Note 7 - Compensation Plans

Cash Bonus Plan

During the first nine months of 2012 and 2011, the Company paid $24.0 million and $21.6 million for cash bonuses earned in the 2011 and 2010 performance years, respectively. The general and administrative expense and exploration expense line items in the accompanying statements of operations include $4.3 million and $3.8 million of accrued cash bonus plan expense for the three-month periods ended September 30, 2012, and 2011, respectively, and $13.6 million and $11.3 million for the nine-month periods ended September 30, 2012, and 2011, respectively, related to the respective performance year.

Restricted Stock Units Under the Equity Incentive Compensation Plan

The Company grants Restricted Stock Units (“RSUs”) as part of its long-term equity compensation program. Each RSU represents a right to one share of the Company’s common stock to be delivered upon settlement of the award at the end of the specified vesting period. Expense associated with RSUs is recognized as general and administrative expense and exploration expense over the vesting period of the award.

Total expense recorded for RSUs for the three-month periods ended September 30, 2012, and 2011, was $3.9 million and $1.6 million, respectively, and $6.5 million and $3.6 million for the nine-month periods ended September 30, 2012, and 2011, respectively. As of September 30, 2012, there was $17.5 million of total unrecognized compensation expense related to unvested RSU awards, which is being amortized through 2015.

A summary of the status and activity of non-vested RSUs for the nine-month period ended September 30, 2012, is presented in the following table:



	RSUs		Weighted-Average Grant-Date Fair Value
Non-vested, at beginning of year	308,877		$	44.33
Granted	369,332		$	49.32
Vested	(160,991	)	$	32.02
Forfeited	(22,305	)	$	51.06
Non-vested, at end of quarter	494,913		$	51.75

During the first nine months of 2012, the Company granted 369,332 RSUs, with a fair value of $18.2 million, as part of its regular long-term equity compensation program. These RSUs will vest 1/3^rd on each of the next three anniversary dates of the grants. During the first nine months of 2012, the Company settled 160,989 RSUs that related to awards granted in previous years by issuing a net 111,452 shares of the Company’s common stock in accordance with the terms of the RSU awards. The remaining 49,537 shares were withheld to satisfy income and payroll tax withholding obligations that arose upon delivery of the shares underlying those RSUs.

Performance Stock Units Under the Equity Incentive Compensation Plan

The Company also grants Performance Stock Units as part of its long-term equity compensation program. Performance Stock Units are structurally the same as the previously granted Performance Share Awards (collectively known as “Performance Stock Units” or “PSUs”). The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on the Company’s performance over a three-year measurement period. The performance criteria for the PSUs are based on a combination of the Company’s annualized total shareholder return (“TSR”) for the measurement period and the relative measure of the Company’s TSR compared with the annualized TSRs of a group of peer companies for the measurement period. Expense associated with PSUs is recognized as general and administrative expense and exploration expense over the vesting period of the award.

Total expense recorded for PSUs for the three-month periods ended September 30, 2012, and 2011, was $5.1 million and $5.9 million, respectively, and $13.2 million and $14.3 million for the nine-month periods ended September 30, 2012, and 2011, respectively. As of September 30, 2012, there was $25.2 million of total unrecognized compensation expense related to unvested PSUs to be amortized through 2015.

A summary of the status and activity of non-vested PSUs for the nine-month period ended September 30, 2012, is presented in the following table:



	PSUs⁽¹⁾		Weighted-Average Grant-Date Fair Value
Non-vested, at beginning of year	885,894		$	57.52
Granted	314,853		$	51.98
Vested	(473,750	)	$	43.96
Forfeited	(34,708	)	$	65.22
Non-vested, at end of quarter	692,289		$	63.90

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⁽¹⁾	The number of awards assumes a one multiplier. The final number of shares of common stock issued may vary depending on the three-year performance multiplier, which ranges from zero to two.

During the first nine months of 2012, the Company granted 314,853 PSUs, with a fair value of $16.4 million, as part of its regular long-term equity compensation program. These PSUs will vest 1/3^rdon each of the next three anniversary dates of the grant. During the first nine months of 2012, the Company settled 609,714 PSUs, that were granted in 2009, which earned a two times multiplier, by issuing a net 812,562 shares of the Company’s common stock in accordance with the terms of the PSU awards. There were 406,866 shares withheld to satisfy income and payroll tax withholding obligations in conjunction with the issuance of the shares.

Stock Option Grants Under the Equity Incentive Compensation Plan

A summary of activity associated with the Company’s Stock Option Plan for the nine months ended September 30, 2012, is presented in the following table:



	Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding, at beginning of year	508,214		$	13.86	$	30,109
Exercised	(151,083	)	$	12.39	$	8,308
Forfeited	—		$	—
Outstanding, at end of quarter	357,131		$	14.48	$	14,155
Vested and exercisable, at end of quarter	357,131		$	14.48	$	14,155

As of September 30, 2012, there was no unrecognized compensation expense related to stock option awards.

Director Shares

During the nine months ended September 30, 2012, and 2011, the Company issued 30,486 and 21,568 shares, respectively, of its common stock from treasury to its non-employee directors, under the Company’s Equity Incentive Compensation Plan. The Company recorded $147,000 of compensation expense related to these awards for the three months ended September 30, 2012. There was no compensation expenses recorded for the three months ended September 30, 2011. The Company recorded $1.3 million and $1.0 million of compensation expense related to these awards for the nine months ended September 30, 2012, and 2011, respectively.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, without accruing in excess of $25,000 in value from purchases for each calendar year. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on the first or last day of the purchase period. Shares issued under the ESPP have no minimum holding period requirement. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Company had 1.3 million shares available for issuance under the ESPP as of September 30, 2012. There were 37,124 and 22,373 shares issued under the ESPP during the first nine months of 2012 and 2011, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.

Net Profits Interest Bonus Plan

Cash payments made or accrued under the Company’s Net Profits Interest Bonus Plan (“Net Profits Plan”) that have been recorded as either general and administrative expense or exploration expense are presented in the table below:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
	(in thousands)
General and administrative expense	$	4,083	$	4,229	$	12,177	$	14,820
Exploration expense	403		507		1,421		1,569
Total	$	4,486	$	4,736	$	13,598	$	16,389

Additionally, the Company accrued or made cash payments under the Net Profits Plan of $274,000 for the three-month period ended September 30, 2012, and $2.0 million and $6.3 million for the nine-month periods ended September 30, 2012, and 2011, respectively, as a result of divestiture proceeds. There were no cash payments made or accrued relating to divestiture proceeds for the three-month period ended September 30, 2011. These cash payments are accounted for as a reduction in the gain (loss) on divestiture activity in the accompanying statements of operations.

The Company records changes in the present value of estimated future payments under the Net Profits Plan as a separate line item in the accompanying statements of operations. The change in the estimated liability is recorded as a non-cash expense or benefit in the current period. The amount recorded as an expense or benefit associated with the change in the estimated liability is not allocated to general and administrative expense or exploration expense because it is associated with the future net cash flows from oil and gas properties in the respective pools rather than results being realized through current period production. If the Company allocated the change in liability to these specific functional line items, based on the current allocation of actual distributions made by the Company, such expenses or benefits would predominately be allocated to general and administrative expense. The amount that would be allocated to exploration expense is minimal in comparison. Over time, less of the amount distributed relates to prospective exploration efforts as more of the amount distributed is paid to employees that have terminated employment and do not provide ongoing exploration support to the Company.