Financial Instruments and Fair Value Disclosures

12 Months Ended

Dec. 31, 2021

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Disclosures

9. Financial Instruments and Fair Value Disclosures

Concentrations of Credit Risk and Allowance for Credit Losses

Our credit risk corresponds primarily to trade receivables. Since the market for our services is the offshore oil and gas industry, our customer base consists primarily of major and independent oil and gas companies, as well as government-owned oil companies. At December 31, 2021, we believe that we had potentially significant concentrations of credit risk due to the number of rigs we currently had contracted and our limited number of customers, as some of our customers have contracted for multiple rigs.

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, we perform a credit review on that customer, including a review of its credit ratings and financial statements. Based on that credit review, we may require that the customer have a bank issue a letter of credit on its behalf, prepay for the services in advance or provide other credit enhancements. We had not required any other credit enhancements by our customers or required any to pay for services in advance at December 31, 2021.

Prior to the adoption of FASB ASU No. 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (or ASU 2016-13), we historically recorded a provision for bad debts on a case-by-case basis when facts and circumstances indicated that a customer receivable may not be collectible. In establishing these reserves, we considered historical and other factors that predicted collectability of such customer receivables, including write-offs, recoveries and the monitoring of credit quality. The amounts reserved for uncollectible accounts in previous periods have not been significant, individually or in comparison to our total revenues. ASU 2016-13 requires an entity to measure credit losses of certain financial assets, including trade receivables, utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. We adopted ASU 2016-13 and its related amendments (or collectively, CECL) effective January 1, 2020 by recognizing a cumulative-effect adjustment to our Consolidated Financial Statements, which was not material and has been reported in “Contract drilling, excluding depreciation” expense in our Consolidated Statements of Operations, rather than opening retained earnings as prescribed in ASU 2016-13. We have applied CECL prospectively.

Pursuant to ASU 2016-13, we reviewed our historical credit loss experience over a look-back period of ten years, which we deem to be representative of both up-turns and down-cycles in the offshore drilling industry. Based on this review, we developed a credit loss factor using a weighted-average ratio of our actual credit losses to revenues during the look-back period. We also considered current and future anticipated economic conditions in determining our credit loss factor, including crude oil prices and liquidity of credit markets. In applying the requirements of CECL, we determined that it would be appropriate to segregate our trade receivables into three credit loss risk pools based on customer credit ratings, each of which represents a tier of increasing credit risk. We calculated a credit loss factor based on historical loss rate information and applied a multiple of our credit loss factor to each of these risk pools, considering the impact of current and future economic information and the level of risk associated with these pools,

to calculate our current estimate of credit losses. Trade receivables that are fully covered by allowances for credit losses are excluded from these risk pools for purposes of calculating our current estimate of credit losses.

At December 31, 2021, $5.9 million in trade receivables were considered past due by 30 days or more, of which $5.5 million were fully reserved for in previous years. The remaining $0.4 million were less than a year past due and considered collectible. For purposes of calculating our current estimate of credit losses at December 31, 2021 and 2020, all trade receivables were deemed to be in a single risk pool based on their credit ratings at each respective period. Our total allowance for credit losses was $5.6 million at both December 31, 2021 and 2020, including $0.1 million at both December 31, 2021 and 2020 related to our current estimate of credit losses under CECL. See Note 6 “Supplemental Financial Information — Consolidated Balance Sheet Information.”

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 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 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.

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 Successor period from April 24, 2021 through December 31 2021 and the Predecessor periods from January 1, 2021 through April 23, 2021 and the year ended December 31, 2020. The aggregate losses for the periods have been presented as “Impairment of assets” in our Consolidated Statements of Operations for the Successor period from April 24, 2021 through December 31, 2021 and the Predecessor periods from January 1, 2021 through April 23, 2021 and the year ended December 31, 2021.

Assets measured at fair value are summarized below (in thousands).

	Successor
	December 31, 2021
	Fair Value Measurements Using										Predecessor
Nonrecurring fair value measurements:	Level 1		Level 2		Level 3		Assets at Fair Value		Total Losses for Period from April 24, 2021 through December 31, 2021 (1)		Total Losses for Period from January 1, 2021 to April 23, 2021 (2)
Impaired assets (3)	$	—	$	—	$	77,900	$	77,900	$	132,449	$	197,027

	Predecessor
	December 31, 2020
	Fair Value Measurements Using
Nonrecurring fair value measurements	Level 1		Level 2		Level 3		Assets at Fair Value		Total Losses for Year Ended (4)
Impaired assets (5)	$	—	$	—	$	1,000	$	1,000	$	842,016

(1)Represents an impairment charge recognized during the Successor period from April 24, 2021 through December 31, 2021 related to two semisubmersible rigs that were written down to their estimated fair value.

(2)Represents an impairment charge recognized during the Predecessor period from January 1, 2021 through April 23, 2021 related to one semisubmersible rig, which was written down to its estimated fair value.

(3)Represents the total book value as of December 31, 2021 of two semisubmersible rigs, which were written down to estimated fair value during the Successor period from April 24, 2021 through December 31, 2021.

(4)Represents impairment losses of $774.0 million and $68.0 million recognized during the first and fourth quarters of the Predecessor year ended December 31, 2020, respectively, related to four semisubmersible rigs which were written down to their estimated fair value.

(5)Represents the total book value as of December 31, 2020 of one semisubmersible rig, which was written down to its estimated fair value during the fourth quarter of the Predecessor year ended December 31, 2020.

See Note 5 “Impairment of Assets.”

We believe that the carrying amounts of our other financial assets and liabilities (excluding our Exit Term Loans, First Lien Notes and the Predecessor Senior Notes), which are not measured at fair value in our Consolidated Balance Sheets, approximate fair value based on the following assumptions:

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

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

•Exit RCF Borrowings - The carrying amount approximates fair value since the variable interest rates are tied to current market rates and the applicable margins represent market rates.

Our debt is not measured at fair value on a recurring basis; however, under the GAAP fair value hierarchy, our Exit Term Loans, First Lien Notes and the Predecessor Senior Notes would be considered Level 2 liabilities. The fair value of these instruments was derived using a third-party pricing service at December 31, 2021 and 2020. 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 for the Senior Notes, 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 Exit Term Loans, First Lien Notes and the Predecessor Senior Notes Senior Notes (see Note 11 "Prepetition Revolving Credit Facility, Senior Notes and Exit Debt") are shown below (in millions).

	Successor				Predecessor
	December 31, 2021				December 31, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
Exit Term Loans	$	100.0	$	100.0	$	—	$	—
First Lien Notes		86.2		86.1		—		—
3.45% Senior Notes due 2023		—		—		30.6		250.0
7.875% Senior Notes due 2025		—		—		61.3		500.0
5.70% Senior Notes due 2039		—		—		61.2		500.0
4.875% Senior Notes due 2043		—		—		91.9		750.0

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.