Note 14—Commitments and Contingencies

(a) Legal Matters

Prior to the Company’s acquisition of the Oxford Oil Company (“Oxford”), which was completed in June 2013, Oxford commenced a lawsuit on October 24, 2011 in the Common Pleas Court of Belmont County, Ohio against Mr. Barry West, a lessor under an Oxford oil and gas lease, to enforce its rights to access and drill a well pursuant to the lease during its initial 5-year primary term. The lessor counterclaimed, alleging, among other things, that the challenged Oxford lease constituted a lease in perpetuity and, accordingly, should be deemed void and contrary to public policy in the State of Ohio. On October 4, 2013, the Belmont County trial court granted a motion for summary judgment in favor of the lessor and ruled that the lease is a “no term” perpetual lease and, as such, is void as a matter of Ohio law. On October 8, 2013, the Company appealed the trial court’s decision in the West case to the Ohio Court of Appeals for the Seventh Appellate District, arguing, among other things, that the Belmont County trial court erred in finding that the lease is a “no term” perpetual lease, by ruling that perpetual leases are void as a matter of Ohio law and by invalidating such leases.

On September 26, 2014, the Ohio Court of Appeals for the Seventh Appellate District issued its decision in the case of State ex rel. Claugus Family Farm, L.P. v. Beck Energy Corporation (formerly entitled, Hupp v. Beck Energy Corporation), an appeal of a Monroe County, Ohio trial court decision upon which the trial court in West based its decision. The appellate court held that while Ohio law disfavors perpetual leases, courts in Ohio have not found them to be per se illegal or void from their inception. The appellate court further held that the trial court misinterpreted both the pertinent lease provisions and Ohio law on the subject and erred in concluding that the Beck Energy lease is a no-term, perpetual lease that is void ab initio as against public policy. On November 7, 2014, the plaintiff landowners filed an appeal of the appellate court’s decision with the Supreme Court of Ohio, which was accepted by the Supreme Court of Ohio on January 28, 2015. On March 2, 2015, the Ohio Court of Appeals for the Seventh Appellate District stayed all proceedings in the Company’s appeal in the West case pending a decision by the Supreme Court of Ohio in the Claugus Family v. Beck Energy appeal. On January 21, 2016, the Supreme Court of Ohio affirmed the Appellate Court’s decision in Claugus Family v. Beck Energy and held that the subject lease was not perpetual and not void as against public policy. As a result of such ruling, on February 26, 2016, the Ohio Court of Appeals for the Seventh Appellate District lifted the stay of the Company’s appeal in the West case.

On September 6, 2016, the Ohio Court of Appeals for the Seventh Appellate District issued its decision in the West case in the Company’s favor reversing the trial court’s holdings that the Oxford oil and gas lease was perpetual and void. The appellate court held that the Oxford oil and gas lease in West was not perpetual because it had a primary term of a definitive duration of five years, and remanded the lawsuit to the trial court for further proceedings on other claims unrelated to the perpetual lease claim. Mr. West did not appeal the decision of the Ohio Court of Appeals for the Seventh Appellate District to the Ohio Supreme Court, thus concluding the matter as to the perpetual lease claim. The Company and Mr. West settled and resolved the remaining claims, and the West lawsuit was dismissed with prejudice on December 28, 2016.

The Company was a party to one other lawsuit that claimed the Oxford oil and gas lease was void as a perpetual lease in reliance upon the trial court’s decision in the West case, which was stayed pending the outcome of the appeal in the West case. This lawsuit affected approximately 60 leasehold acres and was capitalized on the Company’s condensed consolidated balance sheet as of December 31, 2016 at $0.7 million. On February 8, 2017, the plaintiff voluntarily dismissed all claims in the lawsuit.

Other Matters

From time to time, the Company may be a party to legal proceedings arising in the ordinary course of business. Management does not believe that a material loss is probable as a result of such proceedings.

(b) Environmental Matters

The Company is subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of the Company could be adversely affected.

The development of the Company’s oil and natural gas properties under their related leases will require a significant amount of capital. The timing of those expenditures will be determined by the lease provisions, the term of the lease and other factors associated with unproved leasehold acreage. To the extent that the Company is not the operator of oil and natural gas properties that it owns an interest in, the timing, and to some degree the amount, of capital expenditures will be controlled by the operator of such properties.

The Company leases office space under an operating lease that expires in 2024. Rent expense related to lease agreements for the years ended December 31, 2016, 2015, and 2014 was $0.9 million, $1.1 million and $0.3 million, respectively.

The following is a schedule by year, of the future minimum lease payments required under the lease agreements as of December 31, 2016 (in thousands).

2017	$	637
2018		637
2019		637
2020		690
2021		684
Thereafter		2,052
Total minimum lease payments	$	5,337

(d) Other Commitments (in thousands)

	Drilling rig commitments⁽ⁱ⁾		Firm transportation⁽ⁱⁱ⁾		Gas processing, gathering, and compression services⁽ⁱⁱⁱ⁾		Total
Year Ending December 31:
2017	$	8,937	$	49,748	$	9,430	$	68,115
2018		—		118,316		15,919		134,235
2019		—		111,787		17,140		128,927
2020		—		109,593		7,721		117,314
2021		—		105,391		—		105,391
Thereafter		—		205,766		—		205,766
Total	$	8,937	$	700,601	$	50,210	$	759,748

(i)

Drilling rig commitments -The Company had contracts for the service of two rigs, which one expires in August 2017 with the option to extend and one expires in September 2017. The values in the table represent the gross amounts that the Company is committed to pay and does not deduct amounts that other parties are responsible for as a result of cost sharing arrangements with working interest partners. The Company will record in its consolidated financial statements the Company’s proportionate share of costs based on its working interest, as applicable.

(ii)

Firm transportation -The Company has entered into firm transportation agreements with various pipelines in order to facilitate the delivery of production to market. These contracts commit the Company to transport minimum daily natural gas or NGL volumes at a negotiated rate, or pay for any deficiencies at a specified reservation fee rate. The amounts in this table represent the minimum daily volumes at the reservation fee rate. The values in the table represent the gross amounts that the Company is committed to pay and does not deduct amounts that other parties are responsible for as a result of cost sharing arrangements with working interest partners. The Company will record in its consolidated financial statements the Company’s proportionate share of costs based on its working interest.

(iii)

Gas processing, gathering, and compression services -Contractual commitments for gas processing, gathering and compression service agreements represent minimum commitments under long-term gas processing agreements as well as various gas compression agreements. The values in the table represent the gross amounts that the Company is committed to pay and does not deduct amounts that other parties are responsible for as a result of cost sharing arrangements with working interest partners. The Company will record in its consolidated financial statements its proportionate share of costs based on the Company’s working interest.”