Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments And Hedging Activities Disclosure [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 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 are 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, 2013 and 2012, we settled FOREX contracts with aggregate notional values of approximately $233.9 million and $236.3 million, respectively, of which the entire aggregate amounts were designated as a cash flow accounting hedge. During the nine-month periods ended September 30, 2013 and 2012, we did not enter into or settle any FOREX contracts that were not designated as accounting hedges.

The following table presents the aggregate amount of loss 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, 2013 and 2012.

	Three Months Ended September 30,						Nine Months Ended September 30,
Location of Loss Recognized in Income	2013			2012			2013			2012
	(In thousands)
Contract drilling expense	$	(5,018	)	$	(2,715	)	$	(2,246	)	$	(5,692	)

As of September 30, 2013, we had FOREX contracts outstanding in the aggregate notional amount of $151.6 million, consisting of $20.7 million in Australian dollars, $86.7 million in Brazilian reais, $20.5 million in British pounds sterling, $11.7 million in Mexican pesos and $12.0 million in Norwegian kroner. These contracts generally settle monthly through June 2014. As of September 30, 2013, all outstanding derivative contracts had been designated as cash flow hedges. See Note 6.

We have International Swap Dealers Association, or ISDA, contracts, which are standardized master legal arrangements that establish key terms and conditions, which govern certain derivative transactions. At September 30, 2013, all of our FOREX contracts were with two counterparties and were governed under such ISDA contracts. There are no requirements to post collateral under these contracts; however, they do contain credit-risk related contingent provisions including credit support provisions and the net settlement of amounts owed in the event of early terminations. Additionally, should our credit rating fall below a specified rating immediately following the merger of the company with another entity, the counterparty may require all outstanding derivatives under the ISDA contract to be settled immediately at current market value. Our ISDA arrangements also include master netting agreements to further manage counterparty credit risk associated with our FOREX contracts. We have elected not to offset the fair value amounts recorded for our FOREX contracts under these agreements in our Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012; however, there would have been no significant difference in our Consolidated Balance Sheets if the estimated fair values were presented on a net basis for these periods.

The following table presents the fair values of our derivative FOREX contracts designated as hedging instruments at September 30, 2013 and December 31, 2012.

	Fair Value				Balance Sheet Location	Fair Value
Balance Sheet Location	September 30, 2013		December 31, 2012			September 30, 2013			December 31, 2012
	(In thousands)					(In thousands)
Prepaid expenses and other current assets	$	3,272	$	3,627	Accrued liabilities	$	(4,304	)	$	(29	)

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, 2013 and 2012.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(In thousands)
Amount of gain (loss) recognized in AOCGL on derivative (effective portion)	$	2,486		$	1,720		$	(7,539	)	$	6,191
Location of loss reclassified from AOCGL into income (effective portion)		Contract drilling expense			Contract drilling expense			Contract drilling expense			Contract drilling expense
Amount of loss reclassified from AOCGL into income (effective portion)	$	(5,572	)	$	(2,873	)	$	(2,951	)	$	(5,300	)
Location of gain (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 gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	$	59		$	—		$	(59	)	$	(39	)

As of September 30, 2013, the estimated amount of net unrealized losses associated with our FOREX contracts that will be reclassified to earnings during the next twelve months was $1.0 million. The net unrealized losses associated with these derivative financial instruments will be reclassified to contract drilling expense. During the three-month and nine-month periods ended September 30, 2013 and 2012, we did not reclassify any amounts from AOCGL due to the probability of an underlying forecasted transaction not occurring.