Impact of ASU 842 Adoption	3 Months Ended
Mar. 31, 2019
Impact of ASU 842 Adoption
Impact of ASU 842 Adoption	3. Impact of ASU 842 Adoption In February 2016, the FASB issued ASU 2016-02, which establishes a ROU model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. All leases create an asset and a liability for the lessee and therefore recognition of those lease assets and lease liabilities is required by ASU 2016-02. When measuring lease assets and liabilities, payments to be made for optional extension periods should be included if the lessee is reasonably certain to exercise the option. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 does not impact the accounting or financial presentation of mineral leases and does not apply to leases to explore for or use oil or natural gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842)-Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”). ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired prior to a company’s adoption of ASU 2016-02 and that were not accounted for as leases under previous lease guidance. Additionally, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which included the option to implement the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings, as opposed to the modified retrospective transition method required when ASU 2016-02 was issued. The new standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has analyzed and categorized its contracts to determine if they meet the definition of a lease under ASU 2016-02 and has adopted the new standard using the simplified transition method described in ASU 2018-11 as of January 1, 2019. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for the dates and periods before January 1, 2019. Additionally, the Company has elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases or (iii) initial direct costs for any existing leases, but have not elected the practical expedient of hindsight when determining the lease term of existing contracts at the effective date. The Company also elected the practical expedient under ASU 2018-01 and has not evaluated existing or expired land easements not previously accounted for as leases prior to the effective date. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. The Company also elected the practical expedient to not separate lease and non-lease components for the majority of classes of underlying assets. Through its implementation process, the Company evaluated each of its lease arrangements and enhanced its systems to track and calculate additional information required upon adoption of this standard. The standard had an impact on the Company’s unaudited interim condensed consolidated balance sheets as of March 31, 2019, with the primary change relating to the recognition of ROU assets and lease liabilities for operating leases. Adoption of the new lease standard had an immaterial impact to the Company’s unaudited interim condensed consolidated statement of operations and cash provided from or used in operating, investing or financing activities in its unaudited interim condensed consolidated statements of cash flows for the three months ended March 31, 2019. Further discussion of the Company’s accounting for lease arrangements under ASC 842 is included below. Leases The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it is determined an arrangement represents a lease, the Company classifies that lease as an operating lease or a finance lease. The Company capitalizes operating and finance leases on its unaudited interim condensed consolidated balance sheets through a ROU asset and a corresponding lease liability. 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 lease payments arising from the lease. Operating leases are included in operating lease ROU assets, and operating lease liabilities in the unaudited interim condensed consolidated balance sheets at March 31, 2019. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. As of March 31, 2019, the Company had no leases classified as finance leases. Nature of Leases In support of the Company’s operations, it leases certain office space, field offices, office equipment, compressors, other production equipment and fleet vehicles under cancelable and non-cancelable contracts. A more detailed description of material lease types is included below. Corporate and Field Offices The Company enters into long-term contracts to lease corporate and field office space in support of operations. These contracts are generally structured with an initial non-cancelable term of three to five years. To the extent that corporate and field office contracts include renewal options, the Company evaluates whether it is reasonably certain to exercise those options on a contract by contract basis based on expected future office space needs, market rental rates, drilling plans and other factors. The Company has further determined that its current corporate and field office leases represent operating leases. Compressors The Company rents compressors from third-parties in order to facilitate the downstream movement of its production to market. Compressor arrangements are typically structured with a non-cancelable primary term of one to twenty-four months and often continue thereafter on a month-to-month basis subject to termination by either party with thirty-days’ notice. The Company has concluded that its compressor rental agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease without incurring a significant penalty. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term. To the extent that compressor rental arrangements have a primary term of twelve-months or less, the Company has elected to apply the practical expedient for short-term leases. For those short-term compressor contracts, the Company does not apply the lease recognition requirements, and recognizes lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail. Other Production Equipment The Company rents other production equipment from third-party vendors to be used in its production operations. These arrangements are typically structured on a month-to-month basis subject to termination by either party with thirty-days’ notice. The Company has concluded that it is not reasonably certain of executing the month-to-month renewal options beyond a twelve-month period based on the historical term for which it has used other production equipment, and, therefore, its other equipment agreements represent operating leases with a lease term up to twelve months. The Company has further elected to apply the practical expedient for short-term leases to its other production equipment contracts. Accordingly, it does not apply the lease recognition requirements to these contracts, and recognizes lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail. Fleet Vehicles The Company executes fleet vehicle leases with a third-party vendor in support of its day-to-day drilling and production operations. Its vehicle leases are typically structured with a term of a minimum of 367 days for passenger and light duty vehicles and a minimum of 24 months for commercial vehicles and continue thereafter on a month-to-month basis subject to termination by either party within thirty-days’ notice. The Company has concluded that its fleet vehicle leases represent operating leases. Significant Judgments Transportation, Gathering and Processing Arrangements The Company is party to a gas purchase, gathering and processing contract in the Mississippian Lime region, which includes certain minimum NGLs volume commitments. To the extent the Company does not deliver natural gas volumes in sufficient quantities to generate, when processed, the minimum levels of recovered NGLs, it would be required to reimburse the counterparty an amount equal to the sum of the monthly shortfall, if any, multiplied by a fee. The Company is currently delivering at least the minimum volumes required under these contractual provisions. However, decreased drilling activity could result in the inability to meet these commitments in the future. As the Company does not utilize substantially all of the underlying pipeline, gathering system or processing facilities, it has concluded that those underlying assets do not meet the definition of an identified asset. Discount Rate The Company’s leases typically do not provide an implicit rate, and thus, is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company’s incremental borrowing rate reflects the rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to determine its incremental borrowing rate, the Company utilizes its current credit rating as well as best available market data, which includes public bond information for publicly traded upstream energy companies with similar credit ratings, to estimate its unsecured borrowing rate and applied adjustments to that rate to account for the effect of collateral. The Company has determined the discount rate as of January 1, 2019, using end of day December 31, 2018, market data. This discount rate will be used at transition to ASC 842 as well as all new leases executed within 2019. The Company intends to update the discount rate annually thereafter on January 1 to be used for all new leases within the year (for example, the discount rate will be updated as of January 1, 2020, to be applied to all new leases in 2020). In the event a material lease is executed within a fiscal year or there have been material changes in the market that would impact the Company’s discount rate, the Company will evaluate whether an intra-year update of the discount rate is required. Practical Expedients & Accounting Policy Elections Certain of the Company’s lease agreements include lease and non-lease components. For all current asset classes with multiple component types, the Company has utilized the practical expedient that exempts an entity from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component. In addition, for all asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to its short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less, including renewal options expected to be exercised, and does not include an option to purchase the underlying asset that is reasonably certain to be exercised). Accordingly, the Company recognizes lease payments related to its short-term leases in profit or loss on a straight-line basis over the lease term. To the extent that there are variable lease payments, those payments are recognized in profit or loss in the period in which the obligation for those payments is incurred. Refer to “Nature of Leases” above for further information regarding those asset classes that include material short-term leases.

3. Impact of ASU 842 Adoption

In February 2016, the FASB issued ASU 2016-02, which establishes a ROU model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. All leases create an asset and a liability for the lessee and therefore recognition of those lease assets and lease liabilities is required by ASU 2016-02. When measuring lease assets and liabilities, payments to be made for optional extension periods should be included if the lessee is reasonably certain to exercise the option. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 does not impact the accounting or financial presentation of mineral leases and does not apply to leases to explore for or use oil or natural gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained.

In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842)-Land Easement Practical Expedient for Transition to Topic 842” (“ASU 2018-01”). ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired prior to a company’s adoption of ASU 2016-02 and that were not accounted for as leases under previous lease guidance. Additionally, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which included the option to implement the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings, as opposed to the modified retrospective transition method required when ASU 2016-02 was issued. The new standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The Company has analyzed and categorized its contracts to determine if they meet the definition of a lease under ASU 2016-02 and has adopted the new standard using the simplified transition method described in ASU 2018-11 as of January 1, 2019. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for the dates and periods before January 1, 2019. Additionally, the Company has elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases or (iii) initial direct costs for any existing leases, but have not elected the practical expedient of hindsight when determining the lease term of existing contracts at the effective date. The Company also elected the practical expedient under ASU 2018-01 and has not evaluated existing or expired land easements not previously accounted for as leases prior to the effective date. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. The Company also elected the practical expedient to not separate lease and non-lease components for the majority of classes of underlying assets.

Through its implementation process, the Company evaluated each of its lease arrangements and enhanced its systems to track and calculate additional information required upon adoption of this standard. The standard had an impact on the Company’s unaudited interim condensed consolidated balance sheets as of March 31, 2019, with the primary change relating to the recognition of ROU assets and lease liabilities for operating leases. Adoption of the new lease standard had an immaterial impact to the Company’s unaudited interim condensed consolidated statement of operations and cash provided from or used in operating, investing or financing activities in its unaudited interim condensed consolidated statements of cash flows for the three months ended March 31, 2019. Further discussion of the Company’s accounting for lease arrangements under ASC 842 is included below.

Leases

The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that it is determined an arrangement represents a lease, the Company classifies that lease as an operating lease or a finance lease. The Company capitalizes operating and finance leases on its unaudited interim condensed consolidated balance sheets through a ROU asset and a corresponding lease liability. 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 lease payments arising from the lease.

Operating leases are included in operating lease ROU assets, and operating lease liabilities in the unaudited interim condensed consolidated balance sheets at March 31, 2019. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

As of March 31, 2019, the Company had no leases classified as finance leases.

Nature of Leases

In support of the Company’s operations, it leases certain office space, field offices, office equipment, compressors, other production equipment and fleet vehicles under cancelable and non-cancelable contracts. A more detailed description of material lease types is included below.

Corporate and Field Offices

The Company enters into long-term contracts to lease corporate and field office space in support of operations. These contracts are generally structured with an initial non-cancelable term of three to five years. To the extent that corporate and field office contracts include renewal options, the Company evaluates whether it is reasonably certain to exercise those options on a contract by contract basis based on expected future office space needs, market rental rates, drilling plans and other factors. The Company has further determined that its current corporate and field office leases represent operating leases.

Compressors

The Company rents compressors from third-parties in order to facilitate the downstream movement of its production to market. Compressor arrangements are typically structured with a non-cancelable primary term of one to twenty-four months and often continue thereafter on a month-to-month basis subject to termination by either party with thirty-days’ notice. The Company has concluded that its compressor rental agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease without incurring a significant penalty. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term.

To the extent that compressor rental arrangements have a primary term of twelve-months or less, the Company has elected to apply the practical expedient for short-term leases. For those short-term compressor contracts, the Company does not apply the lease recognition requirements, and recognizes lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail.

Other Production Equipment

The Company rents other production equipment from third-party vendors to be used in its production operations. These arrangements are typically structured on a month-to-month basis subject to termination by either party with thirty-days’ notice. The Company has concluded that it is not reasonably certain of executing the month-to-month renewal options beyond a twelve-month period based on the historical term for which it has used other production equipment, and, therefore, its other equipment agreements represent operating leases with a lease term up to twelve months.

The Company has further elected to apply the practical expedient for short-term leases to its other production equipment contracts. Accordingly, it does not apply the lease recognition requirements to these contracts, and recognizes lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail.

Fleet Vehicles

The Company executes fleet vehicle leases with a third-party vendor in support of its day-to-day drilling and production operations. Its vehicle leases are typically structured with a term of a minimum of 367 days for passenger and light duty vehicles and a minimum of 24 months for commercial vehicles and continue thereafter on a month-to-month basis subject to termination by either party within thirty-days’ notice. The Company has concluded that its fleet vehicle leases represent operating leases.

Significant Judgments

Transportation, Gathering and Processing Arrangements

The Company is party to a gas purchase, gathering and processing contract in the Mississippian Lime region, which includes certain minimum NGLs volume commitments. To the extent the Company does not deliver natural gas volumes in sufficient quantities to generate, when processed, the minimum levels of recovered NGLs, it would be required to reimburse the counterparty an amount equal to the sum of the monthly shortfall, if any, multiplied by a fee. The Company is currently delivering at least the minimum volumes required under these contractual provisions. However, decreased drilling activity could result in the inability to meet these commitments in the future.

As the Company does not utilize substantially all of the underlying pipeline, gathering system or processing facilities, it has concluded that those underlying assets do not meet the definition of an identified asset.

Discount Rate

The Company’s leases typically do not provide an implicit rate, and thus, is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company’s incremental borrowing rate reflects the rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to determine its incremental borrowing rate, the Company utilizes its current credit rating as well as best available market data, which includes public bond information for publicly traded upstream energy companies with similar credit ratings, to estimate its unsecured borrowing rate and applied adjustments to that rate to account for the effect of collateral.

The Company has determined the discount rate as of January 1, 2019, using end of day December 31, 2018, market data. This discount rate will be used at transition to ASC 842 as well as all new leases executed within 2019. The Company intends to update the discount rate annually thereafter on January 1 to be used for all new leases within the year (for example, the discount rate will be updated as of January 1, 2020, to be applied to all new leases in 2020). In the event a material lease is executed within a fiscal year or there have been material changes in the market that would impact the Company’s discount rate, the Company will evaluate whether an intra-year update of the discount rate is required.

Practical Expedients & Accounting Policy Elections

Certain of the Company’s lease agreements include lease and non-lease components. For all current asset classes with multiple component types, the Company has utilized the practical expedient that exempts an entity from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component.

In addition, for all asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to its short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less, including renewal options expected to be exercised, and does not include an option to purchase the underlying asset that is reasonably certain to be exercised). Accordingly, the Company recognizes lease payments related to its short-term leases in profit or loss on a straight-line basis over the lease term. To the extent that there are variable lease payments, those payments are recognized in profit or loss in the period in which the obligation for those payments is incurred. Refer to “Nature of Leases” above for further information regarding those asset classes that include material short-term leases.