Callon Petroleum Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation

Share-Based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

2018 Omnibus Incentive Plan

The 2018 Omnibus Incentive Plan, which became effective May 10, 2018 following shareholder approval (the “2018 Plan”), authorized and reserved for issuance 9,400,000 shares of common stock, which may be issued upon exercise of vested stock options and/or the vesting of any other share-based equity award that is granted under this plan. The 2018 Plan replaced the 2011 Omnibus Incentive Plan (the “Prior Plan”), and included a provision at inception whereby all remaining, un-issued and authorized shares from the Prior Plan became issuable under the 2018 Plan. This transfer provision resulted in the transfer of an additional 1,322,742 shares into the 2018 Plan, increasing the quantity authorized and reserved for issuance under the 2018 Plan to 10,722,742 at the inception of the 2018 Plan. Another provision provided that shares, which would otherwise become available for issuance under the Prior Plan as a result of vesting and/or forfeiture of any equity awards existing as of the effective date of the 2018 Plan, would also increase the authorized shares available to the 2018 Plan. As a result of the Merger, the 2018 Plan was amended and restated to incorporate the 2017 Incentive Plan of Carrizo Oil & Gas, Inc. (the “Carrizo Plan”), including outstanding awards under the Carrizo Plan and shares available to grant to the former employees of Carrizo which were converted to shares of the Company by applying the conversion ratio of 1.75 shares of the Company per one share of Carrizo (the “Amended and Restated 2018 Plan”). At December 31, 2019, there were 13,814,216 shares available for future share-based awards under the Amended and Restated 2018 Plan.

RSU Equity Awards

The following table summarizes RSU Equity Award activity for the years ended December 31, 2019, 2018 and 2017:



	RSU Equity Awards (in thousands)		Weighted Average Grant-Date Fair Value per Share
For the Year Ended December 31, 2017
Unvested at the beginning of the period	1,448			$10.81
Granted ^{(1) (2)}	1,173			$12.25
Vested ⁽³⁾	(797	)		$11.35
Forfeited	(34	)		$9.57
Unvested at the end of the period	1,790			$11.54
For the Year Ended December 31, 2018
Unvested at the beginning of the period	1,790			$11.54
Granted ⁽¹⁾	872			$13.89
Vested ⁽³⁾	(506	)		$9.56
Forfeited	(53	)		$11.43
Unvested at the end of the period	2,103			$13.24
For the Year Ended December 31, 2019
Unvested at the beginning of the period	2,103			$13.24
Granted ⁽¹⁾	1,881			$8.60
Vested ⁽³⁾	(1,062	)		$12.35
Forfeited	(227	)		$10.59
Unvested at the end of the period	2,695			$10.57


(1)	Includes 399,425, 208,000 and 89,000 target performance-based RSU Equity Awards that will vest at a range of 0% - 200% for the years ended December 31, 2019, 2018 and 2017, respectively.


(2)	Includes 73,000 performance based RSU Equity Awards that were granted and subsequently vested at 142% of target at issuance in 2017.


(3)	The fair value of shares vested was $7.3 million, $6.3 million and $9.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Performance-based RSU Equity Awards that vest are based on a calculation that compares the Company’s total shareholder return to the same calculated return of a group of peer companies as selected by the Company, and the number of units that will vest can range between 0% and 200% of the base units awarded. The following table summarizes the shares that vested and did not vest as a result of the Company’s performance as compared to its peers.



	Years Ended December 31,
Performance-based Equity Awards	2019		2018		2017
Vesting Multiplier	100	%	142	%	142% - 200%
Target	88,790		83,002		258,406
Vested at end of performance period	88,790		117,862		441,232
Did not vest at end of performance period	—		—		—

The Company recognizes expense for performance-based RSU Equity Awards based on the fair value of the awards at the grant date. Awards with a performance-based provision do not allow for the reversal of previously recognized expense, even if the market metric is not achieved and no shares ultimately vest. For the years ended December 31, 2019, 2018 and 2017, the grant date fair value of the performance-based RSU Equity Awards, calculated using a Monte Carlo simulation, was $4.3 million, $3.5 million, and $2.6 million, respectively. The following table summarizes the assumptions used and the resulting grant date fair value per performance-based RSU Equity Award granted during the years ended December 31, 2019, 2018 and 2017:



	Years Ended December 31,
Performance-based Awards	2019		2018		2017
Number of simulations	100,000		100,000		100,000
Expected term (in years)	2.9		2.6		2.6
Expected volatility	47.9	%	51.6	%	65.3	%
Risk-free interest rate	2.4	%	2.6	%	1.5	%
Dividend yield	—	%	—	%	—	%
Grant date fair value per performance-based RSU Equity Award	$10.78		$16.66		$16.06

As of December 31, 2019, unrecognized compensation costs related to unvested RSU Equity Awards were $15.1 million and will be recognized over a weighted average period of 1.3 years.

Cash-Settled RSU Awards

The table below summarizes the Cash-Settled RSU Award activity for the years ended December 31, 2019, 2018 and 2017:



	Cash-Settled RSU Awards (in thousands)		Weighted Average Grant-Date Fair Value per Share
For the Year Ended December 31, 2017
Unvested at the beginning of the period	734			$8.87
Granted	283			$12.13
Vested	(379	)		$9.61
Forfeited	(13	)		$9.54
Unvested at the end of the period	625			$9.88
For the Year Ended December 31, 2018
Unvested at the beginning of the period	625			$9.88
Granted	348			$14.16
Vested	(276	)		$9.04
Forfeited	(19	)		$12.05
Unvested at the end of the period	678			$12.36
For the Year Ended December 31, 2019
Unvested at the beginning of the period	678			$12.36
Granted	424			$8.14
Vested	(164	)		$12.02
Forfeited	(83	)		$11.58
Unvested at the end of the period	855			$10.41

All of the Company’s outstanding Cash-Settled RSU Awards include a performance-based vesting condition that determines the actual number of units that will ultimately vest. The number of Cash-Settled RSU Awards that vest is based on a calculation that compares the Company’s total shareholder return to the same calculated return of a group of peer companies as selected by the Company, and the number of units that will vest can range between 0% and 200% of the base units awarded.

For the year ended December 31, 2019, 147,492 performance-based Cash-Settled RSU Awards vested at 100% of their issued units, resulting in a payable amount of $0.7 million in 2020. Also during 2019, 16,600 non-performance-based Cash-Settled RSU Awards vested, resulting in cash payments of $0.1 million in 2019.

For the year ended December 31, 2018, 207,261 performance-based Cash-Settled RSU Awards subject to the peer performance-based vesting described above, vested between 100% to 163% of their issued units, depending on the date of the vesting, resulting in cash payments of $0.1 million in 2018 and $1.3 million in 2019. Also during 2018, 129,753 non-performance-based Cash-Settled RSU Awards vested, resulting in cash payments of $1.8 million during 2018.

The following table summarizes the Company’s liability for Cash-Settled RSU Awards and the classification in the consolidated balance sheets for the periods indicated:



	December 31,
	2019		2018
Other current liabilities		$966		$1,390
Other long-term liabilities	2,089		2,067
Total Cash-Settled RSU Awards		$3,055		$3,457

As of December 31, 2019, the Company had the following performance-based Cash-Settled RSU Awards outstanding:



	Target Awards Outstanding	Potential Minimum Units Vesting	Potential Maximum Units Vesting
	(In thousands)
Vesting in 2020	292	—	586
Vesting in 2021	373	—	745
Vesting in 2022	—	—	—
Other	24	24	24
Total Cash-Settled RSU Awards	689	24	1,355

As of December 31, 2019, unrecognized compensation costs related to unvested Cash-Settled RSU Awards were $1.1 million and will be recognized over a weighted average period of 1.5 years.

Cash-Settled SARs

As a result of the Merger, Cash SARs previously granted by Carrizo that were outstanding at closing of the Merger were canceled and converted into a Cash SAR covering shares of the Company’s common stock, with the conversion calculated as prescribed in the agreement governing the Merger. The table below summarizes the Cash SAR activity for the year ended December 31, 2019.



	Stock Appreciation Rights	Weighted Average Exercise Prices		Weighted Average Remaining Life (In years)	Aggregate Intrinsic Value (In millions)
For the Year Ended December 31, 2019
Outstanding, beginning of period	—		$—
Granted	—		$—
Reissued	3,677,955		$10.03
Exercised	—		$—
Forfeited	—		$—
Expired	—		$—
Outstanding, end of period	3,677,955		$10.03	4.4		$—
Vested, end of period	3,677,955		$10.03	0		$—
Vested and exercisable, end of period	—		$—	0		$—

The acquisition date fair value of the Cash SARs, calculated using the Black-Scholes-Merton option pricing model was $4.6 million. The following table summarizes the assumptions used, the resulting acquisition date fair value per Cash SAR, and the expiration dates for the grants that occurred during periods presented below:



	2019		2018		2017		2016
Fair Value Inputs
Expected term (in years)	5.4		4.5		1.9		1.1
Expected volatility	60.7	%	56.9	%	58.6	%	68.1	%
Risk-free interest rate	1.7	%	1.7	%	1.6	%	1.5	%
Dividend yield	—	%	—	%	—	%	—	%
Acquisition date fair value per Cash SAR	$2.11		$1.42		$0.21		$0.10

Expiration date	March 17, 2026		March 17, 2025		March 23, 2022		March 17, 2021

The liability for Cash SARs as of December 31, 2019 was $5.0 million, all of which was classified as “Other current liabilities” in the consolidated balance sheets in the respective period. Changes to the fair value of the Cash SARs are included in “General and

administrative” in the consolidated statements of operations. As all Cash SARs are vested, there is no unrecognized compensation costs as of December 31, 2019.

Share-Based Compensation Expense, Net

The following table presents share-based compensation expense for each respective period:



	Years Ended December 31,
	2019				2018				2017
Share-based compensation cost for:	Equity		Liability		Equity		Liability		Equity		Liability
RSU Equity Awards ⁽¹⁾		$14,322		$—		$9,460		$—		$10,225		$—
Cash-Settled RSU Awards ⁽¹⁾	—		1,021		—		336		—		4,294
Cash SARs	—		443		—		—		—		—
Total share-based compensation cost ⁽²⁾		$14,322		$1,464		$9,460		$336		$10,225		$4,294


(1)	Includes the settlement of the outstanding share-based award agreements of the Company’s former Chief Executive Officer, resulting in $6.4 million recorded on the consolidated statements of operations as settled share-based awards for the year ended December 31, 2017.

(2)

The portion of this share-based compensation cost that was included in “General and administrative” totaled $11.1 million, $6.4 million and $5.0 million for the years ended December 31, 2019, 2018 and 2017, respectively, and the portion capitalized to oil and gas properties was $4.7 million, $3.4 million and $3.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.