Revenue from Contracts with Customers

12 Months Ended

Dec. 31, 2020

Revenue from Contract with Customer [Abstract]

Revenue from Contract with Customer

REVENUE FROM CONTRACTS WITH CUSTOMERS

Our revenue streams are reported under our three segments: oil and natural gas, contract drilling, and mid-stream. This is our disaggregation of revenue and how our segment revenue is reported (as reflected in Note 20 – Industry Segment Information). Revenue from the oil and natural gas segment is derived from sales of our oil and natural gas production. Revenue from the contract drilling segment is derived by contracting with upstream companies to drill an agreed-on number of wells or provide drilling rigs and services over an agreed-on period. Revenue from the mid-stream segment is derived from gathering, transporting, and processing natural gas production and selling those commodities. We sell the hydrocarbons (from the oil and natural gas and mid-stream segments) to other mid-stream and downstream oil and gas companies.

We satisfy the performance obligation under each segment's contracts as follows:

•contract drilling and mid-stream contracts - satisfy the performance obligations over the agreed-on time;

•oil and natural gas contracts - satisfy the performance obligation with each volume delivery.

For oil and natural gas contracts, as it is more feasible, we account for these deliveries monthly.

Per the contracts for all segments, customers pay for the services/goods received monthly within an agreed number of days following the end of the month. Other than the mid-stream demand fees and shortfall fees discussed further below, there were no other contract assets or liabilities falling within the scope of this accounting pronouncement.

Oil and Natural Gas Contracts, Revenues, Implementation Impact to Retained Earnings, and Performance Obligations

Typical types of revenue contracts signed by our oil and gas segments are Oil Sales Contracts, North American Energy Standards Board (NAESB) Contracts, Gas Gathering and Processing Agreements, and revenues earned as the non-operated party with the operator serving as an agent on our behalf under our Joint Operating Agreements. Contract terms can range from a single month to a term spanning a decade or more; some may also include evergreen provisions. Revenues from our sales are recognized when our customer obtains control of the sold product. For sales we make to other mid-stream and downstream oil and gas companies, control typically occurs at a point on delivery to the customer. Sales generated from our non-operated interest are recorded based on the information obtained from the operator. Our adoption of this standard required no adjustment to opening retained earnings.

Certain costs—as either a deduction from revenue or as an expense—are determined based on when control of the commodity is transferred to our customer, which would affect our total revenue recognized, but will not affect gross profit. For example, gathering, processing and transportation costs are included as part of the contract price with the customer on transfer of control of the commodity are included in the transaction price, while costs incurred while we are in control of the commodity represent operating costs.

Our performance obligation for all commodity contracts is the delivery of oil and gas volumes to the customer. Typically, the contract is for a specified period (for example, a month or a year); however, each delivery under that contract can be considered as separately identifiable since each delivery provides its own benefits to the customer. For feasibility, as accounting for a monthly performance obligation is not materially different than identifying a more granular performance obligation, we conclude this performance obligation is satisfied monthly. We typically receive a payment within a set number of days following the end of the month of performance which includes payment for all deliveries in that month. Subject to any contract terms, judgment could be required to determine when the transfer of control occurs. Generally, depending on the facts and circumstances, we consider the change of control of the asset in a commodity sale to occur at the point the commodity transfers to the customer.

The consideration we receive for oil and gas sales is variable. Most of our contracts state the consideration is calculated by multiplying a variable quantity by a variable price less deductions related to any allowed gathering, transportation, fractionation, and related fuel charges. All variable consideration is settled at the end of the month; therefore, the variability does not affect accounting for revenue under ASC 606 as the variability is known before each reporting period. An estimation and allocation of transaction price and future obligations are not required.

Contract Drilling Contracts, Revenues, Implementation impact to retained earnings, and Performance Obligations

The contract drilling segment uses contracts with terms ranging from two months to three or more years or that can be based on terms to drill a specific number of wells. The allocation rules in ASC 606 (called the "series guidance") provide that a contract may contain a single performance obligation composed of a series of distinct goods or services if 1) each distinct good or service is substantially the same and would meet the criteria to be a performance obligation satisfied over time and 2) each distinct good or service is measured using the same method as it relates to the satisfaction of the overall performance obligation. We have determined that the delivery of drilling services is within the scope of the series guidance as both criteria noted above are met. Specifically, 1) each distinct increment of service (i.e., hour available to drill) that the drilling contractor promises to transfer represents a performance obligation that would meet the criteria for recognizing revenue over time, and 2) the drilling contractor would use the same method for measuring progress toward satisfaction of the performance obligation for each distinct increment of service in the series. At inception, the total transaction price is estimated to include any applicable fixed consideration, unconstrained variable consideration (estimated day rate mobilization and demobilization revenue, estimated operating day rate revenue to be earned over the contract term, expected bonuses (if material and can be reasonably estimated without significant reversal)), and penalties (if material and can be reasonably estimated without significant reversal). The estimation of the transaction price for unconstrained variable consideration does not differ materially from the previous revenue accounting standard. A contract liability will be recorded for consideration received before the corresponding transfer of services. Those liabilities will generally only arise in relation to upfront mobilization fees paid in advance and are allocated/recognized over the entire performance obligation. Such balances if material will be amortized over the recognition period based on the same method of measure used for revenue.

Our performance obligation for all drilling contracts is to drill the agreed-on number of wells or drill over an agreed-on period as stated in the contract. Any mobilization and demobilization activities are not considered distinct within the context of the contract and therefore, any associated revenue is allocated to the overall performance obligation of drilling services and recognized ratably over the initial term of the related drilling contract. It typically takes from 10 to 90 days to complete drilling a well; therefore, depending on the number of wells under a contract, the contract term could be up to three years. Most of the drilling contracts are for less than one year. As the customer simultaneously receives and consumes the benefits provided by the company’s performance, and the company’s performance enhances an asset that the customer controls, the performance obligation to drill the well occurs over time. We typically receive payment within a set number of days following the end of the month and that payment includes payment for all services performed during that month (calculated on an hourly basis). The company satisfies its overall performance obligation when the well included in the contract is drilled to an agreed-on depth or by a set date.

All consideration received for contract drilling is variable, excluding termination fees. The consideration is calculated by multiplying a variable quantity (number of days/hours) by an agreed-on daily price (for the daily rate, mobilization, and demobilization revenue). Other revenue items under the contract may include bonus/penalty revenue, reimbursable revenue, drilling fluid rates, and early termination fees. All variable consideration is not constrained but is settled at the end of the month; therefore, whether the variability is constrained or not does not affect accounting for revenue under ASC 606 as the variability is known before each reporting period excluding certain bonuses/penalties which might be based on activity that occurs over the entire term of the contract. We have evaluated the mobilization and de-mobilization charges on outstanding contracts, however, the impact to the financial statements was immaterial. As of December 31, 2020, we had nine drilling contracts (five of which are term contracts) for a duration of two months to one year.

Under the guidance in relation to disclosures regarding the remaining performance obligations, there is a practical expedient for contracts with an original expected duration of one year or less (ASC 606-10-50-14) and for contracts where the entity can recognize revenue as invoiced (ASC 606-10-55-18). Most of our drilling contracts have an original term of less than one year; however, the remaining performance obligations under the contracts with a longer duration are not material.

Mid-stream Contracts Revenues, and Implementation impact to retained earnings, and Performance Obligations

Revenues are generated from the fees earned for gas gathering and processing services provided to a customer or by selling of hydrocarbons to other mid-stream companies. The typical revenue contracts used by this segment are gas gathering and processing agreements as well as product sales. Our gas gathering and processing revenues are generally variable because the volumes are dependent on throughput by third-party customers for which the service provided is only specified on a daily or monthly basis. We deliver natural gas, NGLs and condensate to purchasers at contractually agreed-upon delivery points at which the purchaser takes custody, title, and risk of loss of the commodity. We recognize revenue at the point in time when control transfers to the purchaser at the delivery point based on the contractually agreed upon fixed or index-based price received.

Contracts for gas gathering and processing services may include terms for demand fees or shortfall fees. Demand fees represent an arrangement where a customer agrees to pay a fixed fee for a contractually agreed upon pipeline capacity, which results in performance obligations for each individual period of reservation. Once the services have been completed, or the customer no longer has access to the contracted capacity, revenue is recognized.

Before implementing ASC 606, we immediately recognized the entire demand fee since the fee was payable within the first five years from the effective date of the contract and not over the entire term of the contract. However, the demand fee is a stand-ready obligation under ASC 606 and is now to be recognized over the life of the contract. Therefore, the demand fee previously recognized for $1.7 million ($1.3 million, net of tax) was adjusted to retained earnings as of January 1, 2018 and is recognized over the remaining term of the contract.

Included below is the adjustment to demand fees from adopting ASC 606 over the remaining term of the contracts as of December 31, 2020.

Contract	Remaining Term of Contract	2021		2022		2023 and beyond		Total Remaining Impact to Revenue
Demand fee contracts	2-8 years	$	(3,501)	$	1,380	$	36	$	(2,085)

The adjustment to revenue for these demand fees was $(3.8) million and $2.6 million in 2020 and 2019, respectively.

		Successor		Predecessor
	Classification on the Consolidated Balance Sheets	December 31, 2020		December 31, 2019		Change
		(In thousands)
Assets
Current contract assets	Prepaid expenses and other	$	6,084	$	6,664	$	(580)
Non-current contract assets	Other assets	173		6,257		(6,084)
Total contract assets		$	6,257	$	12,921	$	(6,664)
Liabilities
Current contract liabilities	Current portion of other long-term liabilities	$	2,583	$	2,889	$	(306)
Non-current contract liabilities	Other long-term liabilities	1,589		4,172		(2,583)
Total contract liabilities		4,172		7,061		(2,889)
Contract assets (liabilities), net		$	2,085	$	5,860	$	(3,775)

Shortfall fees are minimum volume commitment arrangements where a customer agrees to pay the contractually agreed upon gathering fees for a minimum volume of natural gas irrespective of whether or not the minimum volume of natural gas is delivered, which results in performance obligations for each individual unit of volume. If the actual volumes exceed the minimum volume of natural gas, the customer pays the contractually agreed upon gathering fees for the excess volumes in addition to the fees paid for the minimum volume of natural gas. Once the services have been completed, or the customer no longer has the ability to utilize the services, the performance obligation is met, and revenue is recognized. In addition, when certain minimum volume commitment fee arrangements include commitments of one year or more, significant judgment is used in interim commitment periods in which a customer’s actual volumes are deficient in relation to the minimum volume commitment. Revenue is recognized when the likelihood of the customer meeting the minimum volume commitment becomes remote. During the Successor Period and Predecessor Period of 2020, we recognized revenue from shortfall fees of $4.0 million and $1.3 million, respectively. No shortfall fees were recognized in the year 2019.