Financial Instruments and Fair Value Disclosures

12 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Disclosures

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.

Most of our investments in debt securities are securitized corporate bonds whereby our credit risk is mitigated by the collateral. However, we are exposed to market risk due to price volatility associated with interest rate fluctuations.

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. During 2014 and 2013, our largest customer in Brazil, Petróleo Brasileiro S.A., or Petrobras, (a Brazilian multinational energy company that is majority-owned by the Brazilian government), accounted for $123.3 million and $154.5 million, or 29% and 35%, respectively, of our total consolidated net trade accounts receivable balance.

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 agreement with Niko, or the Niko Settlement, whereby Niko will be released from certain obligations under the dayrate contracts for the Ocean Monarch and Ocean Lexington, subject to and effective upon the full payment of amounts owed to us under the Niko Settlement and subject to its other conditions. In accordance with the terms of the Niko Settlement, we received cash payments of $20.3 million during 2014 and $25.0 million in the fourth quarter of 2013, which we recognized as revenue against invoices due us. Niko is further obligated to make future periodic payments to us pursuant to the Niko Settlement totaling an aggregate of $34.8 million, payable at various times through December 2016. We plan to recognize these amounts in revenue as they are received due to the uncertainty regarding their timing and collection.

In 2014, the creditors of OGX, including us, agreed to a settlement whereby the creditors would receive 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 set up 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, 2014 consisted of cash held in money market funds of $197.5 million and time deposits of $20.3 million. Our Level 1 assets at December 31, 2013 consisted of cash held in money market funds of $281.3 million, time deposits of $30.0 million and investments in U.S. Treasury securities of $1,749.9 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 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 were valued using a model-derived valuation technique based on the quoted closing market prices received from a financial institution. Our FOREX contracts were valued based on quoted market prices, which are derived from observable inputs including current spot and forward rates, less the contract rate multiplied by the notional amount. The inputs used in our valuation are obtained from a Bloomberg curve analysis which uses par coupon swap rates to calculate implied forward rates so that projected floating rate cash flows can be calculated. 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, 2014 consisted of nonrecurring measurements of four mid-water semisubmersible rigs for which we recorded an impairment loss during the third quarter of 2014. See Notes 1 and 2.

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, 2014 and 2013.

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 six mid-water semisubmersible rigs, which were measured at fair value on a nonrecurring basis in the third quarter of 2014, of $109.5 million and have presented the loss in “Impairment of assets” in our Consolidated Statements of Operations for the year ended December 31, 2014. We did not record any such impairment charges during the year ended December 31, 2013. See Notes 1 and 2.

	December 31, 2014
	Fair Value Measurements Using							Assets at Fair Value			Total Losses for Year Ended
	Level 1		Level 2			Level 3
	(In thousands)
Recurring fair value measurements:
Assets:
Short-term investments	$	217,789	$	—		$	—	$	217,789
Corporate bonds		—		15,899			—		15,899
Mortgage-backed securities		—		134			—		134
Total assets	$	217,789	$	16,033		$	—	$	233,822
Liabilities:
FOREX contracts	$	—	$	(5,439	)	$	—	$	(5,439	)
Nonrecurring fair value measurements:
Assets:
Impaired assets (1)(2)	$	—	$	—		$	9,421	$	9,421		$	109,462

⁽¹⁾  Represents the book value as of December 31, 2014 of four of our mid-water semisubmersible rigs, which were written down to their estimated recoverable amounts in September 2014 and had not yet been scrapped.

⁽²⁾  Includes depreciation expense of $6.6 million recognized in the fourth quarter of 2014 for the Ocean Winner, which is still under contract through March 2015 and was written down to its estimated fair value using an income approach in September 2014 and excludes the fair values of the Ocean New Era and Ocean Whittington, which were included in the September 2014 write-down, but were subsequently sold for scrap in the fourth quarter of 2014.

	December 31, 2013
	Fair Value Measurements Using							Assets at Fair Value
	Level 1		Level 2			Level 3
	(In thousands)
Recurring fair value measurements:
Assets:
Short-term investments	$	2,061,154	$	—		$	—	$	2,061,154
FOREX contracts		—		1,562			—		1,562
Mortgage-backed securities		—		197			—		197
Total assets	$	2,061,154	$	1,759		$	—	$	2,062,913
Liabilities:
FOREX contracts	$	—	$	(1,143	)	$	—	$	(1,143	)

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.

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, 2014 and 2013. 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 (see Note 10) of our senior notes are shown below.

	December 31, 2014				December 31, 2013
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In millions)
5.15% Senior Notes due 2014	$	—	$	—	$	257.4	$	250.0
4.875% Senior Notes due 2015		255.0		250.0		265.7		249.9
5.875% Senior Notes due 2019		544.9		499.6		578.1		499.6
3.45% Senior Notes due 2023		232.0		249.1		241.4		249.0
5.70% Senior Notes due 2039		478.5		497.0		543.1		496.9
4.875% Senior Notes due 2043		638.9		748.8		736.1		748.8

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.