Impairments and Other Charges

3 Months Ended

Mar. 31, 2020

Impairments and Other Charges [Abstract]

The oil and gas industry experienced an unprecedented disruption during the first quarter of 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts, and disagreements between the Organization of Petroleum Exporting Countries and other oil producing nations (OPEC+) in February 2020 regarding limits on production of oil. These events created a substantial surplus in the supply of oil. WTI oil spot prices decreased from a high of $63 per barrel in early January to a low of $14 per barrel in late March, a level which had not been experienced since March 1999, with physical markets showing signs of distress as spot prices were negatively impacted by the lack of available storage capacity. Activity declined in the face of depressed crude oil pricing, with the average U.S. land rig count dropping 25% in the first quarter of 2020 as compared to the first quarter of 2019. The global rig count has continued to decline into April 2020.

These market conditions have significantly impacted our business and our outlook globally, with a more severe impact to our North America business in the near-term. Customers continue to revise their capital budgets in order to adjust spending levels in response to the lower commodity prices, and we have experienced significant activity reductions and pricing pressure for our products and services, which we expect to continue. In line with these rapidly changing market conditions, our market capitalization also deteriorated during the first quarter of 2020. We determined these recent events constituted a triggering event that required us to review the recoverability of our long-lived assets and perform an interim goodwill impairment assessment as of March 31, 2020.

We determined the fair value of our long-lived assets based on a discounted cash flow analysis, and we determined the fair value for each reporting unit in our goodwill impairment assessment using both a discounted cash flow analysis and a multiples-based market approach for comparable companies. Given the current volatile market environment, we utilized third-party valuation advisors to assist us with these valuations. These analyses included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on our weighted average cost of capital, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset. These impairment assessments incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts.

Based upon our impairment assessments, we determined the carrying amount of some of our long-lived assets exceeded their respective fair values. Therefore, we recorded impairments and other charges of approximately $1.1 billion during the three months ended March 31, 2020 relating to these assets. As a result of our goodwill impairment assessment, we determined that the fair value of each reporting unit exceeded its net book value and, therefore, no goodwill impairments were deemed necessary. We will continue to evaluate these reporting units for potential goodwill impairment in the second quarter of 2020 as market conditions evolve.

The following table presents various pre-tax charges we recorded during the three months ended March 31, 2020 and 2019, which are reflected within "Impairments and other charges" on our condensed consolidated statements of operations.


	Three Months Ended March 31
Millions of dollars	2020		2019
Long-lived asset impairments	$	1,016	$	42
Severance costs	32		19

Other	25		—
Total impairments and other charges	$	1,073	$	61

Of the $1.1 billion of impairments and other charges recorded during the three months ended March 31, 2020, approximately $780 million was attributable to our Completion and Production segment and approximately $277 million was attributable to our Drilling and Evaluation segment. The $1.0 billion of long-lived asset impairments consists of the following: $588 million attributable to hydraulic fracturing equipment, the majority of which was located in North America, $151 million related to drilling equipment, and the remaining amount is primarily associated with other fixed asset impairments.

Given the dynamic nature of the COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period of time that these events will persist or the full extent of the impact they will have on our business. We will continue to take actions designed to mitigate the adverse effects of the rapidly changing market environment and expect to continue to adjust our cost structure to market conditions. This includes a significant reduction of our global workforce to better align our employee count with anticipated lower activity levels. We also plan on further rationalizing our portfolio of real estate facilities and managing our equipment fleet to match expected lower demand levels. If market conditions continue to deteriorate, including crude oil prices further declining and remaining at low levels for a sustained period of time, we may record further asset impairments, which may include an impairment of the carrying value of our goodwill.