Commitments and Contingencies

Commitments

Leases and Other Commitments

The following is a schedule of the Company’s future minimum lease payments with commitments that have initial or remaining lease terms in excess of one year as of December 31, 2019:



	2020		2021		2022		2023		2024		Thereafter		Total
	(In thousands)
Operating lease obligations	$	2,495	$	1,465	$	544	$	—	$	—	$	—	$	4,504
Water disposal agreement	1,436		1,462		1,487		1,513		1,540		6,436		13,874
Total	$	3,931	$	2,927	$	2,031	$	1,513	$	1,540	$	6,436	$	18,378

Operating lease obligations. The Company’s operating leases primarily relates to office space in Houston, Texas and Midland, Texas and also includes corporate apartment, compressor, and generator rentals. The Company recognized office rent expense of $1.3 million, $1.2 million and $1.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company recognizes rent expense on a straight-line basis over the noncancelable lease term. The leases for office space in Houston, Texas and Midland, Texas expire in June 2022 and December 2020, respectively. The lease terms for equipment generally range from 1 to 2 years.

Water disposal agreement. In 2019, the Company commenced a water disposal agreement for transportation and disposal of produced water from some of its southern operated wells. Under the terms of this agreement, the Company is obligated to provide a minimum volume of produced water or else pay for any deficiencies at the prices stipulated in the contract. The Company did not have any deficiencies as of December 31, 2019. The obligations reported above represent the minimum financial commitments pursuant to the terms of the contracts as of December 31, 2019. Actual expenditures under these contracts may exceed the minimum commitments presented above. The Company incurred water disposal costs of $0.9 million for the year ended December 31, 2019 related to its water disposal agreement.

Rosehill Operating Common Unit Redemption Right. The LLC Agreement provides Tema with a redemption right, which entitles Tema to cause Rosehill Operating to redeem, from time to time, all or a portion of its Rosehill Operating Common Units (and a corresponding number of shares of Class B Common Stock) for, at Rosehill Operating’s option, newly issued shares of Class A Common Stock on a one-for-one basis or a cash payment equal to the average of the volume-weighted closing price of one share of Class A Common Stock for the twenty trading days prior to the date Tema delivers a notice of redemption for each Rosehill Operating Common Units redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications). In the event of a reclassification event (as defined in the LLC Agreement), the Company as managing member is required to ensure that each Rosehill Operating Common Unit (and a corresponding share of Class B Common Stock) is redeemable for the same amount and type of property, securities or cash that a share of Class A Common Stock becomes exchangeable for or converted into as a result of such reclassification event. Upon the exercise of the redemption right, Tema will surrender its Rosehill Operating Common Units (and a corresponding number of shares of Class B Common Stock) to Rosehill Operating and (i) Rosehill Operating shall cancel such Rosehill Operating Common Units and issue to the Company a number of Rosehill Operating Common Units equal to the number of surrendered Rosehill Operating Common Units and (ii) the Company shall cancel the surrendered shares of Class B Common Stock. The LLC Agreement requires that the Company contribute cash or shares of Class A Common Stock to Rosehill Operating in exchange for the issuance to the Company described in clause (i). Rosehill Operating will then distribute such cash or shares of Class A Common Stock to Tema to complete the redemption. Upon the exercise of the redemption right, the Company may, at its option, affect a direct exchange of cash or its Class A Common Stock for such Rosehill Operating Common Units in lieu of such a redemption.

Maintenance of One-to-One Ratios. The LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A Common Stock and (ii) the number of Rosehill Operating Common Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar shareholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plans and certain equity securities issued pursuant to the Company’s equity compensation plans (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the Series A Preferred Stock and the warrants exercisable for shares of Class A Common Stock) and (ii) the number of corresponding outstanding equity securities of Rosehill Operating. These provisions are intended to result in Tema having a voting interest in the Company that is identical to Tema’s economic interest in Rosehill Operating.

Pecos County, Texas Farm-in Agreement. On February 27, 2019, Rosehill entered into a farm-in agreement that would allow it to earn approximately 2,200 net acres contiguous to its core areas in the Southern Delaware Basin subject to its obligations to drill and complete up to seven wells through 2020 and to carry 25% of the drilling and completion costs for each of the seven wells and the costs of facilities and equipment and subject to the Company’s ability to obtain certain lease modifications. As of December 31, 2019, the Company had drilled and completed two wells, which earned the Company 935 net acres. If the Company fails to drill and complete any of the remaining wells or obtain certain lease modifications, the Company will be required to reassign the net acres associated with those remaining wells back to its partner in the farm-in agreement or pay liquidated damages. On March 23, 2020, the Company provided notice to its partner that it intended to reassign the net acres associated with those remaining wells back to the partner.

Contingencies

Legal. In the ordinary course of business, the Company is party to various legal actions, which arise primarily from its activities as operator of oil and natural gas wells. In management’s opinion, the outcome of any such currently pending legal actions will not have a material adverse effect on the Company’s financial position or results of operations. There is no material litigation, arbitration or governmental proceeding currently pending against the Company or any members of its management team in their capacity as such requiring a contingent liability to be recognized as of the date of the consolidated financial statements.