Financial Instruments and Fair Value Disclosures

6 Months Ended

Jun. 30, 2011

Financial Instruments and Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Disclosures

6. Financial Instruments and Fair Value Disclosures

Concentrations of Credit and Market Risk

     Financial instruments which 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 place our excess cash investments in high quality 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.

     A majority of our investments in debt securities are U.S. government securities with minimal credit risk. 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. Our two customers in Brazil, Petróleo Brasileiro S.A. (a Brazilian multinational energy company that is majority-owned by the Brazilian government) and OGX Petróleo e Gás Ltda. (a privately owned Brazilian oil and natural gas company), accounted for $132.5 million and $68.3 million, or 23% and 12%, respectively, of our total consolidated gross trade accounts receivable balances as of June 30, 2011, and $180.8 million and $52.4 million, or 29% and 8%, respectively, as of December 31, 2010.

     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. Historically, we have not experienced significant losses on our trade receivables. 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. Our allowance for bad debts was $3.4 million and $31.9 million at June 30, 2011 and December 31, 2010, respectively. See Note 2.

     One of our drilling contracts obligates our customer to pay us, over the term of the drilling program, an aggregate drilling rate of $560,000 per day, consisting of $75,000 per day payable in accordance with our normal credit terms (due 30 days after receipt of invoice) and the remainder of the contractual dayrate, $485,000 per day, payable through the conveyance of a 27% net profits interest, or NPI, in certain developmental oil-and-gas producing properties.

     At June 30, 2011, $80.7 million was payable to us from the NPI. Based on current production payout estimates, we expect to collect the entire $80.7 million receivable within the next twelve months and have presented this amount in “Accounts receivable” in our Consolidated Balance Sheets. At June 30, 2011, we believe that collectability of the amount owed pursuant to the NPI arrangement was reasonably assured.

     At December 31, 2010, $85.0 million was payable to us from the NPI, of which $49.6 million and $35.4 million are presented as “Accounts receivable” and “Long-term receivable,” respectively, in our Consolidated Balance Sheets.

Fair Values

     The amounts reported in our Consolidated Balance Sheets for cash and cash equivalents, marketable securities, accounts receivable, forward exchange contracts and accounts payable approximate fair value. Fair values and related carrying values of our debt instruments are shown below.

	June 30, 2011				December 31, 2010
	Fair Value		Carrying Value		Fair Value		Carrying Value
			(In millions)
4.875% Senior Notes	$	271.1	$	249.7	$	270.0	$	249.7
5.15% Senior Notes		274.0		249.8		271.1		249.7
5.70% Senior Notes		492.6		496.8		493.1		496.8
5.875% Senior Notes		558.2		499.4		550.9		499.4

     We have estimated the fair value amounts by using appropriate valuation methodologies and information available to management as of June 30, 2011 and December 31, 2010, respectively. 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. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it was practicable to estimate that value:

• Cash and cash equivalents — The carrying amounts approximate fair value because of the short maturity of these instruments.

• Marketable securities — The fair values of the debt securities, including residential mortgage-backed securities, available for sale were based on the quoted closing market prices on June 30, 2011 and December 31, 2010, respectively.

• Accounts receivable and accounts payable — The carrying amounts approximate fair value based on the nature of the instruments.

• Forward exchange contracts — The fair value of our FOREX contracts is based on both quoted market prices and valuations derived from pricing models on June 30, 2011 and December 31, 2010, respectively.

• Long-term receivable — The carrying amount approximates fair value based on the nature of the instrument.

• Long-term debt — The fair value of our 5.70% Senior Notes due 2039, 5.875% Senior Notes due 2019, 4.875% Senior Notes due July 1, 2015, and 5.15% Senior Notes due September 1, 2014 is based on the quoted market prices from brokers of these instruments.

     Certain of our assets and liabilities are required to be measured at fair value in accordance with GAAP. 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 and U.S. Treasury Bills. Our Level 1 assets at June 30, 2011 consisted of cash held in money market funds of $244.3 million and investments in U.S. Treasury Bills of $700.0 million. Our Level 1 assets at December 31, 2010 consisted of cash held in money market funds of $442.2 million and investments in U.S. Treasury Bills of $600.0 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 and over-the-counter FOREX contracts. Our residential mortgage-backed securities were valued using a model-derived valuation technique based on the quoted closing market prices received from a financial institution. Our FOREX contracts are valued based on quoted market prices, which are derived from observable inputs including current spot and forward rates, less the contract rate multiplied by the notional amount. 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.

Market conditions could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 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.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	June 30, 2011
	Fair Value Measurements Using						Assets at Fair
	Level 1		Level 2		Level 3		Value
	(In thousands)
Assets:
Short-term investments	$	944,290	$	—	$	—	$	944,290
FOREX contracts		—		8,410		—		8,410
Mortgage-backed securities		—		494		—		494
Total assets	$	944,290	$	8,904	$	—	$	953,194

	December 31, 2010
	Fair Value Measurements Using							Assets at Fair
	Level 1		Level 2			Level 3		Value
	(In thousands)
Assets:
Short-term investments	$	1,042,224	$	—		$	—	$	1,042,224
FOREX contracts		—		4,327			—		4,327
Corporate bonds		—		11,760			—		11,760
Mortgage-backed securities		—		606			—		606
Total assets	$	1,042,224	$	16,693		$	—	$	1,058,917
Liabilities:
FOREX contracts	$	—	$	(121	)	$	—	$	(121	)