Leases

12 Months Ended

Dec. 31, 2020

LEASES

Operating Leases under ASC 842

Adoption of Accounting Standards Codification (ASC) Topic 842, “Leases." We adopted Topic 842 on January 1, 2019, using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are presented under ASC 840.

We determine whether a contract is or contains a lease at inception of the contract based on whether an identified asset exists and whether we have the right to obtain substantially all the benefit of the assets and to control its use over the full term of the agreement. When available, we use the rate explicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable explicit rate. Therefore, we must estimate our incremental borrowing rate considering both the revolving credit rates and a credit notching approach to discount the lease payments based on information available at lease commencement. There are no material residual value guarantees and no restrictions or covenants included in our lease agreements. Certain of our leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput or actual days or another measure of usage and are not included in the calculation of lease liabilities and right-of-use assets.

Related to our oil and natural gas segment, our short-term lease costs include those that are recognized in profit or loss during the period and those that are capitalized as part of the cost of our full cost pool. As the costs related to our drilling and production activities are reflected at our net ownership consistent with the principals of proportional consolidation, and lease commitments are generally considered gross as the operator, the costs may not reasonably reflect the company’s short-term lease commitments.

Practical Expedients and Policies Elected. We elected the hindsight expedient, which allows us to use hindsight in assessing lease term; the package of practical expedients permitted under the guidance, which among other things, allowed us to carry forward the historical lease classification; and the land easement expedient, which allowed us to apply the guidance prospectively at adoption for land easements on existing agreements. We applied the short-term policy election, which allowed us to exclude from recognition on the balance sheet leases with an initial term of 12 months or less. We considered quantitative and qualitative factors when determining the application of the practical expedient that allowed us not to separate lease and non-lease components and are accounting for the agreements as a single lease component.

We routinely enter into related party agreements between our three segments. These agreements have been evaluated under the guidance of ASC 842. Our oil and natural gas segment may contract for the use of drilling equipment from our drilling segment. We have determined that the contracting of our drilling segment's drilling rigs will be accounted for under ASC 606 as the service has been deemed the predominate component of the contract per the lessor practical expedient.

Adoption. Adoption of Topic 842 resulted in new operating lease assets and lease liabilities on our Consolidated Balance Sheet of $3.7 million and $3.5 million, respectively, as of January 1, 2019, which represents noncash operating activity. The immaterial difference between the lease assets and lease liabilities was recorded as an adjustment to the beginning balance of retained earnings, which represents the cumulative impact of adopting the standard. Our accounting for finance leases remained substantially unchanged.

Lease Agreements. We lease certain office space, land, and equipment, including pipeline equipment and office equipment. Our lease payments are generally straight-line and the exercise of lease renewal options, which vary in term, is at our sole discretion. We include renewal periods in our lease term if we are reasonably certain to exercise available renewal options. Our lease agreements do not include options to purchase the leased property.

The following table sets forth the maturity of our operating lease liabilities as of December 31, 2020:


	Amount
	(In thousands)
Ending December 31,
2021	$	4,232
2022	1,305
2023	96
2024	12
2025	12
2026 and beyond	63
Total future payments	5,720
Less: Interest	200
Present value of future minimum operating lease payments	5,520
Less: Current portion	4,075
Total long-term operating lease payments	$	1,445

Finance Leases under ASC 842

During 2014, our mid-stream segment entered into finance lease agreements for 20 compressors with initial terms of seven years. The underlying assets are included in gas gathering and processing equipment. The current portion of our finance lease obligations of $3.2 million is included in current portion of other long-term liabilities in the accompanying Consolidated Balance Sheets as of December 31, 2020. These finance leases are discounted using annual rates of 4.0%. Total maintenance and interest remaining related to these leases were $0.5 million at December 31, 2020. At the end of the term, our mid-stream segment has the option to purchase the assets at 10% of the fair market value of the assets at that time.

Future payments required under the finance leases at December 31, 2020 are as follows:


	Amount
Ending December 31,	(In thousands)
2021	$	3,774
Total future payments	3,774
Less payments related to:
Maintenance	525
Interest	33
Present value of future minimum payments	3,216
Less: Current portion	3,216
Total long-term finance lease payments	$	—

Information about our lease assets and liabilities included in our Consolidated Balance Sheets as of December 31, 2020 and 2019 are as follows:


		Successor		Predecessor
	Classification on the Consolidated Balance Sheets	December 31, 2020		December 31, 2019
		(In thousands)
Assets
Operating right of use assets	Right of use assets	$	5,592	$	5,673
Finance right of use assets	Property, plant, and equipment, net	7,281		17,396
Total right of use assets		$	12,873	$	23,069

Liabilities
Current liabilities:
Operating lease liabilities	Current operating lease liabilities	$	4,075	$	3,430
Finance lease liabilities	Current portion of other long-term liabilities	3,216		4,164
Non-current liabilities:
Operating lease liabilities	Operating lease liabilities	1,445		2,071
Finance lease liabilities	Other long-term liabilities	—		3,215
Total lease liabilities		$	8,736	$	12,880

The following table shows certain information related to the lease costs for our finance and operating leases for the periods indicated:


		Successor		Predecessor
		Period September 1, 2020 through December 31, 2020		Period January 1, 2020 through August 31, 2020		Year Ended December 31, 2019

	(In thousands)
Components of total lease cost:
Amortization of finance leased assets		$	1,406	$	2,757	$	4,001
Interest on finance lease liabilities		54		165		382
Operating lease cost		1,331		3,604		4,034
Short-term lease cost, included are amounts capitalized related to our oil and natural gas segment of less than $0.2 million, $1.5 million, and $24.7 million, respectively		3,664		8,190		38,868
Variable lease cost		64		223		351
Total lease cost		$	6,519	$	14,939	$	47,636

The following table provides supplemental cash flow information related to leases for the periods indicated:


	Successor		Predecessor
	Period September 1, 2020 through December 31, 2020		Period January 1, 2020 through August 31, 2020		Year Ended December 31, 2019

	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	1,489	$	3,849	$	4,034
Financing cash flows for finance leases	1,407		2,757		4,001
Lease liabilities recognized in exchange for new operating lease right of use assets	—		—		5

The following table shows certain information related to the weighted average remaining lease terms and the weighted average discount rates for our operating and finance leases at December 31, 2020:


	Weighted Average Remaining Lease Term	Weighted Average Discount Rate (1)
	(In years)
Operating leases	1.6	4.41%
Finance leases	0.7	4.00%

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1.Our weighted average discount rates represent the rate implicit in the lease or our incremental borrowing rate for a term equal to the remaining term of the lease.

We lease office space in Oklahoma City, Oklahoma; Houston and Odessa, Texas; Englewood, Colorado; and Pinedale, Wyoming under the terms of operating leases expiring through January 2022. We also have compressor rentals, equipment leases, and lease space on short-term commitments to stack excess drilling rig equipment and production inventory.