LEASES

On January 1, 2019, the Company adopted ASC 842 using the optional transition approach prescribed in Updated No 2018-11 - Lease (Topic 842), Targeted Improvements. Under this approach, results for reporting periods beginning January 1, 2019, are presented in accordance with ASC 842, while prior period amounts are reported in accordance with ASC 840 - Leases. The Company recognized $32.8 million and $33.6 million in right-of-use assets and liabilities, respectively, on January 1, 2019, representing minimum payment obligations associated with compressors, vehicles, office space, and other field and corporate equipment with contractual durations in excess of one year. There was no cumulative-effect adjustment to retained earnings upon adoption of the new standard.

ASC 842 provided certain practical expedients, of which, the Company elected to account for lease and non-lease components in its contracts as a single lease component for all asset classes, to adopt the land easement practical expedient, which allows the Company to apply ASC 842 prospectively to new or modified land easements beginning January 1, 2019, and to not apply the recognition requirements of ASC 842 to leases with a lease term of twelve months or less. The Company's leasing activities as a lessor are negligible.

During the three months ended March 31, 2019, the Company incurred $1.2 million in new right-of-use assets and liabilities. The Company’s right-of-use assets and liabilities are recognized at their discounted present value on the balance sheet at $32.0 million and $32.8 million as of March 31, 2019, respectively. All leases recognized on the Company's balance sheet are classified as operating leases, which include leases related to the asset classes reflected in the table below (in thousands):



		Right-of-use Asset		Right-of-use Liability
Field equipment⁽¹⁾	$	28,466	$	28,466
Corporate leases		2,993		3,782
Vehicles		540		540
Total	$	31,999	$	32,788

____________________________

(1) Includes compressors, certain gas processing equipment, and other field equipment.

The lease amounts disclosed are presented on a gross basis. A portion of these costs may have been or will be billed to other working interest owners, and the Company's net share of these costs once paid are included in property and equipment, lease operating expenses, or general and administrative expenses, as applicable.

The Company recognizes lease expense on a straight-line basis excluding short-term and variable lease payments which are recognized as incurred. Short-term lease cost represents payments for leases with a lease term of one year or less, excluding leases with a term of one month or less. Short-term leases include drilling rigs and other equipment. Drilling rig contracts are structured based on an allotted number of wells to be drilled consecutively at a daily operating rate. Short-term drilling rig costs include a non-lease labor component, which is treated as a single lease component.

The following table summarizes the components of the Company's gross operating lease costs incurred during the three months ended March 31, 2019 (in thousands):



		Amount
Operating lease cost⁽¹⁾	$	2,350
Short-term lease cost		1,822
Variable lease cost⁽²⁾		20
Sublease income⁽³⁾		(87	)
Total lease cost	$	4,105

____________________________

(1) Includes office rent expense of $0.3 million.

(2) Variable lease cost represents differences between minimum lease obligations and actual costs incurred for certain leases that do not have fixed payments related to both lease and non-lease components. Such incremental costs include lease payment increases or decreases driven by market price fluctuations and leased asset maintenance costs.

(3) The Company subleased a portion of its office space for the remainder of the office lease term.

The Company does not have any leases with an implicit interest rate that can be readily determined. As a result, the Company used the incremental borrowing rate, based on the Current Credit Facility benchmark rate, adjusted for facility utilization and lease term, to calculate the respective discount rates. Please refer to Note 5 - Long-term Debt for additional information.

The Company's weighted-average lease term and discount rate used during the three months ended March 31, 2019 are as follows:



	Three Months Ended March 31, 2019
Weighted-average lease term (years)	3.88
Weighted-average discount rate	4.33	%

Minimum future commitments by year for the Company's long-term operating leases as of March 31, 2019 are presented in the table below. Such commitments are reflected at undiscounted values and are reconciled to the discounted present value recognized on the balance sheet as follows (in thousands):



		Amount
Remainder of 2019	$	7,276
2020		9,389
2021		8,678
2022		7,254
2023		2,932
Thereafter		39
Total lease payments	$	35,568
Less: imputed interest		(2,780	)
Total lease liability	$	32,788