Leases

3 Months Ended

Mar. 31, 2019

Effective January 1, 2019, we adopted ASC 842. The most significant changes of the new standard are (1) lessees recognize a lease liability and a right-of-use (“ROU”) asset for all leases, including operating leases, with an initial term greater than 12 months on their balance sheets and (2) lessees and lessors disclose additional key information about their leasing transactions.

We have elected to implement ASC 842 using the effective date method which recognizes and measures all leases that exist at the effective date, January 1, 2019, using a modified retrospective transition approach. There was no cumulative-effect adjustment required to be recorded in connection with the adoption of the new standard and the reported amount of lease expense and cash flows are substantially unchanged under ASC 842. Comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments.

As a Lessor

Our daywork drilling contracts, under which the vast majority of our revenues are derived, contain both a lease component and a service component.

ASU 2018-11 amended ASC 842 to, among other things, provide lessors with a practical expedient to not separate non-lease components from lease components and, instead, to account for those components as a single amount, if the non-lease components otherwise would be accounted for under Topic 606 and both of the following are met:


1)	The timing and pattern of transfer of non-lease components and lease components are the same.


2)	The lease component, if accounted for separately, would be classified as an operating lease.

If the non-lease component is the predominant component of the combined amount, an entity is required to account for the combined amount in accordance with Topic 606. Otherwise, the entity must account for the combined amount as an operating lease in accordance with Topic 842.

Revenues from our daywork drilling contracts meet both of the criteria above and we have determined both quantitatively and qualitatively that the service component of our daywork drilling contracts is the predominant component. Accordingly, we combine the lease and service components of our daywork drilling contracts and account for the combined amount under Topic 606. See Note 5 - Revenue from Contracts with Customers.

We have multi-year operating and financing leases for corporate office space, field location facilities, land, vehicles and various other equipment used in our operations. We also have a significant number of rentals related to our drilling operations that are day-to-day or month-to-month arrangements. Our multi-year leases have remaining lease terms of greater than one year to 5 years.

As a Lessee

As a practical expedient, a lessee may elect not to apply the recognition requirements in ASC 842 to short-term leases. Instead a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. We have elected to utilize this practical expedient.

We have elected the package of practical expedients permitted in ASC 842. Accordingly, we accounted for our existing capital leases as finance leases under the new guidance, without reassessing whether the contracts contained a lease under ASC 842, whether classification of the capital lease would be different in accordance with ASC 842 and without reassessing any initial costs associated with the lease. As a result, we recognized on January 1, 2019 a lease liability at the carrying amount of the capital lease obligation on December 31, 2018, of $1.2 million and a ROU asset at the carrying amount of the capital lease asset of $1.3 million. Additionally, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under ASC 842 or (b) whether classification of the operating lease would be different in accordance with ASC 842. As a result, we recognized on January 1, 2019 a lease liability of $1.7 million, which represents the present value of the remaining lease payments discounted using our incremental borrowing rate of 8.17%, and a ROU asset of $0.9 million, which represents the lease liability of $1.7 million plus any prepaid lease payments, and less any unamortized lease incentives, totaling $0.8 million.

On January 1, 2019, the vehicle leases assumed in the Sidewinder merger were amended to be consistent with our existing vehicle leases, which resulted in a change in the classification from operating leases to finance leases. On the amendment date, we recorded $0.4 million in finance lease obligations and right of use assets.

The components of lease expense were as follows:



(in thousands)	Three Months Ended March 31, 2019
Operating lease expense	$	125
Short-term lease expense	1,193
Variable lease expense	86

Finance lease cost:
Amortization of right-of-use assets	$	265
Interest expense on lease liabilities	32
Total finance lease expense	297
Total lease expenses	$	1,701

Supplemental cash flow information related to leases is as follows:



(in thousands)	Three Months Ended March 31, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	103
Operating cash flows from finance leases	$	32
Financing cash flows from finance leases	$	216

Right-of-use assets obtained or recorded in exchange for lease obligations:
Operating leases	$	955
Finance leases	$	520

Supplemental balance sheet information related to leases is as follows:



(in thousands)	March 31, 2019
Operating leases:
Operating lease right-of-use assets	$	865

Accrued liabilities	$	480
Other long-term liabilities	1,196
Total operating lease liabilities	$	1,676

Finance leases:
Property and equipment	$	2,523
Accumulated depreciation	(971		)
Property and equipment, net	$	1,552

Current portion of long-term debt	$	905
Long-term debt	679
Total finance lease liabilities	$	1,584

Weighted-average remaining lease term
Operating leases	4.3 years
Finance leases	1.6 years

Weighted-average discount rate
Operating leases	8.17		%
Finance leases	6.64		%

Maturities of lease liabilities at March 31, 2019 were as follows:



(in thousands)	Operating Leases			Finance Leases
Cash payments in future twelve month periods:
Year 1	$	594		$	759
Year 2	351			365
Year 3	353			84
Year 4	363			—
Year 5	326			—
Thereafter	—			—
Total cash lease payment	1,987			1,208
Add: expected residual value	—			479
Less: imputed interest	(311		)	(103		)
Total lease liabilities	$	1,676		$	1,584

As of December 31, 2018, future total obligations on our noncancellable capital and operating leases were $3.7 million in the aggregate, which consisted of the following: $1.4 million in 2019, $1.0 million in 2020, $0.5 million in 2021 and $0.8 million thereafter.

Leases