Financial Instruments and Fair Value Disclosures

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Disclosures

4. Financial Instruments and Fair Value Disclosures

Concentrations of Credit Risk and Allowance for Credit Losses

Our credit risk corresponds primarily to trade receivables. The market for our services is the offshore oil and gas industry, and our customer base consists primarily of major and independent oil and gas companies, as well as government-owned oil companies. At September 30, 2023, we believed that we had potentially significant concentrations of credit risk due to the number of rigs we 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 our 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. At September 30, 2023, we had not required any credit enhancements by our customers or required any to pay for services in advance. We have historically used the specific identification method to identify and reserve for uncollectible accounts. The amounts reserved for uncollectible accounts in previous periods have not been significant, individually or in comparison to our total revenues. At September 30, 2023, $6.6 million in trade receivables were considered past due by 30 days or more, of which $5.5 million have been fully reserved. The remaining $1.1 million were less than a year past due. We are working with our customers to resolve any billing issues and expect that the outstanding receivables will be collected or resolved.

Pursuant to Financial Accounting Standards Board (or FASB) Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and its related amendments (or collectively, CECL), we have 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. In addition, 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 segregated 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 then 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.

For purposes of calculating our current estimate of credit losses at September 30, 2023 and December 31, 2022, all trade receivables were deemed to be in a single risk pool based on their credit ratings at each respective period. Our current estimate of credit losses under CECL was $0.2 million at both September 30, 2023 and December 31, 2022. Our total allowance for credit losses was $5.7 million and $5.6 million at September 30, 2023 and December 31, 2022, respectively. See Note 3 “Supplemental Financial 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.

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

	September 30, 2023
	Fair Value Measurements Using
	Level 1			Level 2		Level 3		Assets (Liabilities) at Fair Value			Total Losses for Nine Months Ended (2)
Recurring fair value measurements:
Short-term investments (1)	$	109,880		$	—	$	—	$	109,880		$	—
Liability-classified Director restricted stock units		(1,417	)		—		—		(1,417	)		(413	)

(1)Represents short-term investments in debt securities classified as available-for-sale. As the original maturities of these debt securities are three months or less, we have reported that our $109.9 million investment in these debt securities as Cash and cash equivalents in our unaudited Condensed Consolidated Balance Sheet at September 30, 2023.

(2)Represents an increase in stock compensation expense due to the “marking-to-market” of liability-classified restricted stock units granted to our non-employee directors.

	December 31, 2022
	Fair Value Measurements Using
	Level 1			Level 2		Level 3		Liabilities at  Fair Value			Total Losses for Year Ended (1)
Recurring fair value measurements:
Liability-classified Director restricted stock units	$	(1,258	)	$	—	$	—	$	(1,258	)	$	(230	)

(1)Represents an increase in stock compensation expense due to the “marking-to-market” of liability-classified restricted stock units granted to our non-employee directors.

We believe that the carrying amounts of our other financial assets and liabilities (excluding our Second Lien Notes, Exit Term Loans and First Lien Notes (each as defined below in Note 6 “Long-Term Debt”)), which are not measured at fair value in our unaudited Condensed 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 of borrowings under our Exit RCF (as defined below in Note 6 “Long-Term Debt”) approximates fair value since the variable interest rates are tied to current market rates and the applicable margins represent market rates.

Our long-term debt is not measured at fair value on a recurring basis; however, under the GAAP fair value hierarchy, our long-term debt would be considered Level 2 liabilities. The fair value of these instruments was derived using valuation specialists at September 30, 2023 and December 31, 2022.

Fair values and related carrying values of our long-term debt are shown below (in millions).

	September 30, 2023				December 31, 2022
	Fair Value		Carrying Value		Fair Value		Carrying Value
Second Lien Notes	$	550.4	$	550.0	$	—	$	—
Exit Term Loans		—		—		91.1		100.0
First Lien Notes		—		—		78.3		85.3

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.