Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

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 generally require us 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 and losses on future foreign currency expenditures. 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.

During the nine months ended September 30, 2012 and 2011, we settled FOREX contracts with aggregate notional values of approximately $236.3 million and $224.8 million, respectively, of which the entire aggregate amounts were designated as an accounting hedge. During the nine-month periods ended September 30, 2012 and 2011, 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, 2012 and 2011.

	Amount of (Loss) Gain Recognized in Income
	Three Months Ended September 30,					Nine Months Ended September 30,
Location of (Loss) Gain Recognized in Income	2012			2011		2012			2011
	(In thousands)
Contract drilling expense	$	(2,715	)	$	2,362	$	(5,692	)	$	9,593

As of September 30, 2012, we had FOREX contracts outstanding in the aggregate notional amount of $140.2 million, consisting of $13.5 million in Australian dollars, $73.9 million in Brazilian reais, $22.6 million in British pounds sterling, $23.1 million in Mexican pesos and $7.1 million in Norwegian kroner. These contracts settle monthly through September 2013. As of September 30, 2012, 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, 2012 and December 31, 2011.

Balance Sheet Location	Fair Value				Balance Sheet Location		Fair Value
	September 30, 2012		December 31, 2011				September 30, 2012		December 31, 2011
	(In thousands)						(In thousands)
Prepaid expenses and other current assets	$	4,383	$	1,262		Accrued liabilities	$	—	$	(8,454	)

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, 2012 and 2011.

	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2012			2011			2012			2011
	(In thousands)
Amount of gain (loss) recognized in AOCGL on derivative (effective portion)	$	1,720		$	(17,263	)	$	6,191		$	(5,443	)
Location of (loss) gain reclassified from AOCGL into income (effective portion)		Contract drilling expense			Contract drilling expense			Contract drilling expense			Contract drilling expense
Amount of (loss) gain reclassified from AOCGL into income (effective portion)	$	(2,873	)	$	4,792		$	(5,300	)	$	12,407
Location of loss 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 loss recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	$	—		$	—		$	(39	)	$	—

As of September 30, 2012, the estimated amount of net unrealized gains associated with our FOREX contracts that will be reclassified to earnings during the next twelve months was $4.4 million. The net unrealized gains associated with these derivative financial instruments will be reclassified to contract drilling expense.