Derivative Financial Instruments

9 Months Ended

Sep. 30, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

5. Derivative Financial Instruments

Foreign Currency Forward Exchange Contracts

     Our international operations expose us to foreign exchange risk associated with our costs payable in foreign currencies for employee compensation, foreign income tax payments and purchases from foreign suppliers. We may utilize FOREX contracts to manage our foreign exchange risk. Our FOREX contracts may obligate us to exchange predetermined amounts of foreign currencies on specified dates or to net settle the spread between the contracted foreign currency exchange rate and the spot rate on the contract settlement date, which, for most of our contracts, is the average spot rate for the contract period.

     We enter into FOREX contracts when we believe market conditions are favorable to purchase contracts for future settlement with the expectation that such contracts, when settled, will reduce our exposure to foreign currency gains/losses on foreign currency expenditures in the future. The amount and duration of such contracts is based on our monthly forecast of expenditures in the significant currencies in which we do business and for which there is a financial market (i.e., Australian dollars, Brazilian reais, British pounds sterling, Mexican pesos and Norwegian kroner). These forward contracts are derivatives as defined by GAAP.

     We have adopted a hedging strategy whereby certain of our qualifying FOREX contracts are designated as cash flow hedges based on our expected future foreign currency requirements. These hedges are expected to be highly effective, and therefore, adjustments to record the carrying value of the effective portion of our derivative financial instruments to their fair value are recorded as a component of “Accumulated other comprehensive gain (loss),” or AOCGL, in our Consolidated Financial Statements. The effective portion of the cash flow hedge will remain in AOCGL until it is reclassified into earnings in the period or periods during which the hedged transaction affects earnings or it is determined that the hedged transaction will not occur. Adjustments to record the carrying value of the ineffective portion of our derivative financial instruments to fair value are recorded as “Foreign currency transaction gain (loss)” in our Consolidated Statements of Operations.

     During the nine months ended September 30, 2011 and 2010, we settled FOREX contracts with an aggregate notional value of approximately $224.8 million and $251.1 million, respectively, all of which were designated as accounting hedges. During the nine-month periods ended September 30, 2011 and 2010, we did not enter into or settle any FOREX contracts that were not designated as accounting hedges.

     The following table presents the amounts recognized in our Consolidated Statements of Operations related to our FOREX contracts designated as accounting hedges for the three-month and nine-month periods ended September 30, 2011 and 2010.

	Amount of Gain (Loss) Recognized in Income
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Location of Gain (Loss)	2011		2010		2011		2010
Recognized in Income	(In thousands)
Contract drilling expense	$	2,362	$	1,467	$	9,593	$	1,924

     As of September 30, 2011, we had FOREX contracts outstanding in the aggregate notional amount of $191.0 million, consisting of $30.7 million in Australian dollars, $102.9 million in Brazilian reais, $33.6 million in British pounds sterling, $10.9 million in Mexican pesos and $12.9 million in Norwegian kroner. These contracts generally settle monthly through March 2012. As of September 30, 2011, all outstanding derivative contracts had been designated as cash flow hedges. See Note 6.

     The following table presents the fair values of our derivative FOREX contracts designated as hedging instruments at September 30, 2011 and December 31, 2010.

	Fair Value				Balance Sheet Location		Fair Value
	September 30,		December 31,				September 30,			December 31,
Balance Sheet Location	2011		2010				2011			2010
	(In thousands)						(In thousands)
Prepaid expenses and other current assets	$	236	$	4,326		Accrued liabilities	$	(13,880	)	$	(121	)

     The following table presents the amounts recognized in our Consolidated Balance Sheets and Consolidated Statements of Operations related to our FOREX contracts designated as cash flow hedges for the three-month and nine-month periods ended September 30, 2011 and 2010.

	For The Three Months Ended					For The Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
				(In thousands)
Amount of gain (loss) recognized in AOCGL on derivative (effective portion)	$	(17,263	)	$	5,550	$	(5,443	)	$	535
Location of gain (loss) reclassified from AOCGL into income (effective portion)	Contract drilling expense			Contract drilling expense		Contract drilling expense			Contract drilling expense
Amount of gain (loss) reclassified from AOCGL into income (effective portion)	$	4,792		$	178	$	12,407		$	1,300
Location of Gain Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)		Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)
Amount of Gain Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	$	—		$	—	$	—		$	—

     As of September 30, 2011, the estimated amount of net unrealized gains associated with our FOREX contracts that will be reclassified to earnings during the next twelve months was $13.6 million. The net unrealized gains associated with these derivative financial instruments will be reclassified to contract drilling expense.