Stock-Based Compensation

9 Months Ended

Sep. 30, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Note 5—Stock-Based Compensation

On October 7, 2016, the stockholders of the Company approved the Centennial Resource Development, Inc. 2016 Long Term Incentive Plan (the “LTIP”). An aggregate of 16,500,000 shares of Class A Common Stock were authorized for issuance under the LTIP, and as of September 30, 2019, the Company had 5,042,238 shares of Class A Common Stock available for future grants. The LTIP provides for grants of stock options (including incentive stock options and nonqualified stock options), stock appreciation rights, restricted stock, dividend equivalents, restricted stock units and other stock or cash-based awards.

Stock-based compensation expense is recognized within both General and administrative expenses and Exploration expense in the Consolidated Statements of Operations. The Company accounts for forfeitures of awards granted under the LTIP as they occur in determining compensation expense.

The following table summarizes stock-based compensation expense recognized for the periods presented:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Restricted stock awards	$	4,569	$	2,393	$	11,159	$	6,157
Stock option awards	2,557		2,337		7,766		6,853
Performance stock units	918		611		2,360		1,319
Other stock-based compensation expense⁽¹⁾	66		—		66		—
Total stock-based compensation expense	$	8,110	$	5,341	$	21,351	$	14,329


⁽¹⁾	Includes expenses related to the Company’s Employees Stock Purchase Plan (the “ESPP”). In May 2019, an aggregate of 2,000,000 shares were authorized by stockholders for issuance under the ESPP, which became effective on July 1, 2019.

Restricted Stock

The following table provides information about restricted stock activity during the nine months ended September 30, 2019:



	Awards		Weighted Average Grant Date Fair Value
Unvested balance as of December 31, 2018	1,535,945		$	17.88
Granted	3,906,196		6.70
Vested	(509,833	)	17.82
Forfeited	(45,217	)	12.96
Unvested balance as of September 30, 2019	4,887,091		8.99

The Company grants service-based restricted stock awards to executive officers and employees, which vest ratably over a three-year service period, and to directors, which vest over a one-year service period. Compensation cost for the service-based restricted stock awards is based on the market price of the Company’s Class A common stock on the grant date, and such costs are recognized ratably over the applicable vesting period. The weighted average grant-date fair value for restricted stock awards granted was $6.70 and $18.38 per share for the nine months ended September 30, 2019 and 2018, respectively. The total fair value of restricted stock awards that vested during the nine months ended September 30, 2019 and 2018 was $9.1 million and $4.4 million, respectively. Unrecognized compensation cost related to restricted shares that were unvested as of September 30, 2019 was $36.6 million, which the Company expects to recognize over a weighted average period of 2.4 years.

Stock Options

Stock options that have been granted under the LTIP expire ten years from the grant date and vest ratably over a three-year service period. The exercise price for an option granted under the LTIP is the closing price of the Company’s Class A Common Stock as reported on the NASDAQ on the date of grant.

Compensation cost for stock options is based on the grant-date fair value of the award which is then recognized ratably over the vesting period of three years. The Company estimates the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the weighted average asset volatility of the Company and identified set of comparable companies. Expected term is based on the simplified method and is estimated as the mid-point between the weighted average vesting term and the time to expiration as of the grant date. The Company uses U.S. Treasury bond rates in effect at the grant date for its risk-free interest rates.

The following table summarizes the assumptions and related information used to determine the grant-date fair value of stock options awarded during the nine months ended September 30, 2019 and 2018:



	For the Nine Months Ended September 30,
	2019			2018
Weighted average grant date fair value per share	$	4.47		$	7.74
Expected term (in years)	6			6
Expected stock volatility	46		%	41		%
Dividend yield	—		%	—		%
Risk-free interest rate	2.3		%	2.6		%

The following table provides information about stock option awards outstanding during the nine months ended September 30, 2019:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2018	4,559,334		$	16.55
Granted	326,000		9.56
Exercised	—		—
Forfeited	(65,336	)	16.90
Expired	(15,998	)	17.88
Outstanding as of September 30, 2019	4,804,000		16.07		7.5	$	—
Exercisable as of September 30, 2019	2,654,623		16.14		7.2	$	—

The total fair value of stock options that vested during the nine months ended September 30, 2019 and 2018 was $4.4 million and $3.7 million, respectively. The intrinsic value of stock options exercised was approximately $0.2 million for the nine months ended September 30, 2018 and there were no stock options exercised for the nine months ended September 30, 2019. As of September 30, 2019, there was $6.2 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize on a pro-rata basis over a weighted average period of 1.5 years.

Performance Stock Units

The Company grants performance stock units to certain executive officers that are subject to market-based vesting criteria as well as a three-year service period. Vesting at the end of the three-year service period is subject to the condition that the Company’s stock price increases by a greater percentage, or decreases by a lesser percentage, than the average percentage increase or decrease, respectively, of the stock prices of a peer group of companies. The market-based conditions must be met in order for the stock awards to vest, and it is, therefore, possible that no shares could vest. However, the Company recognizes compensation expense for the performance stock units subject to market conditions regardless of whether it becomes probable that these conditions will be achieved or not and compensation expense is not reversed if vesting does not actually occur.

The grant-date fair value was estimated using a Monte Carlo valuation model. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility was calculated based on the historical volatility of our common stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period.

The following table summarizes the key assumptions and related information used to determine the grant-date fair value of performance stock units awarded during the nine months ended September 30, 2019 and 2018:



	For the Nine Months Ended September 30,
	2019			2018
Weighted average grant-date fair value per share	$	6.68		$	22.35
Number of simulations	1,000,000			1,000,000
Expected stock volatility	52.3		%	40.2		%
Dividend yield	—		%	—		%
Risk-free interest rate	1.8		%	2.8		%

The following table provides information about performance stock units outstanding during the nine months ended September 30, 2019:



	Awards	Weighted Average Grant Date Fair Value
Unvested balance as of December 31, 2018	386,459	$	21.94
Granted	486,213	6.68
Vested	—	—
Forfeited	—	—
Unvested balance as of September 30, 2019	872,672	13.44

As of September 30, 2019, there was $6.7 million of unrecognized compensation cost related to performance stock units that were unvested, which the Company expects to recognize on a pro-rata basis over a weighted average period of 2.0 years.