Permian Resources Corp - 10-K filing on 2020-02-24

Leases

12 Months Ended

Dec. 31, 2019

Note 15—Leases

Lease Commitments (ASC Topic 842)

At contract inception, the Company determines whether or not an arrangement contains a lease. However, in connection with the implementation of ASC 842, this assessment was made as of the adoption date. Upon determination of a lease, a lease right-of-use (ROU) asset and related liability are recorded based on the present value of the future lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make future lease payments arising from the lease.

Currently, the Company has operating leases for drilling rig contracts, office rental agreements, and other wellhead equipment. As of December 31, 2019, these leases have remaining lease terms ranging from two months to two years, some of which include options to extend the lease term for up to five years, and some of which include options to early terminate. These options are considered in determining the lease term and are included in the present value of future payments that are recorded for leases when the Company is reasonably certain to exercise the option. Leases with an initial term of one year or less are not recorded in the Consolidated Balance Sheets. Additionally, none of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants.

The present value of future lease payments is determined at the lease commencement date based upon the Company’s incremental borrowing rate. The incremental borrowing rate is calculated for each lease using a risk-free interest rate adjusted for the Company’s specific risk and the specific lease term. The table below summarizes the Company’s discount rate and remaining lease term as of the period presented.



	As of December 31, 2019
Weighted-average discount rate	4.56	%
Weighted-average remaining lease term (years)	1.29

The Company’s drilling rig contracts, office rental agreements, and wellhead equipment agreements contain both lease and non-lease components, which are combined and accounted for as a single lease component.

Variable lease payments are recognized in the period in which they are incurred and include operating expenses related to the office rental agreements and expenses incurred on the drilling rig contracts in excess of the contractual rate. Expenses related to short-term leases are recognized on a straight-line basis over the lease term. The following table presents the components of the Company’s lease expenses for the period presented.



(in thousands)	Year Ended December 31, 2019
Lease costs⁽¹⁾
Operating lease cost	$	37,679
Variable lease cost	3,566
Short-term lease cost	67,493
Total Lease Cost	$	108,738

⁽¹⁾

The majority of the Company’s operating leases relate to the operations or completion of the Company’s wells. Therefore, the lease costs presented in the above table represent the total gross costs the Company incurs, which are not comparable to the Company’s net costs recorded to the Consolidated Statements of Operations, Consolidated Statements of Cash Flows or capitalized in the Consolidated Balance Sheets, as amounts therein are reflected net of amounts billed to working interest partners.

Maturities of the Company’s long-term operating lease liabilities by for the year ended December 31, 2019 are as follows:



(in thousands)	Total⁽²⁾
2020	$	9,573
2021	3,033
2022	425
Total lease payments	13,031
Less: imputed interest	(445		)
Present value of lease liabilities ⁽¹⁾	$	12,586


⁽¹⁾	Of the total present value of lease liabilities, $9.2 million was recorded to current Operating lease liabilities and $3.4 million was recorded in noncurrent Operating lease liabilities in the Consolidated Balance Sheets as of December 31, 2019.


⁽²⁾	Total lease payments exclude variable lease payments which can be charged under the terms of the lease agreements.

Lease Commitments (ASC Topic 840)

The following is a schedule of the Company’s future contractual payments for operating leases under the scope of ASC 840 that had initial contractual terms greater than one year as of December 31, 2018:



(in thousands)	Drilling Rigs		Office Leases
2019	$	43,036	$	3,057
2020	4,124		2,830
2021	—		2,761
2022	—		404
Total lease payments	$	47,160	$	9,052