The Company adopted ASU 2016-02, Leases (Topic 842), and all applicable amendments as of January 1, 2019. The Company elected to apply the new standard to all leases existing at the date of initial application. Consequently, historical financial information will not be updated, and the disclosures required under the new standard will be provided only for periods beginning January 1, 2019.

The Company determines if an arrangement is a lease at inception. Operating leases are included in long-term right-of-use (“ROU”) assets, and long-term lease liabilities on our condensed consolidated balance sheets. ROU assets represent the Company’s right to use of an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The ROU assets are tested for impairment in accordance with ASC 360.

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component under the practical expedient provisions of the standard. Additionally, for certain leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities. The portfolio approach was used to assess and determine the incremental borrowing rate with information available at adoption date.

The Company has lease agreements with terms less than one year. For the qualifying short-term leases, the Company elected the short-term lease recognition exemption in which the Company will not recognize ROU assets or lease liabilities, including the ROU assets or lease liabilities for existing short-term leases of those assets in upon adoption.

As of the adoption date, the Company had existing lease agreements with easements in which the Company elected the practical expedient. All new and modified lease agreements with easements completed after the adoption date will be evaluated under the ASC 842.

The Company has operating leases for corporate offices, drilling rigs, the Company’s liquids gathering system, and certain equipment. The leases have remaining lease terms of one year to nine years. The Company does not include renewal options in the lease term for calculating the lease liability unless it is reasonably certain that it will exercise the option or the lessor has the sole ability to exercise the option.

	For the Three Months Ended		For the Six Months Ended
	June 30, 2019		June 30, 2019
Operating lease cost	$	5,221	$	10,476
Variable lease cost (1)	$	1,347	$	3,041
Short-term lease cost (2)	$	5,157	$	15,067
Total lease cost (3)	$	11,725	$	28,584

(1)

Variable lease payments include additional payments made that were not included in the initial measurement of the ROU asset and corresponding lease liability for agreements with terms longer than 12 months. Variable lease payments relate to the actual volumes transported under certain agreements, and variable utility costs associated with the Company’s leased office space. Fluctuations in variable lease payments are driven by actual volumes under long-term agreements.

(2)

Costs associated with short-term lease agreements relate primarily to operational activities where underlying lease terms are less than one year. This amount is significant as it includes drilling activities, most of which are contracted for 12 months or less. It is expected this amount will fluctuate primarily with the number of drilling rigs the Company is operating under short-term agreements. Additionally, this balance includes approximately $2.0 million of rig demobilization costs and early termination costs.

(3)

Lease costs are either expensed on the accompanying statements of operations or capitalized on the accompanying balance sheets depending on the nature and use of the underlying ROU asset.

The following table provides supplemental balance sheet information related to the Company’s operating leases:

	June 30, 2019
Operating Leases
Operating lease right-of-use assets	$	125,110

Operating lease liabilities	$	11,489
Long-term operating lease liabilities		113,642
Total operating lease liabilities	$	125,131

Weighted Average Remaining Lease Term
Operating leases	8.5 years
Weighted Average Discount Rate
Operating leases		7.91	%

The following table provides supplemental cash flow information related to the Company’s operating leases:

	Six Months Ended
	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	10,455

The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted by the Company’s incremental borrowing rates to calculate the lease liabilities for the Company’s operating leases:

	Operating Leases
For the year ending December 31,
2019 (remaining)	$	10,434
2020		20,853
2021		20,750
2022		20,327
2023		19,719
Thereafter		78,239
Total lease payments	$	170,322
Less: imputed interest		(45,191	)
Total	$	125,131