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FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2020

NOTE 15—FAIR VALUE MEASUREMENTS

Fair value of financial instruments

Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is available and significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:

•

Level 1—inputs are based on quoted prices for identical instruments traded in active markets.

•

Level 2—inputs are based on quoted prices for similar instruments in active markets, quoted prices for similar or identical instruments in inactive markets and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

•

Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar valuation techniques.

The following table presents the fair value of our financial instruments as of March 31, 2020 and December 31, 2019 that are (1) measured and reported at fair value in the Financial Statements on a recurring basis and (2) not measured at fair value on a recurring basis in the Financial Statements:

	March 31, 2020
	Carrying Amount			Fair Value			Level 1		Level 2			Level 3
	(In millions)
Measured at fair value on recurring basis
Forward contracts ⁽¹⁾	$	(94	)		(94	)	$	-	$	(94	)	$	-
Not measured at fair value on recurring basis
Debt and finance lease obligations ⁽²⁾		(2,083	)		(1,956	)		-		(1,885	)		(71	)
Liabilities subject to compromise ⁽³⁾		(4,578	)		(1,133	)		-		(860	)		(273	)


	December 31, 2019
	Carrying Amount			Fair Value			Level 1		Level 2			Level 3
	(In millions)
Measured at fair value on recurring basis
Forward contracts ⁽¹⁾	$	(75	)		(75	)	$	-	$	(75	)	$	-
Embedded derivatives ⁽⁴⁾		(28	)		(28	)		-		-			(28	)
Not measured at fair value on recurring basis
Debt and finance lease obligations ⁽²⁾		(4,353	)		(2,362	)		-		(2,275	)		(87	)

⁽¹⁾

The fair value of forward contracts is classified as Level 2 within the fair value hierarchy and is valued using observable market parameters for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value forward contracts. This approach discounts future cash flows based on current market expectations and credit risk.

⁽²⁾

^{Our debt instruments are generally valued using a market approach based on quoted prices for similar instruments traded in active markets and are classified as Level 2 within the fair value hierarchy. Quoted prices were not available for the NO 105 construction financing, structured equipment financing or finance leases. Therefore, these instruments were valued based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms and are classified as Level 3 within the fair value hierarchy.}

⁽³⁾

^{Thefair value of the Term Facility and the Senior Notes included in “Liabilities subject to compromise” is valued using a market approach based on quoted prices for similar instruments traded in active markets and are classified as Level 2 within the fair value hierarchy. Quoted prices were not available for the Revolving Credit Facility and the interest rate derivative included in “Liabilities subject to compromise”. Therefore, they were valued based on estimated prices for similar instruments and are classified as Level 3 within the fair value hierarchy. According to the Plan of Reorganization, liabilities subject to compromise will be impaired at the Effective Date. See Note 3, Reorganization, for further discussion.}

⁽⁴⁾

^{The fair value of the embedded derivatives, discussed in Note 11, Debt, was determined using a discounted cash flow approach and is classified as Level 3 because the inputs to the fair value measurement of the embedded derivatives are unobservable and reflect our estimates of forward yield. The fair value of the embedded derivative as of March 31, 2020 was not material.}

The carrying amounts that we have reported for our other financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short maturity of those instruments.

Fair value of non-financial instruments

We evaluate our assets for impairment whenever events or changes in circumstances indicate that indicators of impairment exist. In those evaluations, we compare estimated future undiscounted cash flows generated by each asset (or asset group) to the carrying value of the asset (or asset group) to determine if an impairment charge is required. If the undiscounted cash flows test fails, we estimate the fair value of the asset (or asset group) to determine the impairment.

As a result of the impact of the COVID-19 pandemic and significant decline in oil and gas prices, we concluded these events represented impairment triggers to our vessels and fabrication yards as of March 31, 2020.

The indicators of impairment were present for our global use vessels (DLV 2000, NO 102, NO 102 and LV108), our Emerald Sea vessel, used in our MENA segment, four derrick barges, servicing our NCSA, MENA and APAC segments, and three fabrication yards in Altamira, Mexico, Batam, Indonesia and Jebel Ali, Saudi Arabia. The indicators of impairment were primarily related to downward revisions to our forecast future utilization plans, driven by the current COVID-19 pandemic and low oil and gas price environment.

Our tests resulted in impairments to all vessels, derrick barges and the Altamira fabrication yard. We determined the aggregate carrying value of these assets (approximately $1.34 billion) was in excess of their estimated fair value ($463 million), and recorded an $881 million impairment. The fair value was estimated based on the amount and timing of estimated associated net future cash flows, discounted at a risk-adjusted rate of 10%. The fair value measurements were based on inputs that are not observable in the market and thus represent level 3 inputs.

In addition, during the first quarter of 2020, we made a decision to exit one of our leased spoolbase facilities by June 2020. In connection with this decision we tested the recoverability of the fixed assets located at this facility and determined that the assets were impaired by approximately $3 million. The remaining carrying amount of fixed assets at that facility is not material.

Impairment charges are recorded within our Corporate segment.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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