| Financial Instruments and Fair Value Disclosures | 4. 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.
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 has consisted 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, we do not believe that we
have any significant concentrations of credit risk at
March 31, 2017.
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
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 notes. Our Level 1
assets at March 31, 2017 consisted of cash held in money
market funds of $92.2 million and time deposits of
$20.6 million. Our Level 1 assets at December 31,
2016 consisted of cash held in money market funds of
$125.7 million and time deposits of $20.6 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
may include residential mortgage-backed securities, corporate bonds
purchased in a private placement offering and over-the-counter
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, 2017 and
December 31, 2016 consisted of nonrecurring measurements of
certain of our drilling rigs and associated spare parts and
supplies for which we recorded impairment losses during 2016.
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 period ended
March 31, 2017 or the year ended December 31, 2016.
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 of $678.1 million related to
certain of our drilling rigs and related rig spare parts and
supplies, which were measured at fair value on a nonrecurring basis
during the year ended December 31, 2016.
Assets and liabilities measured at fair value are summarized
below.
March 31, 2017
Fair Value Measurements
Using
Level 1 Level 2 Level 3 Assets at Fair Value
(In
thousands)
Recurring fair value measurements:
Assets:
Short-term investments $ 112,843 $
— $
— $ 112,843
Mortgage-backed securities
— 24
— 24
Total assets $ 112,843 $ 24 $
— $ 112,867
December 31, 2016
Fair Value Measurements
Using
Level 1 Level 2 Level 3 Assets at Fair Value Total Losses for Year Ended (1)
(In
thousands)
Recurring fair value measurements:
Assets:
Short-term investments $ 146,360 $
— $
— $ 146,360
Mortgage-backed securities
— 35
— 35
Total assets $ 146,360 $ 35 $
— $ 146,395
Nonrecurring fair value measurements:
Assets:
Impaired assets (2)(3) $
— $
— $ 69,153 $ 69,153 $ 678,145
(1) Represents impairment losses of
$8.1 million and $670.0 million recognized during the
year ended December 31, 2016 related to our rig spare parts
and supplies and certain impaired rigs, respectively.
(2) Represents the total book value as of
December 31, 2016 for 11 drilling rigs ($45.5 million) and for
rig spare parts and supplies ($23.6 million), which were previously
written down to their estimated recoverable amounts. Of the total
fair value, $23.6 million, $0.4 million and
$45.1 million were reported as “Prepaid expenses and
other current assets,” “Asset held for sale” and
“Drilling and other property and equipment, net of
accumulated depreciation,” respectively, in our Condensed
Consolidated Balance Sheets at December 31, 2016.
(3) Includes depreciation expense of
$23.9 million recognized during the year ended
December 31, 2016 for rigs which had previously been written
down to their estimated fair values using an income approach. Also
excludes four jack-up mid-water
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 Condensed Consolidated Balance Sheets,
approximate fair value based on the following assumptions:
• Cash and cash equivalents
• Accounts receivable and accounts
payable
• Short-term borrowings
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, 2017 and December 31, 2016. 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
March 31, 2017 December 31, 2016
Fair Value Carrying Value Fair Value Carrying Value
(In
millions)
5.875% Senior Notes due 2019 $ 522.5 $ 499.8 $ 518.6 $ 499.8
3.45% Senior Notes due 2023 223.1 249.3 215.0 249.3
5.70% Senior Notes due 2039 407.5 497.1 392.5 497.1
4.875% Senior Notes due 2043 543.8 748.9 532.7 748.9
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. |
