| Financial Instruments and Fair Value Disclosures | 7. Financial Instruments and Fair
Value Disclosures
Financial instruments that potentially subject us to significant
concentrations of credit or market risk consist primarily of
periodic temporary investments of excess cash, trade accounts
receivable and investments in debt securities, including
residential mortgage-backed securities. We generally place our
excess cash investments in U.S. government-backed short-term money
market instruments through several financial institutions. At
times, such investments may be in excess of the insurable limit. We
periodically evaluate the relative credit standing of these
financial institutions as part of our investment strategy.
Most of our investments in debt securities are securitized
corporate bonds whereby our credit risk is mitigated by the
collateral. However, we are exposed to market risk due to price
volatility associated with interest rate fluctuations.
Concentrations of credit risk with respect to our trade accounts
receivable are limited primarily due to the entities comprising our
customer base. Since the market for our services is the offshore
oil and gas industry, this customer base consists primarily of
major and independent oil and gas companies and government-owned
oil companies. Based on our current customer base and the
geographic areas in which we operate, as well as the number of rigs
currently working in a geographic area, we do not believe that we
have any significant concentrations of credit risk at
March 31, 2016.
In general, before working for a customer with whom we have not had
a prior business relationship and/or whose financial stability may
be uncertain to us, we perform a credit review on that company.
Based on that analysis, we may require that the customer present a
letter of credit, prepay or provide other credit enhancements. We
record a provision for bad debts on a case-by-case basis when facts
and circumstances indicate that a customer receivable may not be
collectible and, historically, losses on our trade receivables have
been infrequent occurrences.
Fair Values
Fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. The fair value hierarchy prescribed by GAAP
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair
value:
Level 1 Quoted prices for identical instruments in
active markets. Level 1 assets include short-term investments such
as money market funds, U.S. Treasury Bills and Treasury notes. Our
Level 1 assets at March 31, 2016 consisted of cash held in
money market funds of $93.4 million and time deposits of $20.4
million. Our Level 1 assets at December 31, 2015 consisted of
cash held in money market funds of $85.2 million and time deposits
of $20.4 million.
Level 2 Quoted market prices for similar instruments in
active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations in
which all significant inputs and significant value drivers are
observable in active markets. Level 2 assets and liabilities
include residential mortgage-backed securities, corporate bonds
purchased in a private placement offering and over-the-counter
FOREX contracts. Our residential mortgage-backed securities and
corporate bonds were valued using a model-derived valuation
technique based on the quoted closing market prices received from a
financial institution. The inputs used in our valuation are
obtained from a Bloomberg curve analysis which uses par coupon swap
rates to calculate implied forward rates so that projected floating
rate cash flows can be calculated. The valuation techniques
underlying the models are widely accepted in the financial services
industry and do not involve significant judgment.
Level 3 Valuations derived from valuation techniques in
which one or more significant inputs or significant value drivers
are unobservable. Level 3 assets and liabilities generally include
financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques,
as well as instruments for which the determination of fair value
requires significant management judgment or estimation or for which
there is a lack of transparency as to the inputs used. Our Level 3
assets at March 31, 2016 consisted of nonrecurring measurements of
certain of our drilling rigs for which we recorded an impairment
loss during 2015. See Note 2.
Market conditions could cause an instrument to be reclassified
among Levels 1, 2 and 3. Our policy regarding fair value
measurements of financial instruments transferred into and out of
levels is to reflect the transfers as having occurred at the
beginning of the reporting period. There were no transfers between
fair value levels during the three-month periods ended
March 31, 2016 and 2015.
Certain of our assets and liabilities are required to be measured
at fair value on a recurring basis in accordance with GAAP. In
addition, certain assets and liabilities may be recorded at fair
value on a nonrecurring basis. Generally, we record assets at fair
value on a nonrecurring basis as a result of impairment charges. We
recorded impairment charges related to certain of our drilling
rigs, which were measured at fair value on a nonrecurring basis
during the three-month periods ended March 31,
2015, September 30, 2015 and December 31, 2015 of
$358.5 million, $2.6 million and $499.4 million, respectively.
Assets and liabilities measured at fair value are summarized
below:
March 31, 2016
Fair Value Measurements
Using
Level 1 Level 2 Level 3 Assets at
(In
thousands)
Recurring fair value measurements:
Assets:
Short-term investments $ 113,843 $
— $
— $ 113,843
Corporate bonds
— 4,999
— 4,999
Mortgage-backed securities
— 68
— 68
Total assets $ 113,843 $ 5,067 $
— $ 118,910
Nonrecurring fair value measurements:
Assets:
Impaired assets (1)(2) $
— $
— $ 178,415 $ 178,415
(1) Represents the book value as of
March 31, 2016 of 11 drilling rigs, which were written down to
their estimated recoverable amounts in 2015, of which $6.6 million
and $171.8 million were reported as “Assets held for
sale” and “Drilling and other property and equipment,
net of accumulated depreciation,” respectively, in our
Consolidated Balance Sheets at March 31, 2016. See Note
2.
(2) Excludes the fair value of one
marketed-for-sale jack-up rig sold in February 2016.
December 31, 2015
Fair Value Measurements
Using
Level 1 Level 2 Level 3 Assets at Total for Year (1)
(In
thousands)
Recurring fair value measurements:
Assets:
Short-term investments $ 105,659 $
— $
— $ 105,659
Corporate bonds
— 11,438
— 11,438
Mortgage-backed securities
— 80
— 80
Total assets $ 105,659 11,518 $
— $ 117,177
Nonrecurring fair value measurements:
Assets:
Impaired assets (2)(3) $
— $
— $ 189,600 $ 189,600 $ 860,441
(1) Represents the aggregate impairment
loss recognized for the year ended December 31, 2015 related
to our 2015 Impaired Rigs.
(2) Represents the book value of our 2015
Impaired Rigs, which were written down to their estimated
recoverable amounts during 2015, of which $14.2 million and $175.4
million were reported as “Assets held for sale” and
“Drilling and other property and equipment, net of
accumulated depreciation,” respectively, in our Consolidated
Balance Sheets at December 31, 2015.
(3) Excludes five rigs with an aggregate
fair value of $2.4 million, which were impaired in 2015, but were
subsequently sold for scrap prior to December 31, 2015.
We believe that the carrying amounts of our other financial assets
and liabilities (excluding long-term debt), which are not measured
at fair value in our Consolidated Balance Sheets, approximate fair
value based on the following assumptions:
• Cash and cash equivalents
• Accounts receivable and accounts
payable
• Commercial paper
We consider our senior notes to be Level 2 liabilities under the
GAAP fair value hierarchy and, accordingly, the fair value of our
senior notes was derived using a third-party pricing service at
March 31, 2016 and December 31, 2015. We perform control
procedures over information we obtain from pricing services and
brokers to test whether prices received represent a reasonable
estimate of fair value. These procedures include the review of
pricing service or broker pricing methodologies and comparing fair
value estimates to actual trade activity executed in the market for
these instruments occurring generally within a 10-day period of the
report date. Fair values and related carrying values of our senior
notes are shown below.
March 31, 2016 December 31, 2015
Fair Carrying Fair Carrying
(In
millions)
5.875% Senior Notes due 2019 $ 472.1 $ 499.7 $ 506.8 $ 499.7
3.45% Senior Notes due 2023 177.9 249.2 208.0 249.2
5.70% Senior Notes due 2039 343.6 497.0 360.0 497.0
4.875% Senior Notes due 2043 493.8 748.9 455.3 748.9
We have estimated the fair value amounts by using appropriate
valuation methodologies and information available to management.
Considerable judgment is required in developing these estimates,
and accordingly, no assurance can be given that the estimated
values are indicative of the amounts that would be realized in a
free market exchange. |
