Employee compensation

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Employee compensation

The Company has a Long-Term Incentive Plan (the "LTIP"), which provides for the granting of incentive awards in the form of restricted stock awards, restricted stock options awards, performance share awards, performance unit awards and other awards. The LTIP provides for the issuance of 10.0 million shares.

The Company recognizes the fair value of stock-based compensation granted to employees and directors 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. Stock-based compensation is included in "General and administrative" in the unaudited consolidated statements of operations. On January 1, 2014, the Company began capitalizing a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration and development of oil and natural gas properties into the full-cost pool. Capitalized stock-based compensation is included as an addition to "Oil and natural gas properties" in the unaudited consolidated balance sheets.

1. Restricted stock awards

All restricted stock awards are treated as issued and outstanding in the accompanying unaudited consolidated financial statements. Per the award agreement terms, if an employee terminates employment prior to the restriction lapse date, the awarded shares are forfeited and canceled and are no longer considered issued and outstanding. If the employee's termination of employment is by reason of death or disability, all of the holder's restricted stock will automatically vest. Restricted stock awards granted to officers and employees vest in a variety of vesting schedules including (i) 20% at the grant date and then 20% annually thereafter, (ii) 33%, 33% and 34% per year beginning on the first anniversary date of the grant, (iii) 50% in year two and 50% in year three, (iv) fully on the first anniversary date of the grant and (v) fully on the third anniversary date of the grant. Restricted stock awards granted to non-employee directors vest fully on the first anniversary date of the grant.

The following table reflects the outstanding restricted stock awards for the nine months ended September 30, 2014:



(in thousands, except for weighted-average grant date fair values)	Restricted stock awards		Weighted-average grant date fair value (per award)
Outstanding at December 31, 2013	1,799		$	19.17
Granted	1,209		$	25.81
Forfeited	(105	)	$	22.54
Vested⁽¹⁾	(635	)	$	18.90
Outstanding at September 30, 2014	2,268		$	22.65

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(1)	The vesting of certain restricted stock awards could result in federal and state income tax expense or benefit related to the difference between the market price of the common stock at the date of vesting and the date of grant. See Note F for additional discussion regarding the tax impact of vested restricted stock awards.

The Company utilizes the closing stock price on the date of grant to determine the fair value of service vesting restricted stock awards. As of September 30, 2014, unrecognized stock-based compensation related to the restricted stock awards was $33.8 million. Such cost is expected to be recognized over a weighted-average period of 1.7 years.

2. Restricted stock option awards

Restricted stock option awards granted under the LTIP vest and are exercisable in four equal installments on each of the four anniversaries of the date of the grant. The following table reflects the stock option award activity for the nine months ended September 30, 2014:



(in thousands, except for weighted-average exercise price and contractual term)	Restricted stock option awards		Weighted-average exercise price (per option)		Weighted-average remaining contractual term (years)
Outstanding at December 31, 2013	1,229		$	19.32	8.82
Granted	336		$	25.60	9.41
Exercised⁽¹⁾	(95	)	$	19.93	7.98
Expired or canceled	—		$	—	—
Forfeited	(47	)	$	19.70	—
Outstanding at September 30, 2014	1,423		$	20.75	8.40
Vested and exercisable at end of period⁽²⁾	352		$	20.38	7.91
Vested, exercisable, and expected to vest at end of period⁽³⁾	1,390		$	20.75	8.40

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(1)	The exercise of stock option awards could result in federal and state income tax expense or benefit related to the difference between the fair value of the stock option award at the date of grant and the intrinsic value of the stock option award when exercised. See Note F for additional discussion regarding the tax impact of exercised stock option awards.


(2)	The aggregate intrinsic value of vested and exercisable options at September 30, 2014 was $1.0 million.


(3)	The aggregate intrinsic value of vested, exercisable and expected to vest options at September 30, 2014 was $3.9 million.

The Company utilizes the Black-Scholes option pricing model to determine the fair values of restricted stock option awards and is recognizing the associated expense on a straight-line basis over the four-year requisite service period of the awards. Determining the fair value of equity-based awards requires judgment, including estimating the expected term that stock option awards will be outstanding prior to exercise and the associated volatility. As of September 30, 2014, unrecognized stock-based compensation related to the restricted option awards was $9.4 million. Such cost is expected to be recognized over a weighted-average period of 2.56 years.

The assumptions used to estimate the fair value of restricted stock options granted on February 27, 2014 are as follows:



Risk-free interest rate⁽¹⁾	1.88		%
Expected option life⁽²⁾	6.25 years
Expected volatility⁽³⁾	53.21		%
Fair value per stock option	$	13.41

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(1)	U.S. Treasury yields as of the grant date were utilized for the risk-free interest rate assumption, matching the treasury yield terms to the expected life of the option.


(2)	As the Company had limited exercise history at the time of valuation relating to terminations and modifications, expected option life assumptions were developed using the simplified method in accordance with GAAP.


(3)	The Company utilized a peer historical look-back, which was weighted with the Company’s own volatility, in order to develop the expected volatility.

In accordance with the LTIP and stock option agreement, the options granted will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company, following the date of grant:



Full years of continuous employment	Incremental percentage of option exercisable		Cumulative percentage of option exercisable
Less than one	—	%	—	%
One	25	%	25	%
Two	25	%	50	%
Three	25	%	75	%
Four	25	%	100	%

No shares of common stock may be purchased unless the optionee has remained in continuous employment with the Company for one year from the grant date. Unless terminated sooner, the option will expire if and to the extent it is not exercised within 10 years from the grant date. The unvested portion of a stock option award shall expire upon termination of employment, and the vested portion of a stock option award shall remain exercisable for (i) one year following termination of employment by reason of the holder's death or disability, but not later than the expiration of the option period, or (ii) 90 days following termination of employment for any reason other than the holder's death or disability, and other than the holder's termination of employment for cause. Both the unvested and the vested but unexercised portion of a stock option award shall expire upon the termination of the option holder's employment or service by the Company for cause.

3. Performance share awards

The Company performance share awards granted to management on February 27, 2014 ("Performance Share Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party was utilized in order to determine the fair value of these awards at the date of grant. The Company has determined the Performance Share Awards are equity awards and is recognizing the associated expense on a straight-line basis over the three-year requisite service period of the awards. These awards will be settled in stock at the end of the requisite service period based on the achievement of certain performance criteria.

The Performance Share Awards have a performance period of January 1, 2014 to December 31, 2016 and any shares earned under such awards are expected to be issued in the first quarter of 2017 if the performance criteria is met. During the nine months ended September 30, 2014, 271,667 performance shares were awarded and all remain outstanding at September 30, 2014. As of September 30, 2014, unrecognized stock-based compensation related to the Performance Share Awards was $6.0 million. Such cost is expected to be recognized over a weighted-average period of 2.41 years.

The assumptions used to estimate the fair value of the Performance Share Awards are as follows:



Risk-free rate⁽¹⁾	0.63		%
Dividend yield	—		%
Expected volatility⁽²⁾	38.21		%
Laredo stock closing price as of February 27, 2014	$	25.60
Fair value per performance share	$	28.56

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(1)	The risk-free rate was derived using a zero-coupon yield derived from the Treasury Constant Maturities yield curve on the grant date.


(2)	The Company utilized a peer historical look-back, weighted with the Company's own volatility, to develop the expected volatility.

4. Stock-based compensation award expense

The following has been recorded to stock-based compensation expense for the periods presented:



	Three months ended September 30,					Nine months ended September 30,
(in thousands)	2014			2013		2014			2013
Restricted stock award compensation	$	5,880		$	4,707	$	16,122		$	11,105
Restricted stock option award compensation	931			1,169		2,736			2,451
Restricted performance share award compensation	631			—		1,476			—
Total stock-based compensation	7,442			5,876		20,334			13,556
Less amounts capitalized in oil and natural gas properties	(1,248		)	—		(3,415		)	—
Net stock-based compensation expense	$	6,194		$	5,876	$	16,919		$	13,556

5. Performance unit awards

The performance unit awards issued to management on February 15, 2013 ("2013 Performance Unit Awards") and on February 3, 2012 ("2012 Performance Unit Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party is utilized in order to determine the fair value of these awards at the date of grant and to re-measure the fair value at the end of each reporting period until settlement in accordance with GAAP. The volatility criteria utilized in the Monte Carlo simulation is based on the volatility of the Company's stock price and the stock price volatilities of a group of peer companies that have been determined to be most representative of the Company’s expected volatility. These awards are accounted for as liability awards as they will be settled in cash at the end of the requisite service period based on the achievement of certain performance criteria. The liability and related compensation expense of these awards for each period is recognized by dividing the fair value of the total liability by the requisite service period and recording the pro rata share for the period for which service has already been provided. As there are inherent uncertainties related to these factors and the Company’s judgment in applying them to the fair value determinations, there is risk that the recorded performance unit compensation may not accurately reflect the amount ultimately earned by the members of management.

The 44,481 outstanding 2013 Performance Unit Awards have a performance period of January 1, 2013 to December 31, 2015 and are expected to be paid in the first quarter of 2016 if the performance criteria are met. The 27,381 outstanding 2012 Performance Unit Awards have a performance period of January 1, 2012 to December 31, 2014 and are expected to be paid in the first quarter of 2015 if the performance criteria are met.

Compensation expense for the 2012 Performance Unit Awards and the 2013 Performance Unit Awards is recognized in "General and administrative" in the Company’s unaudited consolidated statements of operations, and the corresponding liabilities are included in "Other current liabilities" and "Other noncurrent liabilities" in the unaudited consolidated balance sheets. Due to the quarterly re-measurement of the fair value of these awards as of September 30, 2014, compensation expense for the three months ended September 30, 2014 was a reversal of $0.4 million. Compensation expense related to these awards amounted to $2.8 million in the three months ended September 30, 2013, and $0.8 million and $5.0 million in the nine months ended September 30, 2014 and 2013, respectively.