NOTE 10 - LEASES

Lease Recognition

The Company has entered into contractual lease arrangements to rent office space, compressors, drilling rigs and other equipment from third-party lessors. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make future lease payments arising from the lease. Operating lease ROU assets and liabilities are recorded at commencement date based on the present value of lease payments over the lease term. Lease payments included in the measurement of the lease liability include fixed payments and termination penalties or extensions that are reasonably certain to be exercised. Variable lease costs associated with leases are recognized when incurred and generally represent maintenance services provided by the lessor, allocable real estate taxes and local sales and business taxes. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense on a straight-line basis over the lease term. The Company does not account for lease components separately from the non-lease components. The Company uses the implicit interest rate when readily determinable; however, most of the Company’s lease agreements do not provide an implicit interest rate. As such, at implementation and for new or modified leases subsequent to January 1, 2019, the Company uses its incremental borrowing rate based on the information available at commencement date of the contract in determining the present value of future lease payments. The incremental borrowing rate is calculated using a risk-free interest rate adjusted for the Company’s risk. Operating lease ROU assets also include any lease incentives received in the recognition of the present value of future lease payments. Certain of the Company’s leases may also include escalation clauses or options to extend or terminate the lease. These options are included in the present value recorded for the leases when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company determines if an arrangement is or contains a lease at inception of the contract and records the resulting operating lease asset on the consolidated balance sheets as an asset, with offsetting liabilities recorded as a liability. The Company recognizes a lease in the consolidated financial statements when the arrangement either explicitly or implicitly involves property or equipment, the contract terms are dependent on the use of the property or equipment, and the Company has the ability or right to operate the property or equipment or to direct others to operate the property or equipment and receives greater than 10% of the economic benefits of the assets. As of December 31, 2019, the Company does not have any financing leases.

The Company has adopted the modified retrospective method for the new lease recognition rule. Therefore, prior periods are not presented as prior period amounts have not been adjusted under the modified retrospective. Refer to Note 3 - Basis of Presentation and Summary of Significant Accounting Policies for additional information.

The Company’s ROU assets and operating lease liabilities were included in the consolidated balance sheets as follows (in thousands):



	December 31, 2019
Right of use assets:
Right of use assets - long-term⁽¹⁾	$	1,722

Lease liabilities:
Lease liabilities - current ⁽²⁾	$	412
Lease liabilities - long-term ⁽³⁾	1,323
Total lease liabilities	$	1,735

⁽¹⁾Right of use assets - long-term are included in other assets on the consolidated balance sheets.

⁽²⁾Lease liabilities - current are included in accrued liabilities and other on the consolidated balance sheets.

⁽³⁾ Lease liabilities - long-term are included in long-term derivatives instruments and other non-current liabilities on the consolidated balance sheets.

During the second quarter of 2019, the Company canceled a long-term drilling rig lease, within the terms of the agreement, which resulted in the write-off of the related lease liability and ROU asset of $5.4 million.

During the third quarter of 2019, the Company entered into a new long-term drilling rig lease which resulting in a lease liability and ROU asset of $10.8 million. During the 4th quarter of 2019, the Company canceled the long-term drilling rig lease, within the terms of the agreement, which resulted in the write-off of the related lease liability and ROU asset of $10.4 million.

Lease costs represent the straight line lease expense of ROU assets, short-term leases, and variable lease costs. The components of lease cost were classified as follows (in thousands):



	Year Ended December 31, 2019
Fixed lease costs	$	5,084
Short-term lease costs	1,096
Variable lease costs	575
Total lease costs	$	6,755



Lease Cost included in the Consolidated Financial Statements	Year Ended December 31, 2019
Oil and natural gas properties, full cost method of accounting, net⁽¹⁾
Total lease costs capitalized	$	5,688

Production costs	593
General and administrative	474
Total lease costs expensed	1,067
Total lease costs	$	6,755

⁽¹⁾Represents short-term lease capital expenditures related to drilling rigs for the year ended December 31, 2019.

During the year ended December 31, 2019, the following cash activities were associated with the Company’s leases as follows (in thousands):



Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	222
Investing cash flows from operating leases	$	4,768

As of December 31, 2019, the weighted average lease term and discount rate related to the Company’s remaining leases were as follows:



Lease term and discount rate
Weighted-average remaining lease term (years)	4.45
Weighted-average discount rate	5.3	%

As of December 31, 2019, minimum future payments, including imputed interest, for long-term operating leases under the scope of ASC Topic 842, “Leases”, were as follows (in thousands):



Year	Amount
2020	$	477
2021	425
2022	353
2023	379
2024	315
After 2024	—
Less: the effects of discounting	(214		)
Present value of lease liabilities	$	1,735

As of December 31, 2018, minimum future payments, including imputed interest, for long-term operating leases under the scope of ASC Topic 840, “Leases”, were as follows (in thousands):



Year	Amount
2019	$	7,586
2020	66
2021	—
2022	—
2023	—
After 2023	—
Total lease commitment	$	7,652