EQUITY-BASED COMPENSATION

The following table presents the effects of the equity compensation plans and related costs:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
General and administrative expenses	$	4,402	$	2,069	$	13,659	$	5,387
Equity-based compensation capitalized pursuant to full cost method of accounting for oil and natural gas properties	1,534		2,043		5,125		4,758

Stock Options

The following table presents the Company’s stock option activity under the Company’s 2012 Equity Incentive Plan (“2012 Plan”) for the nine months ended September 30, 2015.



			Weighted Average
			Exercise		Remaining	Intrinsic
	Options		Price		Term	Value
					(in years)	(in thousands)
Outstanding at December 31, 2014	313,105		$	18.29
Exercised	(150,605	)	$	18.05
Outstanding at September 30, 2015	162,500		$	18.51	1.29	$	7,489
Vested and Expected to Vest at September 30, 2015	162,500		$	18.51	1.29	$	7,489
Exercisable at September 30, 2015	118,500		$	17.50	1.03	$	5,581

The aggregate intrinsic value of stock options that were exercised during the nine months ended September 30, 2015 and 2014 was $8.4 million and $16.8 million, respectively. As of September 30, 2015, the unrecognized compensation cost related to unvested stock options was $0.1 million. Such cost is expected to be recognized over a weighted-average period of 1.27 years.

Restricted Stock Units

The following table presents the Company’s restricted stock units activity under the 2012 Plan during the nine months ended September 30, 2015.



			Weighted Average
	Restricted Stock		Grant-Date
	Units		Fair Value
Unvested at December 31, 2014	167,291		$	49.99
Granted	98,664		$	68.46
Vested	(139,671	)	$	43.32
Forfeited	(1,954	)	$	74.57
Unvested at September 30, 2015	124,330		$	61.74

The aggregate fair value of restricted stock units that vested during the nine months ended September 30, 2015 and 2014 was $9.8 million and $7.2 million, respectively. As of September 30, 2015, the Company’s unrecognized compensation cost related to unvested restricted stock awards and units was $5.0 million. Such cost is expected to be recognized over a weighted-average period of 1.24 years.

Performance Based Restricted Stock Units

To provide long-term incentives for the executive officers to deliver competitive returns to the Company’s stockholders, the Company has granted performance based restricted stock units to eligible employees. The ultimate number of shares awarded from these conditional restricted stock units is based upon measurement of total shareholder return of the Company’s common stock (“TSR”) as compared to a designated peer group during a three-year performance period. In February 2014, eligible employees received initial performance restricted stock unit awards totaling 79,150 units from which a minimum of 0% and a maximum of 200% units could be awarded. The awards have a performance period of January 1, 2013 to December 31, 2015 and cliff vest at December 31, 2015. In February 2015, eligible employees received additional performance restricted stock unit awards totaling 90,249 units from which a minimum of 0% and a maximum of 200% units could be awarded. The awards have a performance period of January 1, 2014 to December 31, 2016 and cliff vest at December 31, 2016.

The fair value of each performance restricted stock unit is estimated at the date of grant using a Monte Carlo simulation, which results in an expected percentage of units to be earned during the performance period.

The following table presents a summary of the grant-date fair values of performance restricted stock units granted and the related assumptions for the February 2015 and February 2014 awards.



	2015			2014
Grant-date fair value	$	137.14		$	125.63
Risk-free rate	0.49		%	0.30		%
Company volatility	43.36		%	39.60		%

The following table presents the Company’s performance restricted stock units activity under the 2012 Plan for the nine months ended September 30, 2015.



	Performance	Weighted Average
	Restricted Stock	Grant-Date
	Units	Fair Value
Unvested at December 31, 2014	79,150	$	125.63
Granted	90,249	$	137.14
Unvested at September 30, 2015⁽¹⁾	169,399	$	131.76


(1)	A maximum of 338,798 units could be awarded based upon the Company’s final TSR ranking.

As of September 30, 2015, the Company’s unrecognized compensation cost related to unvested performance based restricted stock awards and units was $9.5 million. Such cost is expected to be recognized over a weighted-average period of 1.1 years.

Partnership Unit Options

In accordance with the Viper Energy Partners LP Long Term Incentive Plan (“Viper LTIP”), the exercise price of unit options granted may not be less than the market value of the common units at the date of grant. The units issued under the Viper LTIP will consist of new common units of the Partnership. On June 17, 2014, the Board of Directors of the General Partner granted 2,500,000 unit options to the executive officers of the General Partner. The unit options vest approximately 33% ratably on each of the first three anniversaries of the date of grant or earlier upon a change of control (as defined in the Viper LTIP). Vested unit options will be automatically exercised upon the earlier of a change of control or the third anniversary of the grant date unless extended in accordance with the terms of the Viper LTIP (the “Exercise Date”). In the event the fair market value per unit as of the Exercise Date is less than the exercise price per option unit, the vested options will automatically terminate and become null and void on the Exercise Date.

The fair value of the unit options on the date of grant is expensed over the applicable vesting period. The Partnership estimates the fair values of unit options granted using a Black-Scholes option valuation model, which requires the Partnership to make several assumptions. At the time of grant the Partnership did not have a history of market prices, thus the expected volatility was determined using the historical volatility for a peer group of companies. The expected term of options granted was determined based on the contractual term of the awards. The risk-free interest rate is based on the U.S. treasury yield curve rate for the expected term of the unit option at the date of grant. The expected dividend yield was based upon projected performance of the Partnership.



	2014
Grant-date fair value	$	4.24
Expected volatility	36.0		%
Expected dividend yield	5.9		%
Expected term (in years)	3.0
Risk-free rate	0.99		%

The following table presents the unit option activity under the Viper LTIP for the nine months ended September 30, 2015.



		Weighted Average
	Unit	Exercise		Remaining	Intrinsic
	Options	Price		Term	Value
				(in years)	(in thousands)
Outstanding at December 31, 2014	2,500,000	$	26.00
Granted	—	$	—
Outstanding at September 30, 2015	2,500,000	$	—	1.75	$	—
Vested and Expected to Vest at September 30, 2015	2,500,000	$	—	1.75	$	—
Exercisable at September 30, 2015	—	$	—	0	$	—

As of September 30, 2015, the unrecognized compensation cost related to unvested unit options was $6.1 million. Such cost is expected to be recognized over a weighted-average period of 1.8 years.

Phantom Units

Under the Viper LTIP, the Board of Directors of the General Partner is authorized to issue phantom units to eligible employees. The Partnership estimates the fair value of phantom units as the closing price of the Partnership’s common units on the grant date of the award, which is expensed over the applicable vesting period. Upon vesting, the phantom units entitle the recipient to one common unit of the Partnership for each phantom unit.

The following table presents the phantom unit activity under the Viper LTIP for the nine months ended September 30, 2015.



			Weighted Average
	Phantom		Grant-Date
	Units		Fair Value
Unvested at December 31, 2014	17,776		$	19.51
Granted	24,690		$	15.48
Vested	(17,118	)	$	17.57
Unvested at September 30, 2015	25,348		$	16.89

The aggregate fair value of phantom units that vested during the nine months ended September 30, 2015 was $0.3 million. As of September 30, 2015, the unrecognized compensation cost related to unvested phantom units was $0.4 million. Such cost is expected to be recognized over a weighted-average period of 1.4 years.