Annual report pursuant to Section 13 and 15(d)

Equity-Based Compensation

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Equity-Based Compensation
12 Months Ended
Dec. 31, 2019
Equity-Based Compensation  
Equity-Based Compensation

(9) Equity-Based Compensation

Antero Resources is authorized to grant up to 16,906,500 shares of common stock to employees and directors of the Company under the Antero Resources Corporation Long-Term Incentive Plan (the “Plan”). The Plan allows equity-based compensation awards to be granted in a variety of forms, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, dividend equivalent awards, and other types of awards. The terms and conditions of the awards granted are established by the Compensation Committee of Antero Resources’ Board of Directors. A total of 6,297,751 shares were available for future grant under the Plan as of December 31, 2019. In January 2020, a total of 4,644,934 shares were granted as restricted stock unit awards to employees and equity awards to directors.

Antero Midstream Partner’s general partner was authorized to grant up to 10,000,000 common units representing limited partner interests in Antero Midstream Partners under the Antero Midstream Partners LP Long-Term Incentive Plan (the “AMP Plan”) to non-employee directors of its general partner and certain officers, employees, and consultants of Antero Midstream Partners and its affiliates (which include Antero Resources). As part of the Transactions, each outstanding phantom units awards under the AMP Plan was assumed by Antero Midstream Corporation and converted into 1.8926 restricted stock units under the Antero Midstream Corporation Long Term Incentive Plan (the “AMC Plan”). Each restricted stock unit award under the AMC Plan represents a right to receive one shares of Antero Midstream Corporation’s Common Stock, par value $0.01 per share (“Antero Midstream Corporation Common Stock”).

The Company’s equity-based compensation expense, by type of award, was as follows for the years ended December 31, 2017, 2018 and 2019 (in thousands):

Year ended December 31,

2017

2018

2019

Restricted stock unit awards

$

70,866

41,505

10,343

Stock options

2,375

1,799

355

Performance share unit awards

10,797

9,659

8,069

Antero Midstream Partners phantom unit awards (1)

17,461

15,351

3,425

Equity awards issued to directors

1,946

2,100

1,367

Total expense

$

103,445

70,414

23,559

(1) Antero Resources recognized compensation expense for equity awards granted under both the Plan and the AMP Plan because the awards under the AMP Plan are accounted for as if they are distributed by Antero Midstream Partners to Antero Resources. Antero Resources allocates a portion of equity-based compensation expense related to grants prior to the Transactions to Antero Midstream Partners based on its proportionate share of Antero Resources’ labor costs. Through March 12, 2019, the total amount of equity-based compensation is included in the consolidated financial statements of Antero Resources; and effective March 13, 2019 (date of deconsolidation), the amount allocated to Antero Midstream Partners is no longer reflected in Antero Resources’ consolidated financial statements. See Note 3 to the consolidated financial statements for further discussion on the Transactions.

Restricted Stock Unit Awards

Restricted stock unit awards vest subject to the satisfaction of service requirements. Expense related to each restricted stock unit award is recognized on a straight-line basis over the requisite service period of the entire award. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period. The grant date fair values of these awards are determined based on the closing price of Antero Resources’ common stock on the date of the grant.

A summary of restricted stock unit award activity for the year ended December 31, 2019 is as follows:

Weighted

Aggregate

Number of

grant date

intrinsic value

    

shares

    

fair value

    

(in thousands)

Total awarded and unvested—December 31, 2018

 

1,712,485

$

24.57

$

16,080

Granted

 

1,745,784

$

8.14

Vested

 

(730,343)

$

27.60

Forfeited

 

(357,351)

$

16.09

Total awarded and unvested—December 31, 2019

 

2,370,575

$

12.81

$

6,756

Intrinsic values are based on the closing price of Antero Resources’ common stock on the referenced dates. As of December 31, 2019, there was $21 million of unamortized equity-based compensation expense related to unvested restricted stock units. That expense is expected to be recognized over a weighted average period of approximately 2.4 years.

Stock Options

Stock options granted under the Plan have a maximum contractual life of 10 years. Expense related to stock options is recognized on a straight-line basis over the requisite service period of the entire award. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period. Stock options were granted with an exercise price equal to or greater than the market price of Antero Resources’ common stock on the dates of grant.

A summary of stock option activity for the year ended December 31, 2019 is as follows:

Weighted

average

remaining

Intrinsic

Stock

exercise

contractual

value

    

options

    

price

life

    

(in thousands)

  

Outstanding at December 31, 2018

 

579,617

$

50.55

5.81

$

Granted

 

$

Exercised

 

$

Forfeited

 

(4,250)

$

50.18

Expired/Cancelled

 

(107,734)

$

Outstanding at December 31, 2019

 

467,633

$

50.64

5.05

$

Vested or expected to vest as of December 31, 2019

 

467,633

$

50.64

5.05

$

Exercisable at December 31, 2019

 

467,633

$

50.64

5.05

$

Intrinsic values are based on the exercise price of the options and the closing price of Antero Resources’ stock on the referenced dates.

A Black-Scholes option-pricing model is used to determine the grant-date fair value of stock options. Expected volatility was derived from the volatility of the historical stock prices of a peer group of similar publicly traded companies’ stock prices as Antero Resources’ common stock had traded for a relatively short period of time at the dates the options were granted. The risk-free interest rate was determined using the implied yield available for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options. A dividend yield of zero was assumed.

As of December 31, 2019, all stock options were fully vested resulting in no unamortized equity-based compensation expense.

Performance Share Unit Awards

Performance Share Unit Awards Based on Stock Price Targets

In 2016, the Company granted performance share unit awards (“PSUs”) to certain of its executive officers that are based on stock price targets. The vesting of these PSUs is conditioned on the closing price of Antero Resources’ common stock achieving specific price thresholds over 10-day periods, subject to the following vesting restrictions: no PSUs may vest before the first anniversary of the grant date; no more than one-third of the PSUs may vest before the second anniversary of the grant date; and no more than two-thirds of the PSUs may vest before the third anniversary of the grant date. Any PSUs which have not vested by the fifth anniversary of the grant date will expire. Expense related to these PSUs is recognized on a graded basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

Performance Share Unit Awards Based on Total Shareholder Return (“TSR”)

In 2016 and 2017, the Company granted PSUs to certain of its employees and executive officers that vest based on the TSR of Antero Resources’ common stock relative to the TSR of a peer group of companies over a three-year performance period. The number of shares of common stock which may ultimately be earned ranges from zero to 200% of the PSUs granted. Expense related to these PSUs is recognized on a straight-line basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

In 2019, the Company granted PSUs to certain of its employees and executive officers that vest based on Antero Resources’ absolute TSR, with target payout achieved if the price per share of Antero Resources’ common stock reaches 125% of the beginning price (as defined in the award agreement) at the end of a three-year performance period. The number of shares of common stock which may ultimately be earned ranges from zero to 200% of the PSUs granted. Expense related to these PSUs is recognized on a straight-line basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

Performance Share Unit Awards Based on TSR and Return on Capital Employed (“ROCE”)

In 2018, the Company granted PSUs to certain of its employees and executive officers, a portion of which vest based on the Company’s absolute TSR, with target payout achieved if the price per share of Antero Resources’ common stock reaches 125% of the beginning price (as defined in the award agreement) at the end of a three-year performance period (“TSR PSUs”). The number of awards actually earned with respect to the TSR PSUs will be subject to further adjustment based on the TSR of Antero Resources’ common stock relative to the TSR of a peer group of companies over the same period. The number of shares of common stock that may ultimately be earned with respect to the TSR PSUs ranges from zero to 200% of the target number of TSR PSUs originally granted. Expense related to the TSR PSUs is recognized on a straight-line basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

The other portion of the PSUs granted in 2018 vest based on the Company’s actual ROCE (as defined in the award agreement) over a three-year period as compared to a targeted ROCE (“ROCE PSUs”). The number of shares of common stock that may ultimately be earned with respect to the ROCE PSUs ranges from zero to 200% of the target number of ROCE PSUs originally granted. Expense related to the ROCE PSUs is recognized based on the number of shares of common stock that are expected to be issued at the end of the measurement period, and is reversed if the likelihood of achieving the performance condition decreases. As of December 31, 2019, the likelihood of achieving the performance conditions related to the ROCE PSUs decreased to a level below probable and therefore, expense has not been recognized in the current quarter and will not be recognized unless the likelihood of achieving the performance condition becomes probable.

Summary Information for Performance Share Unit Awards

A summary of PSU activity for the year ended December 31, 2019 is as follows:

Weighted average

Number of

grant date

units

fair value

Total awarded and unvested—December 31, 2018

 

1,767,299

$

26.36

Granted

 

1,416,378

$

9.26

Exercised

(31,944)

$

27.38

Cancelled - Unearned

 

(326,938)

$

32.97

Forfeited

 

(287,512)

$

19.38

Total awarded and unvested—December 31, 2019

 

2,537,283

$

16.74

The grant-date fair values of market-based PSUs were determined using Monte Carlo simulations, which use a probabilistic approach for estimating the fair values of the awards. Expected volatilities were derived from the volatility of the historical stock prices of a peer group of similar publicly-traded companies. The risk-free interest rate was determined using the yield available for zero-coupon U.S. government issues with remaining terms corresponding to the service periods of the PSUs. A dividend yield of zero was assumed. The grant-date fair value for the ROCE-based PSUs is based on the closing price of Antero Resources’ common stock on the date of the grant, assuming the achievement of the performance condition.

The following table presents information regarding the weighted average fair values for market-based PSUs granted during the years ended December 31, 2018 and 2019, and the assumptions used to determine the fair values:

Year ended December 31,

2018

2019

Dividend yield

%

%

Volatility

41

%

36

%

Risk-free interest rate

2.49

%

2.35

%

Weighted average fair value of awards granted

$

24.85

$

9.26

As of December 31, 2019, there was $17 million of unamortized equity-based compensation expense related to unvested PSUs. That expense is expected to be recognized over a weighted average period of approximately 1.8 years.

Antero Midstream Partners Phantom Unit Awards and Antero Midstream Corporation Restricted Stock Unit Awards

Phantom units granted by Antero Midstream Partners vested subject to the satisfaction of service requirements, upon the completion of which common units in Antero Midstream Partners were delivered to the holder of the phantom units. Phantom units also contained distribution equivalent rights which entitled the holder of vested common units to receive a “catch up” payment equal to common unit distributions paid by Antero Midstream Partners during the vesting period of the phantom unit award. These phantom units were treated, for accounting purposes, as if Antero Midstream Partners distributed the units to Antero Resources. Antero Resources recognized compensation expense as the units were granted to its employees, and a portion of the expense is allocated to Antero Midstream Partners. Expense related to each phantom unit award was recognized on a straight-line basis over the requisite service period of the entire award. Forfeitures were accounted for as they occurred by reversing the expense previously recognized for awards that were forfeited during the period. The grant date fair values of these awards were determined based on the closing price of Antero Midstream Partners’ common units on the date of grant.

In connection with the closing of the Transactions, the Board of Antero Midstream Corporation adopted the AMC Plan. In accordance with the terms of the Transactions, each outstanding phantom unit under the AMP Plan was assumed by Antero Midstream Corporation and converted into 1.8926 restricted stock units under the AMC Plan.

A summary of phantom unit awards and Antero Midstream Corporation restricted stock unit awards resulting from the conversion activity for the year ended December 31, 2019 is as follows:

Weighted

Aggregate

Number of

average grant

intrinsic value

units

date fair value

(in thousands)

Total awarded and unvested—December 31, 2018

 

583,000

$

27.63

$

12,470

Granted

 

5,972

$

23.44

Vested

 

(3,853)

$

32.44

Forfeited

 

(20,338)

$

26.73

AMP Plan Units awarded and unvested—March 12, 2019

564,781

$

27.59

$

13,476

Effect of conversion (1)

 

504,119

$

14.58

Vested

 

(362,191)

$

14.35

Forfeited

 

(48,952)

$

14.51

Total awarded and unvested—December 31, 2019

 

657,757

$

14.71

$

4,992

(1)Effective March 12, 2019, all outstanding phantom units under the AMP Plan were assumed by Antero Midstream Corporation and converted into restricted stock units under the AMC Plan.

Intrinsic values are based on the closing price of shares of Antero Midstream Corporation’s common stock or Antero Midstream Partners’ common units, as applicable, on the referenced dates. As of December 31, 2019, there was $6.0 million of unamortized equity-based compensation expense related to unvested phantom unit awards. That expense is expected to be recognized over a weighted average period of approximately 1.7 years.