Callon Petroleum Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Leases

Leases

12 Months Ended

Dec. 31, 2019

eases

The Company determines if an arrangement is a lease at inception of the contract and, if the contract is determined to be a lease, classifies the lease as an operating or financing lease. The Company recognizes an operating or financing lease on its consolidated balance sheets as a lease liability, which represents the present value of the Company’s obligation to make lease payments arising from the lease, with a related ROU asset, which represents the Company’s right to use the underlying asset for the lease term. The Company’s operating leases typically do not provide an implicit interest rate, therefore, the Company utilizes its incremental borrowing rate to calculate the present value of the lease payments based on information available at inception of the contract.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for financing leases is comprised of interest expense on the financing lease liability and the amortization of the associated ROU asset, which is recognized on a straight-

line basis over the lease term. Variable lease expense that is not dependent on an index or rate is not included in the operating or financing lease liability or ROU asset and is recognized in the period in which the obligation for those payments is incurred.

Types of Leases

The Company currently has leases associated with contracts for drilling rigs, office space, and the use of well equipment, vehicles, information technology infrastructure, and other office equipment, with the significant lease types described in more detail below.

Drilling Rigs. The Company enters into contracts for drilling rigs with third parties to support its development plan. These contracts are typically for one to three years and can be extended upon mutual agreement with the third party by providing written notice at least thirty days prior to the end of the primary contractual term. The Company exercises its discretion in choosing whether or not to extend these contracts on a drilling rig by drilling rig basis as a result of evaluating the conditions that exist at the time the contract expires, such as availability of drilling rigs and the Company’s development plan. The Company has determined that it cannot conclude with reasonable certainty that it will choose to extend the contract past its primary term. As such, the Company uses the primary term in its calculation of the lease liability and ROU asset. The Company classifies its drilling rigs as operating leases and capitalizes the costs of the drilling rigs to oil and gas properties.

Office Space. The Company leases office space from third parties for its corporate office and certain field locations. These leases have non-cancelable terms between one to fifteen years. The Company has determined that it cannot conclude with reasonable certainty that it will exercise any option to extend the contract past the non-cancelable term. As such, the Company uses the non-cancelable term in its calculation of the lease liability and ROU asset. The Company classifies its leases for office space as operating leases with the costs recognized as “General and administrative” in its consolidated statements of operations.

Well Equipment. The Company rents compressors from third parties to facilitate the flow of production from its drilling operations to market. These contracts range from less than one year to three years for the primary term and continue thereafter on a month to month basis subject to cancellation by either party with thirty days’ notice. The Company classifies the compressors as operating leases with a lease term equal to the primary term for those contracts that have a primary term greater than one year. After the primary term, each party has a substantive right to terminate the lease, therefore, enforceable rights and obligations do not exist subsequent to the primary term. For those contracts that are less than one year, the Company has concluded that they represent short-term operating leases and therefore, an operating lease liability and ROU asset is not recorded in the consolidated balance sheets. These lease payments are recognized as “Lease operating” in the Company’s statements of operations.

The tables below, which present the components of lease costs and supplemental balance sheet information are presented on a gross basis. Other joint owners in the properties operated by the Company generally pay for their working interest share of costs associated with drilling rigs and well equipment.

The table below presents the components of the Company’s lease costs for the year ended December 31, 2019.



	Year Ended December 31, 2019
	(In thousands)
Components of Lease Costs
Finance lease costs		$92
Amortization of right-of-use assets ⁽¹⁾	82
Interest on lease liabilities ⁽²⁾	10
Operating lease cost ⁽³⁾	38,076
Impairment of Operating lease ROU assets ⁽⁴⁾	16,209
Short-term lease cost ⁽⁵⁾	3,640
Variable lease costs ⁽⁶⁾	—
Total lease costs		$58,017


(1)	Included as a component of “Depreciation, depletion and amortization” in the consolidated statements of operations.


(2)	Included as a component of “Interest expense, net of capitalized amounts” in the consolidated statements of operations.


(3)	For the year ended December 31, 2019, approximately $34.9 million are costs associated with drilling rigs and are capitalized to “Evaluated properties, net” in the consolidated balance sheets and the other remaining operating lease costs are components of “General and administrative” and “Lease operating” in the consolidated statements of operations.

(4)

In conjunction with the Carrizo Acquisition, the Company evaluated certain of its office leases for impairment as the determination was made in 2019 that certain corporate offices would be consolidated. Upon evaluation, the Company recorded an impairment of certain of its Operating lease ROU assets of $16.2 million which is a component of “Merger and integration expenses” in the consolidated statements of operations.


(5)	Short-term lease cost excludes expenses related to leases with a contract term of one month or less.


(6)	Variable lease costs include additional payments that were not included in the initial measurement of the lease liability and related ROU asset for lease agreements with terms greater than 12 months. Variable lease costs primarily consist of incremental usage associated with drilling rigs.

The table below presents supplemental balance sheet information for the Company’s leases as of December 31, 2019.



	Year Ended December 31, 2019
	(In thousands)
Leases
Operating leases:
Operating lease ROU assets		$63,908

Current operating lease liabilities		$42,858
Long-term operating lease liabilities	37,088
Total operating lease liabilities	79,946

Financing leases:
Other property and equipment		$2,197
Accumulated depreciation	(82		)
Other property and equipment, net	2,115

Current financing lease liabilities		$1,334
Long-term financing lease liabilities	807
Total financing lease liabilities	2,141

The table below presents the weighted average remaining lease terms and weighted average discounts rates for the Company’s leases as of December 31, 2019.



	December 31, 2019
Weighted Average Remaining Lease Terms (In years)
Operating leases	4.3
Financing leases	2.1

Weighted Average Discount Rate
Operating leases	5.5	%
Financing leases	9.4	%

The table below presents the maturity of the Company’s lease liabilities as of December 31, 2019.



	Operating Leases		Financing Leases
	(In thousands)
2020		$45,864		$1,475
2021	11,648		275
2022	4,363		234
2023	4,209		233
2024	4,110		38
Thereafter	17,902		—
Total lease payments	88,096		2,255
Less imputed interest	8,150		114
Total lease liabilities		$79,946		$2,141