from the grant date unless otherwise determined by the Board. Compensation expense on the stock options is recognized as general and administrative expense over the vesting period of the award.

Stock options are valued using a Black-Scholes Model where expected volatility is based on an average historical volatility of a peer group selected by management over a period consistent with the expected life assumption on the grant date, the risk-free rate of return is based on the U.S. Treasury constant maturity yield on the grant date with a remaining term equal to the expected term of the awards, and the Company’s expected life of stock option awards is derived from the midpoint of the average vesting time and contractual term of the awards.

A summary of the status and activity of non-vested stock options for the six months ended June 30, 2022 is presented below:


	Stock Options	Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding, beginning of year	25,549	$	34.36

Exercised	(6,036)	34.36
Forfeited	(111)	34.36
Outstanding, end of year	19,402	$	34.36	4.5	$	348
Options outstanding and exercisable	19,402	$	34.36	4.5	$	348

The aggregate intrinsic value of options exercised during the six months ended June 30, 2022 was $0.1 million.