We use share-based payments to compensate employees and non-employee directors. We recognize the cost of share-based payments under the fair-value-based method. Share-based awards include equity instruments in the form of stock options or restricted stock units that have included service conditions and, in certain cases, performance conditions. Our share-based awards also include share-settled performance unit awards. Share-settled performance unit awards are accounted for as equity awards. In 2020, we granted performance-based cash-settled phantom units, which are accounted for as a liability classified award. We issue shares of common stock when vested stock options are exercised and after restricted stock units and share-settled performance unit awards vest.

The Patterson-UTI Energy, Inc. 2021 Long-Term Incentive Plan (the “2021 Plan”) was originally approved by our stockholders on June 3, 2021. Subject to stockholder approval, our Board of Directors approved an amendment to the 2021 Plan to increase the number of shares available for issuance under the 2021 Plan by 5.445 million shares (the “First Amendment”). On June 8, 2023, our stockholders approved the First Amendment. On September 1, 2023, in connection with the NexTier merger, our Board of Directors approved a second amendment to the 2021 Plan (the “Second Amendment,” and together with the First Amendment, the “Plan Amendments” and the 2021 Plan, as amended by the Plan Amendments, the “Plan”) to assume approximately 10 million shares previously reserved for issuance under the NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (the “NexTier Plan”). Following the Plan Amendments, the aggregate number of shares of Common Stock authorized for grant under the Plan is approximately 28.9 million.

On September 1, 2023, the Board of Directors also approved amendments to the NexTier Plan and the NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan (the “Former C&J Energy Plan” and, together with the NexTier Plan, the “Assumed Plans”) to assume awards that were previously granted under the Assumed Plans (consisting of stock options, time- and performance-based restricted stock units and cash-settled performance unit awards), which, in connection with the NexTier merger, were converted into equity awards in respect of shares of Patterson-UTI common stock.

Stock Options — We estimate the grant date fair values of stock options using the Black-Scholes-Merton valuation model. Volatility assumptions are based on the historic volatility of our common stock over the most recent period equal to the expected term of the options as of the date such options are granted. The expected term assumptions are based on our experience with respect to employee stock option activity. Dividend yield assumptions are based on the expected dividends at the time the options are granted. The risk-free interest rate assumptions are determined by reference to United States Treasury yields. No options were granted during the nine months ended September 30, 2023.

Stock option activity from January 1, 2023 to September 30, 2023 follows:


				Weighted
				Average
	Underlying			Exercise Price
	Shares			Per Share
Outstanding at January 1, 2023		2,905,150		$	22.19
Granted		—		$	—
Assumed (1)		652,573		$	27.97
Exercised		—		$	—
Expired		(662,500	)	$	22.70
Outstanding at September 30, 2023		2,895,223		$	23.38
Exercisable at September 30, 2023		2,895,223		$	23.38

(1)

Awards assumed in connection with the NexTier merger.

Restricted Stock Units (Equity Based) — For all restricted stock unit awards made to date, shares of common stock are not issued until the units vest. Restricted stock units are subject to forfeiture for failure to fulfill service conditions and, in certain cases, performance conditions. Forfeitable dividend equivalents are accrued on certain restricted stock units that will be paid upon vesting. We use the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock unit activity from January 1, 2023 to September 30, 2023 follows:


						Weighted
						Average Grant
	Time			Performance		Date Fair Value
	Based			Based		Per Share
Non-vested restricted stock units outstanding at January 1, 2023		3,090,846			359,315	$	12.71
Granted		1,675,657			—	$	11.32
Assumed (1)		7,438,031			—	$	5.62
Vested		(5,396,107	)		—	$	6.48
Forfeited		(84,739	)		—	$	13.82
Non-vested restricted stock units outstanding at September 30, 2023		6,723,688			359,315	$	9.47

(1)

Awards assumed in connection with the NexTier merger.

As of September 30, 2023, we had unrecognized compensation cost related to our unvested restricted stock units totaling $58.1 million. The weighted-average remaining vesting period for these unvested restricted stock units was 1.58 years as of September 30, 2023.

Restricted Stock Units (Liability Based) — We converted NexTier’s cash-settled performance based units into our cash-settled restricted stock units in connection with the NexTier merger. These awards are accounted for as liability classified awards and remeasured at fair value at each reporting period. Compensation expense is recorded over the vesting period and is initially based on the fair value at the award conversion date. Compensation expense is subsequently remeasured at each reporting date during the vesting period based on the change in our stock price. Dividend cash equivalents are not paid on cash-settled units. As of September 30, 2023, $8.4 million is included in “Other Liabilities” in our unaudited condensed consolidated balance sheets. We recognized $3.4 million of compensation expense for these awards during the three and nine months ended September 30, 2023.

Performance Unit Awards — We have granted share-settled performance unit awards to certain employees (the “Performance Units”) on an annual basis since 2010. The Performance Units provide for the recipients to receive shares of common stock upon the achievement of certain performance goals during a specified period established by the Compensation Committee. The performance period for the Performance Units is generally the three-year period commencing on April 1 of the year of grant.

The performance goals for the Performance Units are tied to our total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee. For the performance units granted in April 2022 and April 2021, the peer group includes one market index and three market indices, respectively. The performance goals are considered to be market conditions under the relevant accounting standards and the market conditions were factored into the determination of the fair value of the respective Performance Units. The recipients will receive the target number of shares if our total shareholder return during the performance period, when compared to the peer group, is at the 55th percentile. If our total shareholder return during the performance period, when compared to the peer group, is at the 75th percentile or higher, then the recipients will receive two times the target number of shares. If our total shareholder return during the performance period, when compared to the peer group, is at the 25th percentile, then the recipients will only receive one-half of the target number of shares. If our total shareholder return during the performance period, when compared to the peer group, is between the 25th and 55th percentile, or the 55th and 75th percentile, then the shares to be received by the recipients will be determined using linear interpolation for levels of achievement between these points.

The payout under the Performance Units shall not exceed the target number of shares if our absolute total shareholder return is negative or zero.

The total target number of shares with respect to the Performance Units for the awards granted in 2019-2023 is set forth below:


	2023		2022		2021		2020		2019
	Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards
Target number of shares		631,700		414,000		843,000		500,500		489,800

In April 2022, 979,600 shares were issued to settle the 2019 Performance Units. In May 2023, 1,001,000 shares were issued to settle the 2020 Performance Units. The Performance Units granted in 2021, 2022 and 2023 have not reached the end of their respective performance periods.

Because the Performance Units are share-settled awards, they are accounted for as equity awards and measured at fair value on the date of grant using a Monte Carlo simulation model. The fair value of the Performance Units is set forth below (in thousands):


	2023		2022		2021		2020		2019
	Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards
Aggregate fair value at date of grant	$	8,440	$	10,743	$	7,225	$	826	$	9,958

These fair value amounts are charged to expense on a straight-line basis over the performance period. Compensation expense associated with the Performance Units is shown below (in thousands):


	2023		2022		2021		2020		2019
	Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards
Three months ended September 30, 2023	$	903	$	990	$	617	N/A		N/A
Three months ended September 30, 2022	N/A		$	895	$	602	$	69	N/A
Nine months ended September 30, 2023	$	1,372	$	2,781	$	1,821	$	69	N/A
Nine months ended September 30, 2022	N/A		$	1,791	$	1,806	$	206	$	830

As of September 30, 2023, we had unrecognized compensation cost related to our unvested Performance Units totaling $13.5 million. The weighted-average remaining vesting period for these unvested Performance Units was 1.39 years as of September 30, 2023.

Phantom Units — In May 2020, the Compensation Committee approved a grant of long-term performance-based phantom units to our Chief Executive Officer and President, William A. Hendricks, Jr. (the “Phantom Units”). The Phantom Units settled in May 2023, with a cash payment of $7.4 million, which was determined by multiplying 597,000 earned phantom units by our average trading price per share over the twenty consecutive trading days preceding March 31, 2023.