NOTE 11 — COMMITMENTS AND CONTINGENCIES

Leases

The Company enters into leases as lessee to conduct its normal operations. At March 31, 2020, the Company had operating leases in place primarily for its use of compression equipment, a drilling rig, land right of way and surface use arrangements, office facilities, and other production equipment and finance leases in place for its use of field vehicles and office equipment. Most of the Company’s leasing arrangements include extension and termination options, including evergreen provisions, all of which provide the Company flexibility in retaining the underlying facilities and equipment, as well as some protection from future price variability. The Company recognizes options to extend or terminate its leases as part of its assessment of the lease term, when it is reasonably certain to exercise the option.

Some of the Company’s contracts have pricing that is variable within a range based on throughput, others have a set rate increase at predetermined intervals, and others are silent as to future increases or have a rate that is undefined for the variable components. The Company’s leases do not have future variable payments related to indices. For contracts with throughput provisions subject to a range, future payments have been included in the calculation of the lease liabilities at the contract minimum rate. Future payment increases for leases with set rate increases have been incorporated into the calculation of the lease liabilities, including the escalations. Future variable payments such as for movement or demobilization of the underlying leased asset have typically been excluded from the calculation of the lease liabilities unless they are determinable, and are expensed as incurred.

The Company has applied judgment to determine the lease term for some of its lease contracts which include renewal or termination options. Certain of the Company’s leases include an “evergreen” provision that allows the contract term to continue on a month-to-month or year-to-year basis following expiration of the initial term included in the contract. The term of the lease is determined to be the non-cancelable period in the contract, plus the period beyond that cancellation period that the Company believes it is reasonably certain it will need the equipment for operational purposes.

The Company’s lease obligations as of March 31, 2020 will mature as follows (in thousands):


	Operating Leases		Finance Leases
2020 - remaining	$	5,560	$	327
2021		3,546		298
2022		2,610		110
2023		1,922		9
2024		537		-
Thereafter		1,481		-
Total lease payments	$	15,656	$	744
Less: Interest		(1,738)		(39)
Total discounted lease payments	$	13,918	$	705

Marketing, Gathering, Processing and Transportation Commitments

In 2018 the Company entered into contracts with a large midstream company to gather, process, transport and market oil, NGL and natural gas production for certain acquired properties. The contracts contain a Minimum Revenue Commitment (“MRC’) that requires payment of minimum annual fees for those services. Fixed fees are expensed as incurred and settled with the purchaser on a monthly basis. If, at the end of each calendar year, the Company fails to satisfy the MRC, the Company is required to pay a shortfall. The total remaining MRC by fiscal year are as follows (in thousands):


	2020 - remaining		2021		2022		Total
Hydrocarbon gathering and handling agreement	$	12,412	$	13,737	$	6,453	$	32,602
Crude oil and condensate purchase agreements		3,551		7,386		4,173		15,110
Gas processing agreement		1,365		-		-		1,365
Gas transportation agreements		490		-		-		490
Total MRC	$	17,818	$	21,123	$	10,626	$	49,567

Cooper Basin Capital Commitments

At March 31, 2020, the Company had an interest in the petroleum exploration license 570 located in the Cooper Basin, a license located in Australia (“PEL 570”). The Company had a commitment to fund exploratory drilling in the Cooper Basin of up to approximately A$10.6 million (US$6.5 million) through 2022, of which A$7.2 million (US$4.4 million) had been incurred as of March 31, 2020, with a remaining commitment of A$3.5 million. (US$2.1 million). The exploratory drilling has not resulted in any proved reserves to date. The Company recorded exploration expense of $0.1 million during the three months ended March 31, 2020.

On June 12, 2020, the Company conveyed its interest in the PEL570 to the property’s operator. At the time of the conveyance, the Company had accrued expenses related to the exploratory drilling of approximately $3.5 million. As consideration for the property, the operator settled the Company’s outstanding liability for $0.9 million.

Litigation

The Company is involved in various legal proceedings and claims in the ordinary course of business, including mechanic’s liens and contract disputes, and recognizes a contingent liability when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. While the outcome of these lawsuits and claims cannot be predicted with certainty, it is the opinion of management that, as of the date of this report, it is not probable that these claims and litigation will have a material adverse impact on the Company, Accordingly, no material amounts for loss contingencies associated with litigation, claims or assessments have been accrued as of March 31, 2020.