Leases

3 Months Ended

Mar. 31, 2019

Leases [Abstract]

Leases

Leases

Supplemental balance sheet information related to leases was as follows:

(In millions)		March 31, 2019
Operating Leases:	Balance Sheet Location:
ROU asset	Other noncurrent assets	$	247
Current portion of long-term lease liability	Other current liabilities	$	92
Long-term lease liability	Deferred credits and other liabilities	$	162

In determining our ROU assets and long-term lease liabilities, the new lease standard requires certain accounting policy decisions, while also providing a number of optional practical expedients for transition accounting. Our accounting policies and the practical expedients utilized are summarized below:

• Implemented an accounting policy to not recognize any right-of-use assets and lease liabilities related to short-term leases on the balance sheet.

• Implemented an accounting policy to not separate the lease and nonlease components for all asset classes, except for vessels.

• Elected the package of practical expedients which allows us to not reassess our prior conclusions regarding the lease identification and lease classification for contracts that commenced or expired prior to the effective date.

• Elected the practical expedient pertaining to land easements which allows us to continue accounting for existing agreements under the previous accounting policies as nonlease transactions. Any modifications of existing contracts or new agreements will be assessed under the new lease accounting guidance and may become leases in the future.

We enter into various lease agreements to support our operations including drilling rigs, well fracturing equipment, compressors, buildings, aircraft, vessels, vehicles and miscellaneous field equipment. We primarily act as a lessee in these transactions and all of our existing leases are classified as either short-term or long-term operating leases.

The majority of the drilling rig agreements and all of fracturing equipment agreements are classified as short-term leases based on the noncancellable period for which we have the right to use the equipment and assessment of options present in each agreement. We also incur variable lease costs under these agreements primarily related to chemicals and sand used in fracturing operations or various additional on-demand equipment and labor. The lease costs associated with the drilling rigs and fracturing equipment are primarily capitalized as part of the well costs.

Our long-term leases are comprised of compressors, buildings, drilling rigs, aircraft, vessels, vehicles and miscellaneous field equipment. Our lease agreements may require both fixed and variable payments; none of the variable payments are rate or index-based, therefore only fixed payments were considered for recognizing lease liabilities and ROU assets related to long-term leases. Also, based on our election not to separate the lease and nonlease components, fixed payments related to equipment, crew and other nonlease components are included in the initial measurement of lease liabilities and ROU assets for all asset classes, except for vessels. For vessels, the contractual consideration was allocated between lease and nonlease components based on estimates provided by service providers.

Our leased assets may be used in joint oil and gas operations with other working interest owners. We recognize lease liabilities and ROU assets only when we are the signatory to a contract as an operator of joint properties. Such lease liabilities and ROU assets are determined based on gross contractual obligations. As we use the leased assets for joint operations, we have the contractual right to recover the other working interest owners’ share of lease costs. As a result, our lease costs are presented on a net basis, reduced for any costs recoverable from other working interest owners. The table below presents our net lease costs as of March 31, 2019 with the majority of operating lease costs expensed as incurred, while the majority of the short-term and variable term lease costs are capitalized into property, plant and equipment.

(In millions)	Three Months Ended March 31, 2019
Lease costs:
Operating lease costs(a)	$	21
Short-term lease costs(b)	81
Variable lease costs(c)	60
Total lease costs	$	162
Other information:
ROU assets obtained in exchange for new operating lease liabilities(d)	$	268

^(a)  Represents our net share of the ROU asset amortization and the interest expense.

^(b)  Represents our net share of lease costs arising from leases of less than 1 year but longer than one month that were not included in the lease liability.

^(c)  Represents our net share of variable lease payments that were not included in the lease liability.

^(d)  Represents the cumulative value of ROU assets recognized at lease inception during the quarter.  This amount is then amortized as we utilize the ROU asset, the net effect of which is the ending ROU asset of $247 million (first table above).

We use our periodic internal borrowing rate to discount future contractual payments to their present values. The weighted average lease term and the discount rate relevant to long-term leases were three years and 4% as of March 31, 2019. The remaining annual undiscounted cash flows associated with long-term leases and the reconciliation of these cash flows to the lease liabilities recognized on the consolidated balance sheet is summarized below.

(In millions)	Operating Lease Obligations
2019	$	80
2020	94
2021	57
2022	34
2023	4
Thereafter	1
Total undiscounted lease payments	$	270
Less: Amount representing interest	16
Total operating lease liabilities	$	254
Current portion of long-term lease liability as of March 31, 2019	$	92
Long-term lease liability as of March 31, 2019	$	162

Our wholly-owned subsidiary, Marathon E.G. Production Limited, is a lessor for residential housing in Equatorial Guinea, which is occupied by EGHoldings, a related party equity method investee – see Note 21.  The lease was classified as an operating lease and expires in 2024, with a lessee option to extend through 2034.  Lease payments are fixed for the entire duration of the agreement at approximately $6 million per year.  Our lease income is reported in other income in our consolidated statements of income for all periods presented. The undiscounted cash flows to be received under this lease agreement are summarized below.

(In millions)	Operating Lease Future Cash Receipts
2019	$	5
2020	6
2021	6
2022	6
2023	6
Thereafter	66
Total undiscounted cash flows	$	95

In 2018, we signed an agreement with an owner/lessor to construct and lease a new build-to-suit office building in Houston, Texas. The new Houston office location is expected to be completed in 2021.  The lessor and other participants are providing financing for up to $380 million, to fund the estimated project costs. As of March 31, 2019, project costs incurred totaled $47 million, primarily for land acquisition and initial design costs.  The initial lease term is five years and will commence once construction is substantially complete and the new Houston office is ready for occupancy. At the end of the initial lease term, we can negotiate to extend the lease term for an additional five years, subject to the approval of the participants; purchase the property subject to certain terms and conditions; or remarket the property to an unrelated third party.  The lease contains a residual value guarantee of approximately 89% of the total acquisition and construction costs.

Leases

Leases

Supplemental balance sheet information related to leases was as follows:

(In millions)		March 31, 2019
Operating Leases:	Balance Sheet Location:
ROU asset	Other noncurrent assets	$	247
Current portion of long-term lease liability	Other current liabilities	$	92
Long-term lease liability	Deferred credits and other liabilities	$	162

In determining our ROU assets and long-term lease liabilities, the new lease standard requires certain accounting policy decisions, while also providing a number of optional practical expedients for transition accounting. Our accounting policies and the practical expedients utilized are summarized below:

• Implemented an accounting policy to not recognize any right-of-use assets and lease liabilities related to short-term leases on the balance sheet.

• Implemented an accounting policy to not separate the lease and nonlease components for all asset classes, except for vessels.

• Elected the package of practical expedients which allows us to not reassess our prior conclusions regarding the lease identification and lease classification for contracts that commenced or expired prior to the effective date.

• Elected the practical expedient pertaining to land easements which allows us to continue accounting for existing agreements under the previous accounting policies as nonlease transactions. Any modifications of existing contracts or new agreements will be assessed under the new lease accounting guidance and may become leases in the future.

We enter into various lease agreements to support our operations including drilling rigs, well fracturing equipment, compressors, buildings, aircraft, vessels, vehicles and miscellaneous field equipment. We primarily act as a lessee in these transactions and all of our existing leases are classified as either short-term or long-term operating leases.

The majority of the drilling rig agreements and all of fracturing equipment agreements are classified as short-term leases based on the noncancellable period for which we have the right to use the equipment and assessment of options present in each agreement. We also incur variable lease costs under these agreements primarily related to chemicals and sand used in fracturing operations or various additional on-demand equipment and labor. The lease costs associated with the drilling rigs and fracturing equipment are primarily capitalized as part of the well costs.

Our long-term leases are comprised of compressors, buildings, drilling rigs, aircraft, vessels, vehicles and miscellaneous field equipment. Our lease agreements may require both fixed and variable payments; none of the variable payments are rate or index-based, therefore only fixed payments were considered for recognizing lease liabilities and ROU assets related to long-term leases. Also, based on our election not to separate the lease and nonlease components, fixed payments related to equipment, crew and other nonlease components are included in the initial measurement of lease liabilities and ROU assets for all asset classes, except for vessels. For vessels, the contractual consideration was allocated between lease and nonlease components based on estimates provided by service providers.

Our leased assets may be used in joint oil and gas operations with other working interest owners. We recognize lease liabilities and ROU assets only when we are the signatory to a contract as an operator of joint properties. Such lease liabilities and ROU assets are determined based on gross contractual obligations. As we use the leased assets for joint operations, we have the contractual right to recover the other working interest owners’ share of lease costs. As a result, our lease costs are presented on a net basis, reduced for any costs recoverable from other working interest owners. The table below presents our net lease costs as of March 31, 2019 with the majority of operating lease costs expensed as incurred, while the majority of the short-term and variable term lease costs are capitalized into property, plant and equipment.

(In millions)	Three Months Ended March 31, 2019
Lease costs:
Operating lease costs(a)	$	21
Short-term lease costs(b)	81
Variable lease costs(c)	60
Total lease costs	$	162
Other information:
ROU assets obtained in exchange for new operating lease liabilities(d)	$	268

^(a)  Represents our net share of the ROU asset amortization and the interest expense.

^(b)  Represents our net share of lease costs arising from leases of less than 1 year but longer than one month that were not included in the lease liability.

^(c)  Represents our net share of variable lease payments that were not included in the lease liability.

^(d)  Represents the cumulative value of ROU assets recognized at lease inception during the quarter.  This amount is then amortized as we utilize the ROU asset, the net effect of which is the ending ROU asset of $247 million (first table above).

We use our periodic internal borrowing rate to discount future contractual payments to their present values. The weighted average lease term and the discount rate relevant to long-term leases were three years and 4% as of March 31, 2019. The remaining annual undiscounted cash flows associated with long-term leases and the reconciliation of these cash flows to the lease liabilities recognized on the consolidated balance sheet is summarized below.

(In millions)	Operating Lease Obligations
2019	$	80
2020	94
2021	57
2022	34
2023	4
Thereafter	1
Total undiscounted lease payments	$	270
Less: Amount representing interest	16
Total operating lease liabilities	$	254
Current portion of long-term lease liability as of March 31, 2019	$	92
Long-term lease liability as of March 31, 2019	$	162

Our wholly-owned subsidiary, Marathon E.G. Production Limited, is a lessor for residential housing in Equatorial Guinea, which is occupied by EGHoldings, a related party equity method investee – see Note 21.  The lease was classified as an operating lease and expires in 2024, with a lessee option to extend through 2034.  Lease payments are fixed for the entire duration of the agreement at approximately $6 million per year.  Our lease income is reported in other income in our consolidated statements of income for all periods presented. The undiscounted cash flows to be received under this lease agreement are summarized below.

(In millions)	Operating Lease Future Cash Receipts
2019	$	5
2020	6
2021	6
2022	6
2023	6
Thereafter	66
Total undiscounted cash flows	$	95

In 2018, we signed an agreement with an owner/lessor to construct and lease a new build-to-suit office building in Houston, Texas. The new Houston office location is expected to be completed in 2021.  The lessor and other participants are providing financing for up to $380 million, to fund the estimated project costs. As of March 31, 2019, project costs incurred totaled $47 million, primarily for land acquisition and initial design costs.  The initial lease term is five years and will commence once construction is substantially complete and the new Houston office is ready for occupancy. At the end of the initial lease term, we can negotiate to extend the lease term for an additional five years, subject to the approval of the participants; purchase the property subject to certain terms and conditions; or remarket the property to an unrelated third party.  The lease contains a residual value guarantee of approximately 89% of the total acquisition and construction costs.