Permian Resources Corp - 10-Q filing on 2020-08-03

Leases

6 Months Ended

Jun. 30, 2020

Note 13—Leases

At contract inception, the Company determines whether or not an arrangement contains a lease. However, in connection with the implementation of ASC Topic 842, Leases (“ASC 842”), this assessment was made as of the adoption date of ASC 842. 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.

The Company has operating leases for drilling rig contracts, office rental agreements, and other wellhead equipment. As of June 30, 2020, 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 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 weighted-average discount rate and weighted-average remaining lease term as of the period presented.



	As of June 30, 2020
Weighted-average discount rate	4.76	%
Weighted-average remaining lease term (years)	1.45

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 various components of the Company’s lease expenses for the periods presented.



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2020		2019		2020		2019
Lease costs⁽¹⁾
Operating lease cost	$	1,595	$	10,806	$	6,271	$	21,393
Variable lease cost	3,669		703		5,021		1,504
Short-term lease cost⁽²⁾	12,217		16,684		31,827		28,908
Total lease cost	$	17,481	$	28,193	$	43,119	$	51,805

⁽¹⁾

The majority of the Company’s operating leases relate to the operations, drilling 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 the Company’s working interest partners.


⁽²⁾	Includes drilling rig lease costs of $4.6 million and $15.8 million for the three and six months ended June 30, 2020, which may not necessarily be recurring in these amounts in the near-term based on the Company’s reduction in its drilling plan.

Maturities of the Company’s long-term operating lease liabilities by fiscal year as of June 30, 2020 are as follows:



(in thousands)	Total⁽²⁾
2020⁽¹⁾	$	2,211
2021	3,178
2022	425
Total lease payments	5,814
Less: imputed interest	(440		)
Present value of lease liabilities ⁽³⁾	$	5,374


⁽¹⁾	Excludes payments made during the six months ended June 30, 2020.


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

⁽³⁾

Of the total present value of lease liabilities, $3.6 million was recorded to current Operating lease liabilities and $1.8 million was recorded in noncurrent Operating lease liabilities in the Consolidated Balance Sheets as of June 30, 2020.