Leases

6 Months Ended

Jun. 30, 2019

6. Leases

The Company determines if an arrangement is a lease at inception of the contract and, if the contract is determined to be a lease, classifies the lease as an operating or financing lease. The Company recognizes an operating or financing lease on its consolidated balance sheets as a lease liability, which represents the present value of the Company’s obligation to make lease payments arising from the lease, with a related ROU asset, which represents the Company’s right to use the underlying asset for the lease term. The Company’s operating leases typically do not provide an implicit interest rate, therefore, the Company utilizes its incremental borrowing rate to calculate the present value of the lease payments based on information available at inception of the contract.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for financing leases is comprised of interest expense on the financing lease liability and the amortization of the associated ROU asset, which is recognized on a straight-line basis over the lease term. Variable lease expense that is not dependent on an index or rate is not included in the operating or financing lease liability or ROU asset and is recognized in the period in which the obligation for those payments is incurred.

Types of Leases

The Company currently has leases associated with contracts for drilling rigs, office space, and the use of well equipment, vehicles, information technology infrastructure, and other office equipment, with the significant lease types described in more detail below.

Drilling Rigs. The Company enters into contracts for drilling rigs with third parties to support its development plan. These contracts are typically for one to three years and can be extended upon mutual agreement with the third party by providing written notice at least thirty days prior to the end of the primary contractual term. The Company exercises its discretion in choosing whether or not to extend these contracts on a drilling rig by drilling rig basis as a result of evaluating the conditions that exist at the time the contract expires, such as availability of drilling rigs and the Company’s development plan. The Company has determined that it cannot conclude with reasonable certainty that it will choose to extend the contract past its primary term. As such, the Company uses the primary term in its calculation of the lease liability and ROU asset. The Company classifies its drilling rigs as operating leases and capitalizes the costs of the drilling rigs to oil and gas properties.

Office Space. The Company leases office space from third parties for its corporate office and certain field locations. These leases have non-cancelable terms between one to fifteen years. The Company has determined that it cannot conclude with reasonable certainty that it will exercise any option to extend the contract past the non-cancelable term. As such, the Company uses the non-cancelable term in its calculation of the lease liability and ROU asset. The Company classifies its leases for office space as operating leases with the costs recognized as “General and administrative, net” in its consolidated statements of income.

Well Equipment. The Company rents compressors from third parties to facilitate the flow of production from its drilling operations to market. These contracts range from less than one year to three years for the primary term and continue thereafter on a month to month basis subject to cancellation by either party with thirty days notice. The Company classifies the compressors as operating leases with a lease term equal to the primary term for those contracts that have a primary term greater than one year. After the primary term, each party has a substantive right to terminate the lease, therefore, enforceable rights and obligations do not exist subsequent to the primary term. For those contracts that are less than one year, the Company has concluded that they represent short-term operating leases and therefore, an operating lease liability and ROU asset is not recorded in the consolidated balance sheets. These lease payments are recognized as “Lease operating expense” in the Company’s statements of income.

The tables below, which present the components of lease costs, supplemental balance sheet information, and supplemental cash flow information, are presented on a gross basis. Other joint owners in the properties operated by the Company generally pay for their working interest share of costs associated with drilling rigs and well equipment.

The table below presents the components of the Company’s lease costs for the three and six months ended June 30, 2019.



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(In thousands)
Components of Lease Costs
Finance lease costs
Amortization of right-of-use assets ⁽¹⁾		$410		$784
Interest on lease liabilities ⁽²⁾	131		276
Operating lease costs ⁽³⁾	8,700		22,780
Short-term lease costs ⁽⁴⁾	245		463
Variable lease costs ⁽⁵⁾	50		152
Total lease costs		$9,536		$24,455


(1)	Included as a component of “Depletion, depreciation and amortization” in the consolidated statements of income.


(2)	Included as a component of “Interest expense, net” in the consolidated statements of income.


(3)	For the three and six months ended June 30, 2019, approximately $6.1 million and $17.6 million are costs associated with drilling rigs and are capitalized to “Oil and gas properties” in the consolidated balance sheets and the other remaining operating lease costs are components of “General and administrative, net” and “Lease operating expense” in the consolidated statements of income.


(4)	Short-term lease costs are primarily associated with certain well equipment that have lease terms for less than one year and are components of “Lease operating expense” in the consolidated statements of income.


(5)	Variable lease costs include additional payments that were not included in the initial measurement of the lease liability and related ROU asset for lease agreements with terms greater than 12 months. Variable lease costs primarily consist of incremental usage associated with drilling rigs.

The table below presents supplemental balance sheet information for the Company’s leases as of June 30, 2019.



	June 30, 2019
	(In thousands)
Leases
Operating leases:
Operating lease ROU assets		$64,615

Current operating lease liabilities		$34,049
Long-term operating lease liabilities	36,526
Total operating lease liabilities		$70,575

Financing leases:
Other property and equipment, at cost		$7,810
Accumulated depreciation	(5,170		)
Other property and equipment, net		$2,640

Current financing lease liabilities ⁽¹⁾		$1,918
Long-term financing lease liabilities ⁽²⁾	1,034
Total financing lease liabilities		$2,952


(1)	Included in “Other current liabilities” in the consolidated balance sheets.


(2)	Included in “Other long-term liabilities” in the consolidated balance sheets.

The table below presents supplemental cash flow information for the Company’s leases for the six months ended June 30, 2019.



	Six Months Ended June 30, 2019
	(In thousands)
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$5,338
Investing cash flows from operating leases		$22,896
Operating cash flows from financing leases		$276
Financing cash flows from financing leases		$879

ROU assets obtained in exchange for lease liabilities
Operating leases		$9,404
Financing leases		$1,082

The table below presents the weighted average remaining lease terms and weighted average discount rates for the Company’s leases as of June 30, 2019.



	June 30, 2019
Weighted Average Remaining Lease Term (In years)
Operating leases	5.1 years
Financing leases	2.3 years

Weighted Average Discount Rate
Operating leases	8.0	%
Financing leases	12.9	%

The table below presents the maturity of the Company’s lease liabilities as of June 30, 2019.



	Operating Leases			Financing Leases
	(In thousands)
July - December 2019		$20,842			$1,113
2020	27,856			1,475
2021	7,726			275
2022	3,697			234
2023	3,680			232
2024 and Thereafter	21,608			39
Total lease payments	85,409			3,368
Less: Imputed interest	(14,834		)	(416		)
Total lease liabilities		$70,575			$2,952