Gulfport Energy Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

LEASES

LEASES

9 Months Ended

Sep. 30, 2020

Nature of Leases

The Company has operating leases associated with drilling rig commitments, field offices and other equipment with remaining lease terms with contractual durations in excess of one year. Short-term leases that have an initial term of one year or less are not capitalized.

The Company has entered into a contract for a drilling rig with a third party to ensure rig availability. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the evaluation that the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of one to two years, and typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential volatility in commodity prices, the Company is unable to determine at commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liability associated with its rig commitment is based on the minimum contractual obligation, primarily standby rate, and does not include variable amounts based on actual activity in a given period. The Company has also entered into several drilling rig commitments with an initial term less than one year. The costs for these short-term rig commitments are included in the short-term lease cost for the period as shown below. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of these costs are borne by other interest owners.

Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray, a subsidiary of Mammoth Energy and a related party. Pursuant to this agreement, as amended effective July 1, 2018, Stingray has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company through 2021 and the Company has agreed to pay Stingray a monthly service fee plus the associated costs of the services provided. As discussed further in Note 9, the Company has terminated the Master Services Agreement for pressure pumping with Stingray. As a result, in the first quarter of 2020, Gulfport has removed the related right of use assets and lease liabilities associated with the terminated contract.

The Company rents office space for its field locations and certain other equipment from third parties, which expire at various dates through 2024. These agreements are typically structured with non-cancelable terms of one to five years. The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms.

Discount Rate

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Maturities of operating lease liabilities as of September 30, 2020 were as follows:


	(In thousands)
Remaining 2020	$	1,664
2021	142
2022	115
2023	90
2024	30
Total lease payments	$	2,041
Less: Imputed interest	(29)
Total	$	2,012

Lease cost for the three and nine months ended September 30, 2020 and 2019 consisted of the following:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands)
Operating lease cost	$	1,692	$	4,551	$	7,970	$	20,835
Operating lease cost—related party	—		5,610		—		16,830
Variable lease cost	245		105		705		1,065
Variable lease cost—related party	—		5,357		—		64,968
Short-term lease cost	2,259		224		7,698		407
Total lease cost(1)	$	4,196	$	15,847	$	16,373	$	104,105


(1)			The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in general and administrative expenses in the accompanying consolidated statements of operations.

Supplemental cash flow information for the nine months ended September 30, 2020 and 2019 related to leases was as follows:


	Nine months ended September 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities	(In thousands)
Operating cash flows from operating leases	$	109	$	146
Investing cash flow from operating leases	$	9,786	$	18,998
Investing cash flow from operating leases—related party	$	6,800	$	78,518

The weighted-average remaining lease term as of September 30, 2020 was 0.81 years. The weighted-average discount rate used to determine the operating lease liability as of September 30, 2020 was 2.65%.