|6 Months Ended|
Jun. 30, 2019
We determine if an arrangement is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we classify that lease as an operating lease or a finance lease. Based on our evaluation of leases for the three months ended March 31, 2019, we have no leases that meet the criteria for classification as a finance lease. We capitalize operating leases on our consolidated balance sheets through a right-of-use (“ROU”) asset and a corresponding lease liability. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.
Operating leases are included in operating lease ROU assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
Nature of leases
In support of our operations, we lease certain drilling rigs, office space, office equipment, production facilities, compressors, vehicles and other ancillary drilling equipment under cancelable and non-cancelable contracts. A more detailed description of our material lease types is included below.
The Company enters into daywork and long-term contracts for drilling rigs with third party service contractors to support the development of undeveloped reserves. Our daywork 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, well pads or contractually stated extension terms by providing 30 days’ notice prior to the end of the original contract term.
The Company’s long-term drilling contracts are generally structured with an initial non-cancelable term of one to two years. We have concluded that our long-term drilling rig arrangements represent operating leases with a lease term greater than twelve months. Additionally, we have concluded that our daywork drilling rig arrangements represent short-term operating leases with a lease term that equals the period of time required to complete drilling operations on the contractually specified well or well pad (that is, generally one to a few months from commencement of drilling).
We do not include the option to extend the drilling rig contract in the lease term due to the continuously evolving nature of our drilling schedules, which requires significant flexibility in the structure of the term of these arrangements, and the potential volatility in commodity prices in an annual period. We have further elected to apply the practical expedient for short-term leases to our daywork drilling rig leases. Accordingly, we do not apply the lease recognition requirements to our daywork drilling rig contracts, and we recognize lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term.
Corporate and field offices
We enter into long-term contracts to lease corporate and field office space in support of company operations. These contracts are generally structured with an initial non-cancelable term of two to five years. To the extent that our corporate and field office contracts include renewal options, we evaluate whether we are reasonably certain to exercise those options on a contract by contract basis based on expected future office space needs, market rental rates, drilling plans and other factors. We have further determined that our current corporate and field office leases represent operating leases.
Transportation, gathering and processing arrangements
We engage in various types of transactions in which midstream entities transport, gather and/or process our product leveraging integrated systems and facilities wholly-owned and operated by the midstream counterparty. Under most of these arrangements, we do not utilize substantially all of the underlying pipeline, gathering system or processing facilities, and thus, we have concluded that those underlying assets do not meet the definition of an identified asset.
The following tables reflect the current period impact of our adoption of the new leases standard. As we have no leases that meet the criteria for classification as a finance lease, all information contained herein represents our operating leases.
The components of our total lease cost were as follows:
(a) Short-term lease cost excludes expenses related to leases with a contract term of one month or less.
As of June 30, 2019, our weighted average remaining lease term and our weighted average discount rate for our operating leases were 1.45 years and 4.02%, respectively.
Our operating lease liabilities with enforceable contract terms that are greater than one year mature as follows:
The entire disclosure for operating leases of lessee. Includes, but is not limited to, description of operating lease and maturity analysis of operating lease liability.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef