10.

Stock-based Compensation

The Company uses share-based payments to compensate employees and non-employee directors. The Company recognizes the cost of share-based payments under the fair-value-based method. Share-based awards consist of equity instruments in the form of stock options, restricted stock or restricted stock units and have included service and, in certain cases, performance conditions. The Company’s share-based awards have also included both cash-settled and share-settled performance unit awards. Cash-settled performance unit awards are accounted for as liability awards. Share-settled performance unit awards are accounted for as equity awards. The Company issues shares of common stock when vested stock options are exercised, when restricted stock is granted and when restricted stock units and share-settled performance unit awards vest.

The Company’s shareholders have approved the 2005 Plan, and the Board of Directors adopted a resolution that no future grants would be made under any of the Company’s other previously existing plans. The Company’s share-based compensation plans at December 31, 2013 follow:


Plan Name	Shares Authorized for Grant		Awards Outstanding		Shares Available for Grant
Patterson-UTI Energy, Inc. 2005 Long-Term Incentive Plan, as amended		15,250,000		8,026,643		274,071
Patterson-UTI Energy, Inc. Amended and Restated 1997 Long-Term Incentive Plan, as amended (“1997 Plan”)		—		810,000		—

A summary of the 2005 Plan follows:

•

The Compensation Committee of the Board of Directors administers the plan.

•

All employees, officers and directors are eligible for awards.

•

The Compensation Committee determines the vesting schedule for awards. Awards typically vest over one year for non-employee directors and three years for employees.

•

The Compensation Committee sets the term of awards and no option term can exceed 10 years.

•

All options granted under the plan are granted with an exercise price equal to or greater than the fair market value of the Company’s common stock at the time the option is granted.

•

The plan provides for awards of incentive stock options, non-incentive stock options, tandem and freestanding stock appreciation rights, restricted stock awards, other stock unit awards, performance share awards, performance unit awards and dividend equivalents. As of December 31, 2013, non-incentive stock options, restricted stock awards, restricted stock units and performance unit awards had been granted under the plan.

Options granted under the 1997 Plan typically vested over three or five years as dictated by the Compensation Committee. These options have terms of no more than ten years. All options were granted with an exercise price equal to the fair market value of the related common stock at the time of grant. Restricted stock awards granted under the 1997 Plan typically vested over four years.

Stock Options — The Company estimates the grant date fair values of stock options using the Black-Scholes-Merton valuation model. Volatility assumptions are based on the historic volatility of the Company’s common stock over the most recent period equal to the expected term of the options as of the date the options are granted. The expected term assumptions are based on the Company’s 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. Weighted-average assumptions used to estimate grant date fair values for stock options granted in the years ended December 31, 2013, 2012 and 2011 follow:


	2013			2012			2011
Volatility		41.36	%		48.79	%		45.97	%
Expected term (in years)		5.00			5.00			5.00
Dividend yield		0.89	%		1.21	%		0.67	%
Risk-free interest rate		0.70	%		0.87	%		2.34	%

Stock option activity for the year ended December 31, 2013 follows:


	Shares			Weighted-average exercise price
Outstanding at beginning of year		7,827,195		$	20.35
Granted		692,500		$	22.51
Exercised		(1,190,000	)	$	16.21
Cancelled		(10,000	)	$	18.63
Expired		—			—

Outstanding at end of year		7,319,695		$	21.23

Exercisable at end of year		6,250,860		$	21.29

During 2013, the Company acquired 637,624 shares of treasury stock from employees upon the exercise of stock options. Shares having a market value of $12.3 million were withheld from employees and added to treasury stock to satisfy the exercise price in connection with the exercise of the stock options. Shares having a market value of $2.9 million were withheld from employees and added to treasury stock to satisfy payroll tax withholding obligations upon the exercise of the stock options.

Options outstanding at December 31, 2013 have an aggregate intrinsic value of approximately $37 million and a weighted-average remaining contractual term of 5.10 years. Options exercisable at December 31, 2013 have an aggregate intrinsic value of approximately $32 million and a weighted-average remaining contractual term of 4.45 years. Additional information with respect to options granted, vested and exercised during the years ended December 31, 2013, 2012 and 2011 follows:


	2013		2012		2011
Weighted-average grant date fair value of stock options granted (per share)	$	7.59	$	6.37	$	12.24
Aggregate grant date fair value of stock options vested during the year (in thousands)	$	5,240	$	5,512	$	5,639
Aggregate intrinsic value of stock options exercised (in thousands)	$	8,683	$	138	$	12,663

As of December 31, 2013, options to purchase 1.1 million shares were outstanding and not vested. All of these non-vested options are expected to ultimately vest. Additional information as of December 31, 2013 with respect to these non-vested options follows:


Aggregate intrinsic value		$5.0 million
Weighted-average remaining contractual term		8.90 years
Weighted-average remaining expected term		3.90 years
Weighted-average remaining vesting period		1.81 years
Unrecognized compensation cost		$6.3 million

Restricted Stock — For all restricted stock awards to date, shares of common stock were issued when the awards were made. Non-vested shares are subject to forfeiture for failure to fulfill service conditions and, in certain cases, performance conditions. Non-forfeitable dividends are paid on non-vested shares of restricted stock. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock activity for the year ended December 31, 2013 follows:


	Shares			Weighted- average Grant Date Fair Value
Non-vested restricted stock outstanding at beginning of year		1,279,146		$	20.03
Granted		954,750		$	21.66
Vested		(653,636	)	$	20.56
Forfeited		(83,568	)	$	20.04

Non-vested restricted stock outstanding at end of year		1,496,692		$	20.84

As of December 31, 2013, approximately 1.4 million shares of non-vested restricted stock outstanding are expected to vest. Additional information as of December 31, 2013 with respect to these non-vested shares follows:


Aggregate intrinsic value		$35.5 million
Weighted-average remaining vesting period		1.94 years
Unrecognized compensation cost		$22.5 million

Restricted Stock Units — 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. Non-forfeitable cash dividend equivalents are paid on non-vested restricted stock units. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock unit activity for the year ended December 31, 2013 follows:


	Shares			Weighted- average Grant Date Fair Value
Non-vested restricted stock units outstanding at beginning of year		17,670		$	20.08
Granted		11,250		$	21.09
Vested		(8,664	)	$	20.01
Forfeited		—			—

Non-vested restricted stock units outstanding at end of year		20,256		$	20.67

Performance Unit Awards. In 2009, the Company granted cash-settled performance unit awards to certain executive officers (the “2009 Performance Units”). The 2009 Performance Units provided for those executive officers to receive a cash payment upon the achievement of certain performance goals established by the Compensation Committee during a specified period. The performance period for the 2009 Performance Units was the period from April 1, 2009 through March 31, 2012. The performance goals for the 2009 Performance Units were tied to the Company’s total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee. These goals were 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 performance units. Generally, the recipients would receive a target payment if the Company’s total shareholder return was positive and, when compared to the peer group, was at or above the 50^thpercentile but less than the 75^th percentile and two times the target if at the 75^th percentile or higher. If the Company’s total shareholder return was positive, and, when compared to the peer group, was at or above the 25^th percentile but less than the 50^th percentile, the recipients would only receive one-half of the target payment. The total target amount with respect to the 2009 Performance Units was approximately $3.4 million. Because the 2009 Performance Units were settled in cash at the end of the performance period, they were accounted for as liability awards and the Company’s pro-rated obligation was measured at estimated fair value at the end of each reporting period using a Monte Carlo simulation model. The performance period ended on March 31, 2012 and the Company’s total shareholder return was at the 46^th percentile. The resulting cash payments totaling $1.7 million were paid in April 2012. For the year ended December 31, 2012, a compensation benefit of approximately $1.9 million was recognized. For the year ended December 31, 2011, compensation expense associated with the 2009 Performance Units was approximately $1.3 million.

In 2010, 2011, 2012 and 2013, the Company granted stock-settled performance unit awards to certain executive officers (the “Stock-Settled Performance Units”). The Stock-Settled Performance Units provide for the recipients to receive a grant of shares of stock upon the achievement of certain performance goals established by the Compensation Committee during a specified period. The performance period for the Stock-Settled Performance Units is the three year period commencing on April 1 of the year of grant, but can extend for an additional two years in certain circumstances. The performance goals for the Stock-Settled Performance Units are tied to the Company’s total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee. These goals are considered to be market conditions under the relevant accounting standards and the market conditions are factored into the determination of the fair value of the respective performance units. Generally, the recipients will receive a target number of shares if the Company’s total shareholder return is positive and, when compared to the peer group, is at the 50^th percentile and two times the target if at the 75^th percentile or higher. If the Company’s total shareholder return is positive, and, when compared to the peer group, is at the 25^th percentile, the recipients will only receive one-half of the target number of shares. The grant of shares when achievement is between the 25^th and 75^thpercentile will be determined on a pro-rata basis. The performance period for the 2010 Stock-Settled Performance Units ended on March 31, 2013, and the Company’s total shareholder return was at the 93^rd percentile. In April 2013, 357,500 shares were issued to settle the 2010 Stock-Settled Performance Units. The total target number of shares with respect to the Stock-Settled Performance Units is set forth below:


	2013 Performance Unit Awards		2012 Performance Unit Awards		2011 Performance Unit Awards		2010 Performance Unit Awards
Target number of shares		236,500		192,000		144,375		178,750

Because the Stock-Settled Performance Units are stock-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 Stock-Settled Performance Units is set forth below (in thousands):


	2013 Performance Unit Awards		2012 Performance Unit Awards		2011 Performance Unit Awards		2010 Performance Unit Awards
Aggregate fair value at date of grant	$	5,564	$	3,065	$	5,569	$	3,117

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


	2013 Performance Unit Awards		2012 Performance Unit Awards		2011 Performance Unit Awards		2010 Performance Unit Awards
Year ended December 31, 2013	$	1,391	$	1,022	$	1,856	$	260
Year ended December 31, 2012		NA		766	$	1,856	$	1,039
Year ended December 31, 2011		NA		NA	$	1,392	$	1,039

Dividends on Equity Awards — Non-forfeitable cash dividends are paid on restricted stock awards and dividend equivalents are paid on restricted stock units. These payments are recognized as follows:

•

Dividends are recognized as reductions of retained earnings for the portion of restricted stock awards expected to vest.

•

Dividends are recognized as additional compensation cost for the portion of restricted stock awards that are not expected to vest or that ultimately do not vest.

•

Dividend equivalents are recognized as additional compensation cost for restricted stock units.