11. 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 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 approved the 2014 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, 2016 are as follows:

Shares Underlying

Authorized

Awards

Available

Plan Name

for Grant

Outstanding

for Grant

Patterson-UTI Energy, Inc. 2014 Long-Term Incentive Plan

9,100,000

3,851,760

1,784,452

Patterson-UTI Energy, Inc. 2005 Long-Term Incentive Plan, as amended

—

4,454,500

—

A summary of the 2014 Plan follows:

•	The Compensation Committee of the Board of Directors administers the plan other than the awards to directors.

•	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, 2016, non-incentive stock options, restricted stock awards, restricted stock units and performance unit awards had been granted under the plan.

Options granted under the 2005 Plan typically vested over one year for non-employee directors and three years for employees. 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 2005 Plan typically vested over one year for non-employee directors and three years for employees.

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 during the years ended December 31, 2016, 2015 and 2014 are as follows:

	2016			2015			2014
Volatility		35.11	%		37.95	%		35.89	%
Expected term (in years)		5.00			5.00			5.00
Dividend yield		2.05	%		2.00	%		1.17	%
Risk-free interest rate		1.40	%		1.37	%		1.76	%

Stock option activity for the year ended December 31, 2016 follows:

				Weighted-average
	Shares			exercise price
Outstanding at beginning of year		6,307,250		$	21.68
Granted		969,900		$	18.40
Exercised		(40,000	)	$	17.69
Expired		(550,000	)	$	28.26
Outstanding at end of year		6,687,150		$	20.68
Exercisable at end of year		5,326,606		$	21.01

Options outstanding at December 31, 2016 have an aggregate intrinsic value of approximately $46.8 million and a weighted-average remaining contractual term of 5.13 years. Options exercisable at December 31, 2016 have an aggregate intrinsic value of approximately $36.2 million and a weighted-average remaining contractual term of 4.15 years. Additional information with respect to options granted, vested and exercised during the years ended December 31, 2016, 2015 and 2014 follows:

	2016		2015		2014
Weighted-average grant date fair value of stock options granted (per share)	$	4.90	$	5.79	$	9.81
Aggregate grant date fair value of stock options vested during the year (in thousands)	$	4,729	$	5,077	$	5,173
Aggregate intrinsic value of stock options exercised (in thousands)	$	366	$	—	$	21,862

As of December 31, 2016, options to purchase 1.4 million shares were outstanding and not vested. All of these non-vested options are expected to ultimately vest. Additional information as of December 31, 2016 with respect to these non-vested options follows:

Aggregate intrinsic value (in thousands)		$10.5 million
Weighted-average remaining contractual term		9.0 years
Weighted-average remaining expected term		4.0 years
Weighted-average remaining vesting period		2.0 years
Unrecognized compensation cost		$6.0 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, 2016 follows:

				Weighted-
				average Grant
	Shares			Date Fair Value
Non-vested restricted stock outstanding at beginning of year		1,432,250		$	24.56
Granted		785,486		$	20.58
Vested		(747,029	)	$	24.77
Forfeited		(43,252	)	$	24.57
Non-vested restricted stock outstanding at end of year		1,427,455		$	22.26

As of December 31, 2016, approximately 1.3 million shares of non-vested restricted stock outstanding are expected to vest. Additional information as of December 31, 2016 with respect to these non-vested shares follows:

Aggregate intrinsic value		$34.0 million
Weighted-average remaining vesting period		1.8 years
Unrecognized compensation cost		$21.3 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 certain 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, 2016 follows:

				Weighted-average
				Grant Date Fair
	Shares			Value
Non-vested restricted stock units outstanding at beginning of year		41,686		$	26.22
Granted		178,254		$	19.31
Vested		(15,033	)	$	27.30
Forfeited		(13,252	)	$	24.08
Non-vested restricted stock units outstanding at end of year		191,655		$	19.85

Performance Unit Awards. The Company has granted stock-settled performance unit awards to certain executive officers (the “Performance Units”) on an annual basis since 2010. The Performance Units provide for the recipients to receive a grant of shares of stock upon the achievement of certain performance goals during a specified period established by the Compensation Committee. The performance period for the Performance Units is the three year period commencing on April 1 of the year of grant, except that for the Performance Units granted in 2013 the performance period was extended pursuant to its terms, as described below.

The performance goals for the 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 were 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. If the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, is at the 75^th percentile or higher, then the recipients will receive two times the target number of shares. 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. If the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, is between the 25^th and 75^th percentile, then the shares to be received by the recipients will be determined on a pro-rata basis. For the Performance Units awarded prior to 2016, there is no payout unless the Company’s total shareholder return is positive and, when compared to the peer group, is at or above the 25^thpercentile.

For the Performance Units granted in April 2016, if the Company’s total shareholder return is negative and, when compared to the peer group, is at or above the 25^th percentile, then the recipients will receive one-half of the number of shares they would have received had the Company’s total shareholder return been positive.

In respect of the 2013 Performance Units, for which the performance period ended March 31, 2016, the Company’s total shareholder return for the performance period was negative, the Company’s total shareholder return for the performance period when compared to the peer group was above the 75^th percentile, and there was no payout; provided, however, that pursuant to the terms of those 2013 awards, if, during the two-year period ending March 31, 2018, the Company’s total shareholder return for any 30 consecutive day period equals or exceeds 18 percent on an annualized basis from April 1, 2013 through the last day of such 30 consecutive day period, and the recipient is actively employed by the Company through the last day of the extended performance period, then the Company will issue to the recipient the number of shares equal to the amount the recipient would have been entitled to receive had the Company’s total shareholder return been positive during the initial three year performance period.

The total target number of shares with respect to the Performance Units for the years 2011-2016 is set forth below:

	2016		2015		2014		2013		2012		2011
	Performance		Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards

Target number of shares		185,000		190,600		154,000		236,500		192,000		144,375

For the Performance Units that have been settled, the total shareholder return percentiles and the number of shares issued are as follows:

2012

2011

Performance

Unit Awards

Total shareholder return percentile for performance period

87^th

94^th

Shares issued

384,000

288,750

Because the 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 Performance Units is set forth below (in thousands):

	2016		2015		2014		2013		2012		2011
	Performance		Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards

Aggregate fair value at date of grant	$	3,854	$	4,052	$	5,388	$	5,564	$	3,065	$	5,569

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

	2016		2015		2014		2013		2012		2011
	Performance		Performance		Performance		Performance		Performance		Performance
	Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards		Unit Awards

Year ended December 31, 2016	$	963	$	1,351	$	1,796	$	464	NA		NA
Year ended December 31, 2015	NA		$	1,013	$	1,796	$	1,855	$	255	NA
Year ended December 31, 2014	NA		NA		$	1,347	$	1,855	$	1,022	$	464

Dividends on Equity Awards – Non-forfeitable cash dividends are paid on restricted stock awards and dividend equivalents are paid on certain 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.