8.	Financial Instruments and Fair Value Disclosures

Concentrations of Credit and Market Risk

Financial instruments that potentially subject us to significant concentrations of credit or market risk consist primarily of periodic temporary investments of excess cash, trade accounts receivable and investments in debt securities, including mortgage-backed securities. We generally place our excess cash investments in U.S. government backed short-term money market instruments through several financial institutions. At times, such investments may be in excess of the insurable limit. We periodically evaluate the relative credit standing of these financial institutions as part of our investment strategy.

Concentrations of credit risk with respect to our trade accounts receivable are limited primarily due to the entities comprising our customer base. Since the market for our services is the offshore oil and gas industry, this customer base consists primarily of major and independent oil and gas companies and government-owned oil companies. Based on our current customer base and the geographic areas in which we operate, as well as the number of rigs currently working in a geographic area, we do not believe that we have any significant concentrations of credit risk at December 31, 2016.

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 to us, we perform a credit review on that company. Based on that analysis, we may require that the customer present a letter of credit, prepay or provide other credit enhancements. We record a provision for bad debts on a case-by-case basis when facts and circumstances indicate that a customer receivable may not be collectible and, historically, losses on our trade receivables have been infrequent occurrences.

During 2013, based on our assessment of the financial condition of two of our customers, Niko Resources Ltd., or Niko, and OGX Petróleo e Gás Ltda. (a privately owned Brazilian oil and natural gas company that filed for bankruptcy in October 2013), or OGX, and our expectations at the time regarding the probability of collection of amounts due to us from them, we recorded $22.5 million in bad debt expense to fully reserve all outstanding receivables owed to us.

In December 2013, we entered into a settlement with Niko with respect to certain obligations under dayrate contracts for the Ocean Monarch and Ocean Lexington, whereby, we would receive an aggregate $80.0 million. From December 2013 until their default on the agreement, we received $49.0 million from Niko. Commencing in 2015, we filed suit against Niko in the U.S. and Canadian courts, both of which granted judgments against Niko. On October 18, 2016, we executed a final settlement agreement with Niko, or the 2016 Agreement. Under the 2016 Agreement, Niko paid a cash settlement amount of $3.0 million, agreed to make future payments to us equal to 20% of amounts to be retained by Niko pursuant to a waterfall distribution under their credit facility and assigned to us Niko’s interest in potential contingent payments related to the sale of five Indonesian production sharing contracts. We plan to recognize these amounts in revenue as they are received due to the uncertainty regarding their timing and collection. As of December 31, 2016, the amount outstanding under the agreement was $28.0 million.

In 2014, the creditors of OGX, including us, agreed to a settlement whereby the creditors granted us shares of the reorganized OGX company in full settlement of obligations owed to them by OGX. As a result of the settlement, we have written off $21.2 million in receivables due us from OGX against the associated allowance for bad debts, which was established in 2013. See Note 3.

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 1 assets include short-term investments such as money market funds, U.S. Treasury Bills and Treasury notes. Our Level 1 assets at December 31, 2016 consisted of cash held in money market funds of $125.7 million and time deposits of $20.6 million. Our Level 1 assets at December 31, 2015 consisted of cash held in money market funds of $85.2 million and time deposits of $20.4 million.

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 2 assets and liabilities may include residential mortgage-backed securities, corporate bonds purchased in a private placement offering and over-the-counter FOREX contracts. Our residential mortgage-backed securities and corporate bonds, prior to being sold in the second quarter of 2016, were valued using a model-derived valuation technique based on the quoted closing market prices received from a financial institution. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
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. Our Level 3 assets at December 31, 2016 and 2015 consisted of nonrecurring measurements of certain of our drilling rigs and associated spare parts and supplies for which we recorded an impairment loss during the second quarter of 2016 and the year ended December 31, 2015. See Notes 1, 2 and 3.

Market conditions could cause an instrument to be reclassified among Levels 1, 2 and 3. Our policy regarding fair value measurements of financial instruments transferred into and out of levels is to reflect the transfers as having occurred at the beginning of the reporting period. There were no transfers between fair value levels during the years ended December 31, 2016 and 2015.

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 and related spare parts and supplies, which were measured at fair value on a nonrecurring basis in 2016 and 2015, respectively, and have presented the aggregate loss in “Impairment of assets” in our Consolidated Statements of Operations for the years ended December 31, 2016 and 2015.


	December 31, 2016
	Fair Value Measurements Using						Assets at Fair Value		Total Losses for Year Ended ⁽¹⁾
	Level 1		Level 2		Level 3		Assets at Fair Value		Total Losses for Year Ended ⁽¹⁾
	(In thousands)
Recurring fair value measurements:
Assets:
Short-term investments	$	146,360	$	—	$	—	$	146,360
Mortgage-backed securities		—		35		—		35

Total assets	$	146,360	$	35	$	—	$	146,395

Nonrecurring fair value measurements:
Assets:
Impaired assets ⁽²⁾⁽³⁾	$	—	$	—	$	69,153	$	69,153	$	678,145

(1)	Represents impairment losses of $8.1 million and $670.0 million recognized during the year ended December 31, 2016 related to our rig spare parts and supplies and 2016 Impaired Rigs, respectively. See Notes 2 and 3.

(2)

Represents the total book value as of December 31, 2016 for 11 drilling rigs ($45.5 million), which were written down to their estimated recoverable amounts in 2015 and 2016, and for rig spare parts and supplies ($23.6 million), which were written down to their estimated recoverable amounts in the second quarter of 2016. Of the total fair value, $23.6 million, $0.4 million and $45.1 million were reported as “Prepaid expenses and other current assets,” “Assets held for sale” and “Drilling and other property and equipment, net of accumulated depreciation,” respectively, in our Consolidated Balance Sheets at December 31, 2016. See Notes 1, 2 and 3.

(3)

Includes depreciation expense of $23.9 million recognized during the year ended December 31, 2016 for rigs which have previously been written down to their estimated fair values using an income approach. Also excludes four jack-up rigs, three mid-water semisubmersible rigs and one deepwater semisubmersible rig with an aggregate fair value of $16.0 million, which have been sold.


	December 31, 2015
	Fair Value Measurements Using						Assets at Fair Value		Total Losses for Year Ended ⁽¹⁾
	Level 1		Level 2		Level 3		Assets at Fair Value		Total Losses for Year Ended ⁽¹⁾
	(In thousands)
Recurring fair value measurements:
Assets:
Short-term investments	$	105,659	$	—	$	—	$	105,659
Corporate bonds		—		11,438		—		11,438
Mortgage-backed securities		—		80		—		80

Total assets	$	105,659	$	11,518	$	—	$	117,177

Nonrecurring fair value measurements:
Assets:
Impaired assets ⁽²⁾⁽³⁾	$	—	$	—	$	189,600	$	189,600	$	860,441

(1)	Represents the aggregate impairment loss recognized for the year ended December 31, 2015 related to our 2015 Impaired Rigs.

(2)

Represents the book value of our 2015 Impaired Rigs, which were written down to their estimated recoverable amounts during 2015, of which $14.2 million and $175.4 million were reported as “Assets held for sale” and “Drilling and other property and equipment, net of accumulated depreciation,” respectively, in our Consolidated Balance Sheets at December 31, 2015.

(3)	Excludes five rigs with an aggregate fair value of $2.4 million, which were impaired in 2015, but were subsequently sold for scrap during the year.

We believe that the carrying amounts of our other financial assets and liabilities (excluding long-term debt), which are not measured at fair value in our Consolidated Balance Sheets, approximate fair value based on the following assumptions:

•

Cash and cash equivalents — 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.

•

Short-term borrowings — The carrying amounts approximate fair value because of the short maturity of these instruments.

We consider our senior notes, including current maturities, to be Level 2 liabilities under the GAAP fair value hierarchy and, accordingly, the fair value of our senior notes was derived using a third-party pricing service at December 31, 2016 and 2015. 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 comparing fair value estimates to actual trade activity executed in the market for these instruments occurring generally within a 10-day window of the report date. Fair values and related carrying values of our senior notes (see Note 10) are shown below.


	December 31, 2016				December 31, 2015
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In millions)
5.875% Senior Notes due 2019	$	518.6	$	499.8	$	506.8	$	499.7
3.45% Senior Notes due 2023		215.0		249.3		208.0		249.2
5.70% Senior Notes due 2039		392.5		497.1		360.0		497.0
4.875% Senior Notes due 2043		532.7		748.9		455.3		748.9

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.