Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

NOTE 9 – STOCK-BASED COMPENSATION

For the three and nine months ended September 30, 2011, we recognized stock compensation expense for restricted stock awards, stock options and stock settled SARs of $2.7 million and $7.7 million, respectively. We also capitalized for the same periods stock compensation cost for oil and natural gas properties of $0.6 million and $1.9 million, respectively. For these same periods, the tax benefit related to this stock based compensation was $1.1 million and $3.0 million, respectively. For the three and nine months ended September 30, 2010, we recognized stock compensation expense for restricted stock awards, stock options and stock settled SARs of $2.8 million and $8.3 million, respectively, and capitalized stock compensation cost for oil and natural gas properties of $0.7 million and $2.0 million, respectively. For these same periods, the tax benefit related to this stock based compensation was $1.1 million and $3.2 million, respectively. The remaining unrecognized compensation cost related to unvested awards at September 30, 2011 is approximately $11.2 million of which $2.2 million is anticipated to be capitalized. The weighted average period of time over which this cost will be recognized is 0.8 years.

We did not grant any SARs or stock options (other than the non-employee director options discussed below) during either of the three or nine month periods ending September 30, 2011 and 2010.

The table below shows the estimates of the fair value of the stock options granted to our non-employee directors under the Unit Corporation 2000 Non-employee Directors Stock Option Plan during the periods using the Black-Scholes model and applying the estimated values also presented in the table:


	Nine Months Ended September 30,
	2011			2010
Options granted ⁽¹⁾		31,500			52,504
Estimated fair value (in millions)	$	0.7		$	0.8
Estimate of stock volatility		0.48			0.45
Estimated dividend yield		0	%		0	%
Risk free interest rate		2	%		2	%
Expected annual life based on prior experience		5			5
Forfeiture rate		0	%		0	%

(1) On May 29, 2009, eight of our directors were each issued 3,063 options contingent on shareholder approval, which was received at the May 5, 2010 annual shareholders' meeting. These 24,504 options granted and vested simultaneously with that approval.

Expected volatilities are based on the historical volatility of our stock. Within the model, we use historical data to estimate stock option exercise and termination rates and aggregate groups that have similar historical exercise behavior for valuation purposes. To date, we have not paid dividends on our stock. The risk free interest rate is computed from the LIBOR rate using the term over which it is anticipated the grant will be exercised. The stock options granted in the second quarter of 2011 increased stock compensation expense for the third quarter and first nine months of 2011 by $0.4 million and $0.6 million, respectively.

The following table shows the fair value of the restricted stock awards granted to employees during the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Shares granted		12,402			192,272			209,150			440,655

Estimated fair value (in millions)	$	0.6		$	6.0		$	10.9		$	16.6

Percentage of shares granted expected to be distributed		95	%		89	%		93	%		91	%

The restricted stock awards granted during the first three and nine months of 2011 will be recognized over a two- and three-year vesting period, except for a portion of those granted to certain executive officers in the first quarter of 2011. Thirty percent of the shares granted to the designated executive officers, or 20,062 shares (the performance shares), will cliff vest in the first half of 2014. The actual number of performance shares that vest in 2014 will be based on the company's achievement of certain performance criteria over a three-year period, and will range from 50% to 150% of the 20,062 restricted shares granted as performance shares. Total 2011 awards increased the stock compensation expense and the capitalized cost related to oil and natural gas properties for the first nine months of 2011 by an aggregate of $3.5 million.

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

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