Stock-Based Compensation

6 Months Ended

Jun. 30, 2021

Share-based Payment Arrangement [Abstract]

Note 6—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”), which authorized an aggregate of 16,500,000 shares of Common Stock for issuance to employees and directors. On April 29, 2020, the stockholders of the Company approved the amended and restated LTIP, which, among other things, increased the number of shares of Common Stock authorized for issuance by 8,250,000 shares. As of June 30, 2021, the Company had 6,645,120 shares of Common Stock available for future grants. The LTIP provides for grants of restricted stock, stock options (including incentive stock options and nonqualified stock options), restricted stock units, stock appreciation rights and other stock or cash-based awards.

Stock-based compensation expense is recognized within both General and administrative expenses and Exploration and other expenses 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:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Equity Awards
Restricted stock awards	$	3,536	$	3,387	$	7,142	$	7,741
Stock option awards	234		291		505		1,275
Performance stock units	646		1,003		1,285		2,006
Other stock-based compensation expense(1)	65		46		134		114
Total stock-based compensation - equity awards	4,481		4,727		9,066		11,136

Liability Awards
Restricted stock units	4,647		—		7,955		—
Performance stock units	10,013		—		17,119		—
Total stock-based compensation - liability awards	14,660		—		25,074		—

Total stock-based compensation expense	$	19,141	$	4,727	$	34,140	$	11,136

(1) Includes expenses related to the Company’s Employee 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. As of June 30, 2021, the Company had 1,561,164 shares of Common Stock available for future issuance.

Equity Awards

The Company has restricted stock awards, stock options and performance stock units (“PSUs”) outstanding that were granted under the LTIP as discussed below. Each award has service-based and, in the case of the PSUs, market-based vesting requirements, and are expected to be settled in shares of Common Stock upon vesting. As a result, these awards are classified as equity-based awards in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”).

Restricted Stock

The following table provides information about restricted stock activity during the six months ended June 30, 2021:


	Awards	Weighted Average Grant-Date Fair Value
Unvested balance as of December 31, 2020	12,093,723	$	2.33
Granted	—	—
Vested	(504,052)	5.39
Forfeited	(8,228)	8.57
Unvested balance as of June 30, 2021	11,581,443	2.19

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 these service-based restricted stock awards is based on the closing market price of the Company’s Common Stock on the grant date, and such costs are recognized ratably over the applicable vesting period. There were no restricted stock awards granted during the six months ended June 30, 2021. The total fair value of restricted stock awards that vested during the six months ended June 30, 2021 and

2020 was $2.7 million and $4.6 million, respectively. Unrecognized compensation cost related to restricted shares that were unvested as of June 30, 2021 was $13.8 million, which the Company expects to recognize over a weighted average period of 1.5 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 market price of the Company’s Common Stock on the grant date.

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 historical volatilities of the Company and an 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 option awards for the six months ended June 30, 2020. No stock options were granted during the six months ended June 30, 2021.


	Six Months Ended June 30,
	2021			2020
Weighted average grant-date fair value per share	$	—		$	1.16
Expected term (in years)	0			6
Expected stock volatility	—		%	86		%
Dividend yield	—		%	—		%
Risk-free interest rate	—		%	1.0		%

The following table provides information about stock option awards outstanding during the six months ended June 30, 2021:


	Options	Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2020	2,363,334	$	15.07
Granted	—	—
Exercised	(14,999)	0.99			$	71
Forfeited	(5,334)	5.77
Expired	(52,333)	16.98
Outstanding as of June 30, 2021	2,290,668	15.14		6.03	$	473
Exercisable as of June 30, 2021	2,057,977	15.73		5.82	$	103

The total fair value of stock options that vested during the six months ended June 30, 2021 and 2020 was $0.5 million and $4.2 million, respectively. The intrinsic value of the stock options exercised was $0.1 million for the six months ended June 30, 2021 and there were no stock options exercised during the six months ended June 30, 2020. As of June 30, 2021, there was $0.4 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 0.8 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 ultimately 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 met or not, and compensation expense is not reversed if vesting does not actually occur.

During the six months ended June 30, 2021 and 2020, there was no performance stock units activity. As of June 30, 2021, there was $1.1 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 1.0 year.

Liability Awards

The Company has restricted stock units and performance stock units that were granted under the LTIP, which will be settled in cash and are classified as liability awards in accordance with ASC 718. Compensation cost for the liability awards is based on the fair value of the units as of the balance sheet date as further discussed below, and such costs are recognized ratably over the service periods of the awards. As the fair value of liability awards is required to be re-measured each period end, stock compensation expense amounts recognized in future periods for these awards will vary. The estimated future cash payments of these awards are presented as liabilities within Other current liabilities and Other long-term liabilities in the consolidated balances sheets.

Restricted Stock Units

The Company granted 5.5 million restricted stock units during the third quarter of 2020 to certain officers (non-NEOs) and employees that are settleable in cash upon vesting. The restricted stock units vest annually in one-third increments over a three-year service period, with the first portion vesting on September 1, 2021. After one year from the grant date, however, the remaining two-thirds of unvested restricted stock units granted to non-NEOs can vest immediately, on an accelerated basis, if they meet certain market-based vesting criteria equal to the maximum return percentage discussed below for at least 20 out of any 30 consecutive trading days. Additionally, the restricted stock units include maximum and minimum return amounts equal to 400% and 25%, respectively, of the closing market price of the Company’s Common Stock on the grant date. As of June 30, 2021, there was $8.7 million of unrecognized compensation cost, which represents the unvested portion of the fair value of the restricted stock units and will be recognized over a weighted average period of 1.6 years or sooner if the accelerated vesting event occurs. Subsequent to June 30, 2021, the Company modified these restricted stock units to allow the units to be settleable in either cash or Common Stock at the Company’s discretion upon vesting (refer to Note 14—Subsequent Events for additional information regarding the modification).

Performance Stock Units

The Company granted 5.5 million performance stock units (“PSU”) during third quarter of 2020 to certain executive officers that will be settled in cash and are subject to market-based vesting criteria as well as a three-year service condition. 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 lessor percentage, than the average percentage increase or decrease, respectively, of the stock price of a peer group of companies. The market-based conditions must be met in order for the PSU awards to vest, and it is therefore possible that no units could ultimately vest and cumulative stock compensation expense recognized for these awards would then be reduced to zero. As of June 30, 2021, there was $41 million of unrecognized compensation cost that represents the unvested portion of the fair value of the PSUs at June 30, 2021 and will be recognized over a weighted average period of 2.0 years.

Liability Awards Fair Value

The fair value of the restricted stock units and performance stock units was estimated using a Monte Carlo valuation model as of the balance sheet date. 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 the Company’s Common Stock as well as the peer companies that are specified in the PSU award agreement. The risk-free rate is based on U.S. Treasury yield curve rates with maturities consistent with the remaining vesting or performance period.

The following table summarizes the key assumptions and related information used to determine the fair value of the liability awards as of June 30, 2021:


	Restricted stock units	Performance stock units

Number of simulations	10,000,000	10,000,000
Expected implied stock volatility	69.8%	72.3%
Dividend yield	—%	—%
Risk-free interest rate	0.3%	0.3%