Note 8 - Leases

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

8. Leases

Nature of Leases

We lease certain field equipment and other equipment under cancelable and non-cancelable leases to support our operations. A more detailed description of our significant lease types is included below.

Field Equipment

We rent various field equipment from third parties in order to facilitate the downstream movement of our production from our drilling operations to market. Our compressor and cooler arrangements are typically structured with a non-cancelable primary term of one  year and continue thereafter on a month-to-month basis subject to termination by either party with thirty days’  notice. These leases are considered short term and  are not capitalized. We have a small number of  compressor leases that are longer than  twelve months. We have concluded that our equipment 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. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term. We enter into daywork contracts for drilling rigs with third parties to support our drilling activities. Our drilling rig arrangements are typically structured with a term that is in effect until drilling operations are completed on a contractually specified well or well pad. Upon mutual agreement with the contractor, we typically have the option to extend the contract term for additional wells or well pads by providing thirty days’ notice prior to the end of the original contract term. We have concluded that our drilling rig arrangements represent short-term operating leases. The accounting guidance requires us to make an assessment at contract commencement if we are reasonably certain that we will exercise the option to extend the term. Due to the continuously evolving nature of our drilling schedules and the potential volatility in commodity prices in an annual period, our strategy to enter into shorter term drilling rig arrangements allows us the flexibility to respond to changes in our operating and economic environment. We exercise our discretion in choosing to extend or not extend contracts on a rig by rig basis depending on the conditions present at the time the contract expires. At the time of contract commencement, we have determined we cannot conclude with reasonable certainty if we will choose to extend the contract beyond its original term. Pursuant to the full cost method, these costs are capitalized as part of natural gas and oil properties on our balance sheet when paid.

Discount Rate

Our leases typically do not provide an implicit rate. Accordingly, we are required to use our incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. Our incremental borrowing rate reflects the estimated rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We use the implicit rate in the limited circumstances in which that rate is readily determinable.

Practical Expedients and Accounting Policy Elections

Certain of our lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, we have utilized the practical expedient that exempts us from separating lease components from non-lease components. Accordingly, we account for the lease and non-lease components in an arrangement as a single lease component. In addition, for all of our existing asset classes, we have made an accounting policy election not to apply the lease recognition requirements to our short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that we are reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our statement of operations on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our statement of operations in the period in which the obligation for those payments is incurred. None of our current leases contain variable payments.  Refer to “ Nature of Leases”   above for further information regarding those asset classes that include material short-term leases.

The components of our total lease expense for the three and six months ended June 30, 2022, the majority of which is included in lease operating expense, are as follows:

	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
Operating lease cost	$	2	$	8
Short-term lease expense (1)	$	96	$	315
Total lease expense	$	98	$	323
Short-term lease costs (2)	$	-	$	-

(1)	Short-term lease expense represents expense related to leases with a contract term of 12 months or less.
(2)	These short-term lease costs are related to leases with a contract term of 12 months or less which are related to drilling rigs and are capitalized as part of natural gas and oil properties on our balance sheet.

Supplemental balance sheet information related to our operating leases is included in the table below:
 

	June 30, 2022
Operating lease ROU assets	$	4
Operating lease liability - current	$	4
Operating lease liabilities - long-term	$	-

Our weighted average remaining lease term and weighted average discount rate for our operating leases are as follows:

	June 30, 2022
Weighted Average Remaining Lease Term (in years)		0.6
Weighted Average Discount Rate		6	%

Our lease liabilities with enforceable contract terms that are greater than one year mature as follows:

	Operating Leases
Remainder of 2022	$	4
2023		—
2024		—
2025		—
2026		—
Thereafter		—
Total lease payments		4
Less imputed interest		—
Total lease liability	$	4

At June 30, 2022, we had only a lease on office equipment, with minimum lease payments with commitments that had initial or remaining lease terms in excess of one year.