Note 6 – Commitments and Contingencies

Commitments

The Company has entered into various agreements, which include drilling rig contracts of $35.3 million, gathering, processing, and transportation throughput commitments of $864.0 million, office leases, including maintenance, of $59.4 million, and other miscellaneous contracts and leases of $5.7 million. The annual minimum payments for the next five years and total minimum payments thereafter are presented below:



Years Ending December 31,	Amount⁽¹⁾ (in thousands)
2016	$	132,747
2017	128,074
2018	131,489
2019	142,161
2020	141,854
Thereafter	288,113
Total	$	964,438

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(1)	During the third quarter of 2015, the Company vacated its office space in Tulsa, Oklahoma. These amounts include lease payments for the Tulsa office, net of sublease income. The Company expects to receive $3.5 million of sublease income as follows: $831,000 in 2016, $953,000 in 2017, $978,000 in 2018, and $741,000 in 2019.

Drilling rig contracts

The Company has multiple long-term drilling rig contracts. Early termination of these rig contracts as of December 31, 2015, would result in termination penalties of $26.0 million, which would be in lieu of paying the remaining drilling commitments of $35.3 million included in the table above. In light of the low commodity price environment, the Company curtailed drilling activity during 2015. For the year ended December 31, 2015, the Company incurred $13.7 million of expense related to the early termination of drilling rig contracts or fees incurred on rigs placed on standby, which are recorded in the other operating expenses line item in the accompanying statements of operations. These fees include the costs to terminate the contract for an operated drilling rig in the Company’s South Texas & Gulf Coast region, in early 2016.

Subsequent to December 31, 2015, the Company renegotiated the terms of certain drilling rig contracts to provide increased flexibility with regard to the timing of activity and payment.

Transportation commitments

The Company has gathering, processing, and transportation throughput commitments with various third parties that require delivery of a minimum amount of 2,277 Bcf of natural gas and 36 MMBbl of crude oil, of which the first 1,059 Bcf of natural gas delivered under a certain agreement does not have a deficiency payment. These contracts expire at various dates through 2028. The Company will be required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitments under certain agreements. As of December 31, 2015, if the Company delivers no product, the aggregate undiscounted deficiency payments total approximately $864.0 million. If a shortfall in the minimum volume commitment for natural gas is projected, the Company has rights under certain contracts to arrange for third party gas to be delivered, and such volumes would count toward its minimum volume commitment.

Subsequent to December 31, 2015, the Company entered into amendments to certain oil gathering and gas gathering agreements related to certain of its Eagle Ford shale assets, neither of which previously had a minimum volume commitment, in order to obtain more favorable rates and terms. Under these amendments, the Company is now committed to deliver 310 Bcf of natural gas and 41 MMBbl of oil through 2034. In the event that the Company delivers no product, the aggregate undiscounted deficiency payments under these amended agreements would be approximately $360.8 million. Subsequent to December 31, 2015, the Company also entered into an amendment to a gas gathering agreement related to certain of its other Eagle Ford shale assets, which reduced the Company’s volume commitment amount as of December 31, 2015, by 829 Bcf and reduced the aggregate undiscounted deficiency payments by $118.2 million.

As of the filing date of this report, the Company does not expect to incur any material shortfalls.

Office leases

The Company leases office space under various operating leases with terms extending as far as 2026. Rent expense, net of sublease income, for the years ended December 31, 2015, 2014, and 2013, was $6.1 million, $6.5 million, and $5.7 million, respectively. The Company also leases office equipment under various operating leases.

Contingencies

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the results of such pending litigation and claims will not have a material effect on the results of operations, the financial position, or the cash flows of the Company.

The Company is subject to routine severance, royalty and joint interest audits from regulatory authorities, non-operators and others, as the case may be, and records accruals for estimated exposure when a claim is deemed probable and estimable. Additionally, the Company is subject to various possible contingencies that arise from third party interpretations of the Company’s contracts or otherwise affecting the oil and natural gas industry. Such contingencies include differing interpretations as to the prices at which oil and natural gas sales may be made, the prices that royalty owners are paid for production from their leases, allowable costs under joint interest arrangements, and other matters. At December 31, 2015, the Company had $5.3 million accrued for estimated exposure related to claims for payment of royalties on certain Federal and Indian leases. Although the Company believes that it has properly estimated its exposure with respect to the various contracts, laws and regulations, administrative rulings, and interpretations thereof, adjustments could be required as new interpretations and regulations arise.