Commitments and Contingencies

12 Months Ended

Dec. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Note 6 – Commitments and Contingencies

Commitments

As of December 31, 2020, the Company has entered into various agreements, which include drilling rig contracts of $5.9 million, gathering, processing, transportation throughput, and delivery commitments of $161.6 million, office leases, including maintenance, of $22.1 million, fixed price contracts to purchase electricity of $45.4 million, and other miscellaneous contracts and leases of $14.3 million. As of December 31, 2020, the annual minimum payments for the next five years and total minimum payments thereafter are presented below:


For the Years Ending December 31,	Amount
	(in thousands)
2021	$	86,776
2022	79,919
2023	45,474
2024	12,455
2025	11,463
Thereafter	13,233
Total	$	249,320

Drilling Rig and Completion Service Contracts. The Company has drilling rig and completion service contracts in place to facilitate its drilling and completion plans. During the twelve months ended December 31, 2020, and through the filing of this report, the Company entered into new and amended drilling rig contracts resulting in the reduction of day rates and potential early termination fees and the extension of contract terms. As of the filing of this report, the Company’s drilling rig commitments totaled $19.9 million under contract terms extending through the first quarter of 2022. If all of these contracts were terminated as of the filing of this report, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $11.6 million in early termination fees. Excluded from these amounts are variable commitments and potential penalties determined by the number of completion crews the Company has in operation in a particular area under a completion service agreement. As of December 31, 2020, potential penalties under this completion service agreement, which expires on December 31, 2023, range from zero to a maximum of $10.1 million. No material expenses related to early termination or standby fees were incurred by the Company during the year ended December 31, 2020, and the Company does not expect to incur material penalties with regard to its drilling rig and completion service contracts during 2021.

Pipeline Transportation Commitments. The Company has gathering, processing, transportation throughput, and delivery commitments with various third-parties that require delivery of a minimum amount of oil, gas, and produced water. As of December 31, 2020, the Company has commitments to deliver a minimum of 16 MMBbl of oil and 257 Bcf of gas through 2024, and 17 MMBbl of produced water through 2027. 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, 2020, if the Company fails to deliver any product, as applicable, the aggregate undiscounted deficiency payments total approximately $161.6 million. This amount does not include deficiency payment estimates associated with approximately 11.9 MMBbl of future oil delivery commitments where the Company cannot predict with accuracy the amount and timing of these payments, as such payments are dependent upon the price of oil in effect at the time of settlement. The Company expects to fulfill the delivery commitments from a combination of production from existing productive wells, future development of proved undeveloped reserves, and future development of resources not yet characterized as proved reserves. Under certain of the Company’s commitments, if the Company is unable to deliver the minimum quantity from its production, it may deliver production acquired from third-parties to satisfy its minimum volume commitments. As of the filing of this report, the Company does not expect to incur material shortfalls with regard to these commitments.

Office Leases. The Company leases office space under various operating leases with terms extending as far as 2026. Rent expense for the years ended December 31, 2020, 2019, and 2018, was $5.4 million, $5.5 million, and $4.5 million, respectively.

Electrical Power Purchase Contracts. As of December 31, 2020, the Company had a fixed price contract for the purchase of electrical power through 2027 with a total remaining obligation of $45.4 million.

Delivery and Purchase Commitments. As of December 31, 2020, the Company had a sand sourcing agreement with certain commitments and potential penalties that vary based on the amount of sand the Company uses in well completions occurring in a particular area. This sand sourcing agreement expires on December 31, 2023. As of December 31, 2020, potential penalties under this sand sourcing agreement range from zero to a maximum of $10.0 million. The Company does not expect to incur penalties with regard to this agreement.

Drilling and Completion Commitments. During the second quarter of 2020, the Company entered into an agreement that included minimum drilling and completion footage requirements on certain existing leases in South Texas. If these minimum

requirements are not satisfied by March 31, 2021, the Company will be required to pay liquidated damages based on the difference between the actual footage drilled and completed and the minimum requirements. As of December 31, 2020, the liquidated damages could range from zero to a maximum of $26.9 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2021. The Company also entered into an agreement that included a minimum number of wells drilled and completed on certain existing leases in South Texas. If these minimum requirements are not satisfied by December 31, 2021, the Company will be required to pay liquidated damages based on the difference between the actual number of wells drilled and completed and the minimum requirements. As of December 31, 2020, the liquidated damages could range from zero to a maximum of $11.5 million, with the maximum exposure assuming no additional development activity occurred prior to December 31, 2021. No liquidated damages related to these agreements were incurred by the Company during the year ended December 31, 2020, and the Company expects to meet its obligations under both agreements.

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 anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.