9. Stock-Based Compensation

Restricted stock awards. The Company has granted restricted stock awards to employees and directors under its 2010 Long-Term Incentive Plan, the majority of which vest over a three-year period. The fair value of restricted stock grants is based on the value of the Company’s common stock on the date of grant. Compensation expense is recognized ratably over the requisite service period. As of December 31, 2012, the Company assumed no annual forfeiture rate because of the Company’s limited forfeiture history for this type of award.

The following table summarizes information related to restricted stock held by the Company’s employees and directors at December 31, 2012:


	Shares			Weighted Average Grant Date Fair Value per Share
Non-vested shares outstanding at December 31, 2010		240,345		$	16.16
Granted		248,228			30.99
Vested		(92,115	)		16.24
Forfeited		(5,180	)		27.40

Non-vested shares outstanding at December 31, 2011		391,278		$	25.40
Granted		753,285			29.66
Vested		(396,073	)		26.04
Forfeited		(48,066	)		31.15

Non-vested shares outstanding at December 31, 2012		700,424		$	29.22

Stock-based compensation expense recorded for restricted stock awards for the years ended December 31, 2012, 2011, and 2010 was approximately $10.2 million, $3.7 million and $1.2 million, respectively, and is included in general and administrative expenses on the Company’s Consolidated Statement of Operations. Unrecognized expense as of December 31, 2012 for all outstanding restricted stock awards was $17.2 million and will be recognized over a weighted average period of 2.2 years. The fair value of awards vested for the year ended December 31, 2012 was $11.7 million.

Performance share units. On July 30, 2012, the Company’s Board of Directors approved grants of PSUs to officers of the Company pursuant to the Company’s 2010 Long Term Incentive Plan. The PSUs are awards of restricted stock units, and each PSU that is earned represents the right to receive one share of the Company’s common stock.

The PSUs are subject to a designated three-year initial performance period beginning on August 1, 2012 and ending on July 31, 2015. The number of PSUs to be earned is subject to a market condition, which is based on a comparison of the total shareholder return (“TSR”) achieved with respect to shares of the Company’s common stock against the TSR achieved by a defined peer group. Depending on the Company’s performance relative to the defined peer group, an award recipient will earn between 0% and 200% of the initial PSUs granted. If less than 200% of the initial PSUs granted are earned at the end of the initial performance period, then the performance period will be extended to July 16, 2016 to give the recipient the opportunity to earn up to an aggregate of 200% of the initial PSUs granted.

The following table summarizes information related to PSUs held by the Company’s officers at December 31, 2012:


	Initial Unit Awards		Weighted Average Grant Date Fair Value per Unit
Non-vested PSUs at December 31, 2011		—	$	—
Granted		155,220		26.22
Vested		—		—
Forfeited		—		—

Non-vested PSUs at December 31, 2012		155,220	$	26.22

The Company accounted for these PSUs as equity awards pursuant to the FASB’s authoritative guidance for share-based payments. The aggregate grant date fair value of the market-based awards was determined using a Monte Carlo simulation model. The fair value of these PSUs is recognized on a straight-line basis over the performance period. As it is probable that a portion of the awards will be earned during the extended performance period, the grant date fair value will be amortized over four years. However, if 200% of the initial PSUs granted are earned at the end of the initial performance period, then the remaining compensation expense will be accelerated in order to be fully recognized over three years. All compensation expense related to the PSUs will be recognized if the requisite performance period is fulfilled, even if the market condition is not achieved.

The Monte Carlo simulation model uses assumptions regarding random projections and must be repeated numerous times to achieve a probabilistic assessment. The key valuation assumptions for the Monte Carlo model are the forecast period, initial value, risk-free rate, volatility and correlation coefficients. The risk-free rate is the U.S. Treasury rate on the date of grant. The initial value is the average of the volume weighted average prices for the 30 trading days prior to the start of the performance cycle for the Company and each of its peers. Volatility is the standard deviation of the average percentage in stock price over a historical two-year period for the Company and each of its peers. The correlation coefficients are measures of the strength of the linear relationship between and amongst the Company and its peers estimated based on historical stock price data. No forfeiture rate is assumed for these types of awards.

The following assumptions were used for the Monte Carlo model to value the stock-based compensation expense of the PSUs granted during 2012:


	2012 PSUs
Forecast period (years)		4.01
Risk-free rate		0.46	%
Oasis volatility		51.00	%

Stock-based compensation expense recorded for these PSUs for the year ended December 31, 2012 was $0.4 million and is included in general and administrative expenses on the Consolidated Statement of Operations. Unrecognized expense as of December 31, 2012 for all outstanding PSUs was $3.6 million and will be recognized over a remaining period of 3.6 years. No stock-based compensation expense was recorded for the years ended December 31, 2011 and 2010 related to the PSUs as the Company had not issued PSUs prior to July 2012.

Class C common unit interests. In March 2010, the Company recorded a $5.2 million stock-based compensation charge associated with OP Management’s grant of 1.0 million Class C common unit interests (“C Units”) to certain employees of the Company. The C Units were granted on March 24, 2010 to individuals who were employed by the Company as of February 1, 2010, and who were not executive officers or key employees with an existing capital investment in OP Management (“Oasis Petroleum Management LLC Capital Members”). All of the C Units vested immediately on the grant date, and based on the characteristics of the C Units awarded to employees, the Company concluded that the C Units represented an equity-type award and accounted for the value of this award as if it had been awarded by the Company.

The C Units were membership interests in OP Management and not direct interests in the Company. The C Units were non-transferable and had no voting power. As of December 31, 2010, OP Management had distributed substantially all cash or requisite common stock to its members based on membership interests and distribution percentages. OP Management was dissolved in 2011.

In accordance with the FASB’s authoritative guidance for share-based payments, the Company used a fair-value-based method to determine the value of stock-based compensation awarded to its employees and recognized the entire grant date fair value of $5.2 million as stock-based compensation expense on the Consolidated Statement of Operations due to the immediate vesting of the awards with no future requisite service period required of the employees.

The Company used a probability weighted expected return method to evaluate the potential return and associated fair value allocable to the C Unit shareholders using selected hypothetical future outcomes (continuing operations, private sale of the Company, and an IPO). Approximately 95% of the fair value allocated to the C Unit shareholders came from the IPO scenario. The IPO fair value of the C Units awarded to the Company’s employees was estimated on the date of the grant using a Black-Scholes option-pricing model with the assumptions described below.

The exercise price of the option used in the option-pricing model was set equal to the maximum value of OP Management’s current capital investment in the Company as that value must be returned to Oasis Petroleum Management LLC Capital Members before distributions were made to the C Unit shareholders. Since the Company was not a public entity on the grant date, it did not have historical stock trading data that could be used to compute volatilities associated with certain expected terms; therefore, the expected volatility value of 60% was estimated based on an average of volatilities of similar sized oil and gas companies with operations in the Williston Basin whose common stocks were publicly traded. The allocable fair value to the C Units assumed a timing of four years based on a future potential secondary offering or distribution of common stock of the Company. The OAS Holdco agreement between its members required a complete distribution of all remaining shares held by OAS Holdco by 2014, the fourth year following the year of the IPO. The 2.08% risk-free rate used in the pricing model was based on the U.S. Treasury yield for a government bond with a maturity equal to the time to liquidity of four years. The Company did not estimate forfeiture rates due to the immediate vesting of the award and did not estimate future dividend payments as it did not expect to declare or pay dividends in the foreseeable future.

Discretionary stock awards. During the fourth quarter of 2010, the Company recorded a $3.5 million stock-based compensation charge primarily associated with OP Management granting discretionary shares of the Company’s common stock to certain of the Company’s employees who were not C Unit holders and certain contractors. Based on the characteristics of these awards, the Company concluded that they represented an equity-type award and accounted for the value of these awards as if they had been awarded by the Company. The fair value of these awards was based on the value of the Company’s common stock on the date of grant. All of these awards vested immediately on the grant date with no future requisite service period required of the employees or contractors.

Stock-based compensation expense recorded for the C Units and discretionary stock awards for the year ended December 31, 2010 was $8.7 million. As the awards vested immediately, there was no unrecognized stock-based compensation expense as of December 31, 2012 related to these awards. No stock-based compensation expense was recorded for the years ended December 31, 2012 and 2011 related to the C Units or discretionary shares.