Impairments

9 Months Ended

Sep. 30, 2019

Property, Plant and Equipment [Abstract]

Impairments

IMPAIRMENTS

Oil and Natural Gas Properties

Full cost accounting rules require us to review the carrying value of our oil and natural gas properties at the end of each quarter. Under those rules, the maximum amount allowed as the carrying value is called the ceiling. The ceiling is the sum of

the present value (using a 10% discount rate) of the estimated future net revenues from our proved reserves (using the unescalated 12-month average price of our oil, NGLs, and natural gas), plus the cost of properties not being amortized, plus the lower of cost or estimated fair value of unproved properties in the costs being amortized, less related income taxes. If the net book value of the oil, NGLs, and natural gas properties being amortized exceeds the full cost ceiling, the excess amount is charged to expense in the period during which the excess occurs, even if prices are depressed for only a short while. Once incurred, a write-down of oil and natural gas properties is not reversible.

We determined the value of certain unproved oil and gas properties were diminished (in part or in whole) based on an impairment evaluation and our anticipated future exploration plans. Those determinations resulted in $50.0 million of cost being added to the total of our capitalized costs being amortized in the third quarter of 2019. We did not have any in 2018. We incurred a non-cash ceiling test write-down of $169.3 million pre-tax ($127.9 million, net of tax) in the third quarter of 2019. We had no non-cash ceiling test write-downs in the first two quarters of 2019 or for all of 2018.

Goodwill

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually. Our annual goodwill impairment test is performed on December 31. Testing goodwill for impairment is also performed when events indicate a triggering event may have occurred outside of our normal testing period.

During the third quarter of 2019, we determined a triggering event had occurred within our contract drilling reporting unit due to a decline in the number of rigs being used and the overall market performance of the contract drilling industry. As a result, we performed an interim goodwill impairment test as of September 30, 2019. To determine the fair value of this reporting unit, we used the income approach. The income approach estimates the fair value by discounting the reporting unit's estimated future cash flows using our estimate of the discount rate, or expected return, that a marketplace participant would have required as of the valuation date.

Based on the projected discounted cash flows, we recognized a goodwill impairment charge of $62.8 million, pre-tax ($59.7 million, net of tax) which represents the total goodwill previously reported on our condensed consolidated balance sheets.

Long-Lived Assets

Due to the triggering event within the contract drilling reporting unit, we performed a recoverability test of long-lived assets within the segment. Based on the results of the undiscounted projected future cash flows of the asset group, the undiscounted projected future cash flows of the asset group exceeded the group's carrying value as of September 30, 2019 and therefore no long-lived asset impairment was recorded for the group.