Financial Instruments and Fair Value Disclosures

12 Months Ended

Dec. 31, 2023

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Disclosures

8. Financial Instruments and Fair Value Disclosures

Concentrations of Credit Risk and Allowance for Credit Losses

Our credit risk arises primarily from 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 December 31, 2023, we believe that we had potentially significant concentrations of credit risk due to the number of rigs we currently had contracted and the 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 currently have one customer for which prepayments are required and full payment is due prior to commencement of the contract in mid-2024. At December 31, 2023, no amounts were owed by this customer.

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.

Pursuant to ASU 2016-13, we review 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 develop a credit loss factor using a weighted-average ratio of our actual credit losses to revenues during the look-back period. We also consider 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 ASU 2016-13 and its related amendments (or collectively, 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 calculate a credit loss factor based on historical loss rate information and apply 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, 2023, $11.1 million in trade receivables were considered past due by 30 days or more, of which $5.5 million have been fully reserved. The remaining $5.6 million were less than a year past due and considered collectible. For purposes of calculating our current estimate of credit losses at December 31, 2023 and 2022, all trade receivables, except for those fully reserved, 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 $5.8 million and $5.6 million at December 31, 2023 and 2022, including $0.3 million and $0.2 million at December 31, 2023 and 2022, respectively, related to our current estimate of credit losses under CECL. See Note 5 “Supplemental Financial Information — Consolidated Balance Sheets 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 period from January 1, 2021 through April 23, 2021. 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 period from January 1, 2021 through April 23, 2021. See Note 4 “Asset Impairments.”

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

	Successor
	December 31, 2023
	Fair Value Measurements Using
	Level 1			Level 2		Level 3		Assets and Liabilities at Fair Value			Total Losses for Year Ended (2)
Recurring fair value measurements
Short-term investments (1)	$	92,308		$	—	$	—	$	92,308		$	—
Liability-classified Director restricted stock units (2)	$	(1,259	)	$	—	$	—	$	(1,259	)	$	(252	)

	Successor
	December 31, 2022
	Fair Value Measurements Using
	Level 1			Level 2		Level 3		Assets and Liabilities at Fair Value			Total Losses for Year Ended (2)
Recurring fair value measurements
Liability-classified Director restricted stock units (2)	$	(1,258	)	$	—	$	—	$	(1,258	)	$	(201	)

(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 our $92.3 million investment in these debt securities as Cash and cash equivalents in our Consolidated Balance Sheets at December 31, 2023.

(2)The fair value of restricted stock units was estimated based on the quoted market price of our Common Stock at the respective balance sheet date. The total loss for the year includes an increase in stock compensation expense due to the “marking-to-market” of liability-classified restricted stock units granted to our non-employee directors on a recurring basis.

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), 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 Second Lien Notes, Exit Term Loans and First Lien Notes would be considered Level 2 liabilities. The fair value of these instruments was derived using a third-party pricing service at December 31, 2023 and 2022. 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.

Fair values and related carrying values of our Second Lien Notes, Exit Term Loans and First Lien Notes (see Note 10 "Long-Term Debt") are shown below (in millions).

	December 31,
	2023				2022
	Fair Value		Carrying Value		Fair Value		Carrying Value
Second Lien Notes	$	562.6	$	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.