PARKER DRILLING COMPANY Management's discussion and analysis should be read in conjunction with Item 8. Financial Statements and Supplementary Data. We use rounded numbers in the Management Discussion and Analysis section which may result in slight differences with results reported under Item 8. Financial Statements and Supplementary Data. For discussion related to the results of operations and change in financial condition of our Predecessor for the year endedDecember 31, 2018 , compared to the year endedDecember 31, 2017 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onMarch 11, 2019 . Executive Summary The oil and natural gas industry is highly cyclical. Activity levels are driven by traditional energy industry activity indicators, which include current and expected commodity prices, drilling rig counts, footage drilled, well counts, and our customers' spending levels allocated to exploratory and development drilling. Historical market indicators are listed below: 2019 % Change 2018 % Change 2017 Worldwide rig count (1) U.S. (land and offshore) 944 (9 )% 1,032 18 % 875 International (2) 1,098 11 % 988 4 % 948 Commodity prices (3) Crude oil (Brent) per bbl$ 64.16 (11 )%$ 71.69 31 %$ 54.74 Crude oil (West Texas Intermediate) per bbl$ 57.04 (12 )%$ 64.90 28 %$ 50.85 Natural gas (Henry Hub ) per mcf$ 2.53 (18 )%$ 3.07 2 %$ 3.02 (1) Estimate of drilling activity as measured by the average active rig count for the periods indicated - Source: Baker Hughes Rig Count. (2) Excludes Canadian rig count. (3) Average daily commodity prices for the periods indicated based on NYMEX front-month composite energy prices. Chapter 11 Emergence OnDecember 12, 2018 (the "Petition Date"), Parker and certain of itsU.S. subsidiaries (collectively, the "Debtors") filed a prearranged plan of reorganization (the "Plan") and commenced voluntary petitions under chapter 11 (the "Chapter 11 Cases") of title 11 of the United States Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas , Houston Division (the "Bankruptcy Court "). The Plan was confirmed by theBankruptcy Court onMarch 7, 2019 , and the Debtors emerged from the bankruptcy proceedings onMarch 26, 2019 (the "Plan Effective Date"). OnDecember 12, 2018 , prior to the commencement of the Chapter 11 Cases, the Debtors entered into a restructuring support agreement (as amended onJanuary 28, 2019 , the "RSA") with certain significant holders of (1) 7.50% Senior Notes, due 2020 (the "7.50% Note Holders") issued pursuant to the indenture (the "7.50% Notes Indenture") datedJuly 30, 2013 (the "7.50% Notes"), by and amongParker Drilling , the subsidiary guarantors party thereto andBank of New York Mellon Trust Company, N.A. , as trustee (the "Trustee"), (2) 6.75% Senior Notes, due 2022 (the "6.75% Note Holders") issued pursuant to the indenture (the "6.75% Notes Indenture") datedJanuary 22, 2014 (the "6.75% Notes" and together with the 7.50% Notes, the "Senior Notes"), by and amongParker Drilling , the subsidiary guarantors party thereto and the Trustee, (3)Parker Drilling's existing common stock (the "Predecessor Common Stock") and (4)Parker Drilling's 7.25% Series A Mandatory Convertible Preferred Stock (the "Predecessor Preferred Stock" and such holders to support a restructuring (the "Restructuring") on the terms set forth in the Plan. Plan of Reorganization In accordance with the Plan, on the Plan Effective Date: (1) the Company amended and restated its certificate of incorporation and bylaws;
(2) the Company appointed new members to the Successor's board of directors to
replace directors of the Predecessor;
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Table of Contents (3) the Company issued:
• 2,827,323 shares of Successor Common Stock pro rata to 7.50% Note Holders;
• 5,178,860 shares of Successor Common Stock pro rata to 6.75% Note Holders;
• 90,558 shares of Successor Common Stock and 1,032,073 Successor
warrants to purchase 1,032,073 shares of Successor Common Stock pro
rata to holders of the Predecessor Preferred Stock;
• 135,838 shares of Successor Common Stock and 1,548,109 Successor
warrants to purchase 1,548,109 shares of Successor Common Stock pro
rata to holders of the Predecessor Common Stock;
• 504,577 shares of Successor Common Stock to commitmentparties under
that certain Backstop Commitment Agreement, dated December 12, 2018
and amended and restated on January 28, 2019 , (as amended and
restated, the "Backstop Commitment Agreement") in respect of the
commitment premium due thereunder;
• 1,403,910 shares of Successor Common Stock to the commitment parties
under the Backstop Commitment Agreement in connection with their
backstop obligation thereunder to purchase unsubscribed shares of
Successor Common Stock; and
• 4,903,308 shares of Successor Common Stock to participants in the
rights offering extended by Parker to the applicable classes under
the Plan (including to the commitment parties party to the Backstop
Commitment Agreement); and
• all of the Company's agreements, instruments and other documents
evidencing or relating to, or otherwise connected with, any of the
Predecessor's equity interests outstanding prior to the Plan
Effective Date were cancelled and all such equity interests have no
further force or effect.
Fresh Start Accounting
Upon emergence from bankruptcy, we adopted fresh start accounting ("Fresh Start
Accounting") in accordance with FASB ASC Topic No. 852, Reorganizations ("Topic
852"), which resulted in the Company becoming a new entity for financial
reporting purposes. See Note 2 - Chapter 11 Emergence and Note 3 - Fresh Start
Accounting for further details. We evaluated the events between March 26, 2019
and March 31, 2019 and concluded that the use of an accounting convenience date
of March 31, 2019 , (the "Fresh Start Reporting Date") would not have a material
impact on our results of operations or balance sheet. As such, the application
of fresh start accounting was reflected in our condensed consolidated balance
sheet as of March 31, 2019 , and fresh start accounting adjustments related
thereto were included in our condensed consolidated statement of operations for
the three months ended March 31, 2019 .
References to "Successor" relate to the financial position and results of
operations of the reorganized Company as of and subsequent to March 31, 2019 .
References to "Predecessor" relate to the financial position of the Company
prior to, and results of operations through and including, March 31, 2019 . As a
result of the adoption of Fresh Start Accounting and the effects of the
implementation of the Plan, the Company's consolidated financial statements of
the Successor (as of and subsequent to March 31, 2019 ), are not comparable to
its consolidated financial statements of the Predecessor.
Stockholder Approval of Stock Splits Transaction and Delisting of our Common
Stock from the New York Stock Exchange
On January 9, 2020 , the Company held a special meeting of stockholders (the
"Special Meeting"). At the Special Meeting, the holders of a majority of the
Company's issued and outstanding shares of common stock entitled to vote
approved amendments to the Company's certificate of incorporation, as amended
(the "Certificate of Incorporation"), to effect a reverse stock split of the
Company's common stock (the "Reverse Stock Split"), followed immediately by a
forward stock split of the Company's common stock (the "Forward Stock Split,"
and together with the Reverse Stock Split, the "Stock Splits"), at a ratio (i)
not less than 1-for-5 and not greater than 1-for-100, in the case of the Reverse
Stock Split, and (ii) not less than 5-for-1 and not greater than 100-for-1, in
the case of the Forward Stock Split. If the Stock Splits are effectuated, then
as a result of the Stock Splits, a stockholder owning immediately prior to the
effective time of the Reverse Stock Split fewer than a minimum number of shares,
which, depending on the stock split ratios chosen by the Board, would be between
5 and 100, would be paid $30.00 , without interest, for each share of common
stock held by such holder immediately prior to the effective time. Cashed out
stockholders would no longer be stockholders of the Company. On January 29,
2019 , in connection with the anticipated Stock Splits, the Company filed a Form
25 with the Securities and Exchange Commission (the "SEC") to voluntarily delist
its common stock from trading on the New York Stock Exchange ("NYSE") and to
deregister its common stock under Section 12(b) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The delisting occurred ten calendar
days after the filing of the Form 25 so that trading was suspended on February
10, 2020 , prior to the market opening. Following the delisting, the Company's
Board has continued to evaluate updated
28
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ownership data to ascertain the aggregate costs within the ranges of stock split ratios that the Company's stockholders approved at the Special Meeting. Based upon this analysis, the Board will continue to consider the appropriate ratio to effectuate the Stock Splits. As previously disclosed, the Board, at its sole discretion, may elect to abandon the Stock Splits and the overall deregistration process for any reason, including if it determines that effectuating the Stock Splits would be too costly. Assuming the Board determines to proceed with the Stock Splits and the overall deregistration process, the Company will file with theState of Delaware certificates of amendment to the Company's Certificate of Incorporation to effectuate the Stock Splits. Following the effectiveness of the Stock Splits, the Company will file a Form 15 with theSEC certifying that it has less than 300 stockholders, which will terminate the registration of the Company's common stock under Section 12(g) of the Exchange Act. As a result, the Company would cease to file annual, quarterly, current, and other reports and documents with theSEC , and stockholders will cease to receive annual reports and proxy statements. Even if the Company effectuates the Stock Splits and terminates its registration under Section 12(g) of the Exchange Act, the Company intends to continue to prepare audited annual and unaudited quarterly financial statements and to make such information available to its stockholders on a voluntary basis. However, the Company would not be required to do so by law and there is no assurance that even if the Company did make such information available that it would continue to do so in the future. Financial Results Revenues were$472.4 million and$157.4 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and$480.8 million for the year endedDecember 31, 2018 . Operating gross margin was$56.7 million and$11.4 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and a loss of$4.8 million for the year endedDecember 31, 2018 . Outlook For 2020, we expect theU.S. land rig count to be relatively flat to year end levels after a 26% decline during 2019 while theU.S. offshore rig count is expected to increase approximately 10%. The net impact should translate into a decrease in our year over yearU.S. rental tools business results and a small increase in our barge rig utilization, although overall results for ourU.S. (lower 48) drilling segment should decrease due to a shift from rig activation to lower margin plug and abandonment activity on our California O&M. We expect the international rig count to increase approximately 3% in 2020 with improvement mainly coming fromMexico , theUAE ,Iraq , andEgypt . The areas in which the anticipated increase will occur should bode well for Parker. Our International rental tools segment revenue is anticipated to increase as we continue to win projects utilizing our well construction, well intervention, and surface and tubular goods in theMiddle East , theUK , andLatin America . Our International andAlaska drilling segment results are expected to increase as we have won numerous contracts recently, including a 5-year extension of ourSakhalin Island contract and the addition of two O&M contracts inAlaska . In total, the backlog for our O&M contracts has grown to$627 million . Our expectations for 2020 results are directly linked to anticipated worldwide rig activity. Thus, there are inherent risks involved, including changes to the current supply and demand outlook, the impact of the coronavirus, and investor pressure on E&P companies to exercise capital discipline and to generate free cash flow. Please see Item 1A. Risk Factors for further information regarding the risks facing the Company. Results of Operations Our business is comprised of two business lines: (1) rental tools services and (2) drilling services. We report our rental tools services business as two reportable segments: (1)U.S. rental tools and (2) International rental tools. We report our drilling services business as two reportable segments: (1)U.S. (lower 48) drilling and (2) International &Alaska drilling. We eliminate inter-segment revenues and expenses. We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in our consolidated financial statements. See Note 17 - Reportable Segments in Item 8. Financial Statements and Supplementary Data for further discussion. We monitor our reporting segments based on several criteria, including operating gross margin and operating gross margin excluding depreciation and amortization. Operating gross margin excluding depreciation and amortization is computed as revenues less direct operating expenses, and excludes depreciation and amortization expense, where applicable. Operating gross margin percentages are computed as operating gross margin as a percent of revenues. The operating gross margin excluding depreciation and amortization amounts and percentages should not be used as a substitute for those amounts reported under accounting policies generally accepted inthe United States ("U.S. GAAP"), but should be viewed in addition to the Company's reported results prepared in accordance withU.S. GAAP. Management believes this information provides valuable insight into the information management considers important in managing the business. 29 --------------------------------------------------------------------------------
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Nine Months EndedDecember 31, 2019 , Three Months EndedMarch 31, 2019 and the Year EndedDecember 31, 2018 Revenues were$472.4 million and$157.4 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and$480.8 million for the year endedDecember 31, 2018 . Operating gross margin was$56.7 million and$11.4 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and a loss of$4.8 million for the year endedDecember 31, 2018 . The following is an analysis of our operating results for the comparable periods by reportable segment: Successor Predecessor Nine Months Ended December Three Months Ended Year Ended 31, March 31, December 31, Dollars in Thousands 2019 2019 2018 Revenues: U.S. rental tools$ 144,698 31 %$ 52,595 34 %$ 176,531 37 % International rental tools 71,292 15 % 21,109 13 % 79,150 16 % Total rental tools services 215,990 46 % 73,704 47 % 255,681 53 % U.S. (lower 48) drilling 36,710 8 % 6,627 4 % 11,729 2 % International & Alaska drilling 219,695 46 % 77,066 49 % 213,411 45 % Total drilling services 256,405 54 % 83,693 53 % 225,140 47 % Total revenues$ 472,395 100 %$ 157,397 100 %$ 480,821 100 % Operating gross margin excluding depreciation and amortization: (1) U.S. rental tools$ 68,966 48 %$ 29,004 55 %$ 92,679 53 % International rental tools 10,632 15 % 534 3 % 3,864 5 % Total rental tools services 79,598 37 % 29,538 40 % 96,543 38 % U.S. (lower 48) drilling 6,613 18 % (700 ) (11 )% (7,962 ) (68 )% International & Alaska drilling 32,009 15 % 7,688 10 % 14,136 7 % Total drilling services 38,622 15 % 6,988 8 % 6,174 3 % Total operating gross margin excluding depreciation and amortization 118,220 25 % 36,526 23 % 102,717 21 % Depreciation and amortization (61,499 ) (25,102 ) (107,545 ) Total operating gross margin 56,721 11,424 (4,828 ) General and administrative expense (17,967 ) (8,147 ) (24,545 ) Loss on impairment - - (50,698 ) Gain (loss) on disposition of assets, net 226 384 (1,724 ) Pre-petition restructuring charges - - (21,820 ) Reorganization items (1,173 ) (92,977 ) (9,789 ) Total operating income (loss)$ 37,807 $ (89,316 ) $ (113,404 )
(1) Percentage amounts are calculated by dividing the operating gross margin
excluding depreciation and amortization by revenue for the respective
segment and business lines.
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Operating gross margin (loss) amounts are reconciled to our most comparable
U.S. Rental International U.S. (Lower 48) International &
Dollars in Thousands Tools Rental Tools Drilling Alaska Drilling Total
Nine months ended December 31,
2019 (Successor)
Operating gross margin (1)
(Successor) $ 38,054 $ 4,633 $
2,189 $ 11,845
30,912 5,999 4,424 20,164 61,499
Operating gross margin
excluding depreciation and
amortization (Successor) $ 68,966 $ 10,632 $ 6,613 $ 32,009 $ 118,220
U.S. Rental International U.S. (Lower 48) International &
Dollars in Thousands Tools Rental Tools Drilling Alaska Drilling Total
Three months ended March 31,
2019 (Predecessor)
Operating gross margin (1)
(Predecessor) $ 17,289 $ (3,581 ) $ (1,508 ) $ (776 ) $ 11,424
Depreciation and amortization
(Predecessor) 11,715 4,115 808 8,464 25,102
Operating gross margin
excluding depreciation and
amortization (Predecessor) $ 29,004 $ 534 $ (700 ) $ 7,688 $ 36,526
U.S. Rental International U.S. (Lower 48) International &
Dollars in Thousands Tools Rental Tools Drilling Alaska Drilling Total
Year ended December 31, 2018
(Predecessor)
Operating gross margin (1)
(Predecessor) $ 44,512 $ (11,684 ) $
(15,720 )
48,167 15,548 7,758 36,072 107,545
Operating gross margin
excluding depreciation and
amortization (Predecessor) $ 92,679 $ 3,864 $
(7,962 ) $ 14,136
(1) Operating gross margin is calculated as revenues less direct operating
expenses, including depreciation and amortization expense.
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The following table presents our average utilization rates and rigs available for service for the nine months endedDecember 31, 2019 , the three months endedMarch 31, 2019 and year endedDecember 31, 2018 , respectively: Successor Predecessor Nine Months Three Months Ended December Ended March 31, 31, Year Ended December 31, 2019 2019 2018U.S. (lower 48) drilling Rigs available for service (1) 10 13 13 Utilization rate of rigs available for 17 % 4 % 10 % service (2) International &Alaska drilling Eastern Hemisphere Rigs available for service (1) 10 10 10 Utilization rate of rigs available for 44 % 50 % 46 % service (2) Latin America Region Rigs available for service (1) 7 7 7 Utilization rate of rigs available for 51 % 29 % 21 % service (2) Alaska Rigs available for service (1) 2 2 2 Utilization rate of rigs available for 50 % 50 % 50 % service (2)Total International & Alaska drilling Rigs available for service (1) 19 19 19 Utilization rate of rigs available for 47 % 42 % 37 %
service (2)
(1) The number of rigs available for service is determined by calculating
the number of days each rig was in our fleet and was under contract or
available for contract. For example, a rig under contract or available
for contract for six months of a year is 0.5 rigs available for service
during such year. Our method of computation of rigs available for
service may not be comparable to other similarly titled measures of
other companies.
(2) Rig utilization rates are based on a weighted average basis assuming
total days availability for all rigs available for service. Rigs
acquired or disposed of are treated as added to or removed from the rig
fleet as of the date of acquisition or disposal. Rigs that are in
operation or fully or partially staffed and on a revenue-producing
standby status are considered to be utilized. Rigs under contract thatgenerate revenues during moves between locations or during mobilization
or demobilization are also considered to be utilized. Our method of
computation of rig utilization may not be comparable to other similarly
titled measures of other companies.
Rental Tools Services BusinessU.S. Rental ToolsU.S. rental tools segment revenues were$144.7 million and$52.6 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and were$176.5 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by customer activity inU.S. land and offshore rentals.U.S. rental tools segment operating gross margin excluding depreciation and amortization was$69.0 million and$29.0 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$92.7 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by revenues discussed above. International Rental Tools International rental tools segment revenues were$71.3 million and$21.1 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$79.2 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by well construction, well intervention services, and surface and tubular services. 32 --------------------------------------------------------------------------------
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International rental tools segment operating gross margin excluding depreciation and amortization was$10.6 million and$0.5 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$3.9 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by revenues discussed above. Drilling Services BusinessU.S. (Lower 48) DrillingU.S. (lower 48) drilling segment revenues were$36.7 million and$6.6 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$11.7 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by our inland barge rig fleet and O&M revenue.U.S. (lower 48) drilling segment operating gross margin excluding depreciation and amortization was a gain of$6.6 million and a loss of$0.7 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and a loss of$8.0 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by revenues discussed above. International & Alaska Drilling International &Alaska drilling segment revenues were$219.7 million and$77.1 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$213.4 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by O&M revenue and revenue from Company-owned rigs. International &Alaska drilling segment operating gross margin excluding depreciation and amortization was$32.0 million and$7.7 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$14.1 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by revenues discussed above. Other Financial Data General and Administrative Expense General and administrative expense was$18.0 million and$8.1 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$24.5 million for the year endedDecember 31, 2018 . The results for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , were primarily driven by compensation expense and legal fees. Loss on Impairment There was no loss on impairment for the nine months endedDecember 31, 2019 or, the three months endedMarch 31, 2019 . Loss on impairment was$50.7 million for the year endedDecember 31, 2018 . During the third quarter of 2018 we had a loss on impairment of$44.0 million which consisted of$34.2 million forGulf of Mexico inland barge asset group and$9.8 million for international barge asset group. In addition, we performed our 2018 annual goodwill impairment review during the fourth quarter, as ofOctober 1, 2018 , and determined that the carrying value of the reporting unit exceeded its fair value and, therefore, the entire goodwill balance of$6.7 million forU.S. rental tools segment was impaired and written off. Gain (Loss) on Disposition of Assets,Net Gain (loss) on disposition of assets, net was a gain of$0.2 million and a gain of$0.4 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and a loss of$1.7 million for the year endedDecember 31, 2018 . We periodically sell equipment deemed to be excess, obsolete, or not currently required for operations. Pre-petition Restructuring Charges There were no pre-petition charges for the nine months endedDecember 31, 2019 or the three months endedMarch 31, 2019 . Pre-petition charges were$21.8 million for the year endedDecember 31, 2018 , primarily consisting of professional fees related to the Chapter 11 Cases. 33 --------------------------------------------------------------------------------
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Reorganization Items Reorganization items were$1.2 million and$93.0 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively. The reorganization items for the nine months endedDecember 31, 2019 , primarily consisted of professional fees in the amount of$1.2 million , related to the Chapter 11 Cases. The reorganization items for the three months endedMarch 31, 2019 , primarily consisted of gain on settlement of liabilities subject to compromise, loss from fresh start valuation adjustments, professional fees and backstop premium on rights offering in the amount of$191.1 million ,$242.6 million ,$30.1 million and$11.0 million , respectively, related to the Chapter 11 Cases. Reorganization items were$9.8 million for the year endedDecember 31, 2018 , primarily consisting of debt finance costs related to Senior Notes, professional fees, debt finance costs related to the 2015 Secured Credit Agreement and debtor-in-possession financing costs in the amount of$5.4 million ,$2.3 million ,$1.2 million and$1.0 million respectively, related to the Chapter 11 Cases. Interest Expense and Income Interest expense was$20.9 million and$0.3 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$42.6 million for the year endedDecember 31, 2018 . The Company emerged from bankruptcy at the end of the first quarter of 2019, which resulted in a decrease in overall debt balance. Interest income was$0.9 million and nominal for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively. Interest income was$0.1 million for the year endedDecember 31, 2018 . We earn interest income on our cash balances. Other Other income and expense was an expense of$0.2 million and nominal for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and an expense of$2.0 million for the year endedDecember 31, 2018 . Activity in all periods primarily included the impact of foreign currency fluctuations. Income Tax Expense Income tax expense was$11.1 million and$0.7 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and was$7.8 million for the year endedDecember 31, 2018 . We recognized income tax expense due to the jurisdictional mix of income and loss during the period, along with our continued inability to recognize the benefits associated with certain losses as a result of valuation allowances, changes in uncertain tax positions, and the income tax impacts of adjustments made as part of Fresh Start Accounting. 34 --------------------------------------------------------------------------------
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Liquidity and Capital Resources We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of expansion plans, operational and other cash needs. To meet our short-term liquidity requirements we primarily rely on our cash on hand and cash from operations. We also have access to cash through the Credit Facility. We expect that these sources of liquidity will be sufficient to provide us the ability to fund our current operations and required capital expenditures. We may need to fund capital expenditures, acquisitions, debt principal payments, or pursuits of business opportunities that support our strategy, through additional borrowings or the issuance of additional Successor Common Stock or other forms of equity. Our credit agreements limit our ability to pay dividends. In the past we have not paid dividends on our Predecessor Common Stock and we have no present intention to pay dividends on our Successor Common Stock in the foreseeable future. Liquidity The following table provides a summary of our total liquidity: Dollars in thousands December 31, 2019 Cash and cash equivalents (1) $ 104,951 Availability under Credit Facility (2) 30,941 Total liquidity $ 135,892
(1) As of
of cash and equivalents was held by our foreign subsidiaries.
(2) As of
Facility was
supporting letters of credit outstanding, resulting in availability under
the Credit Facility of $30.9 million .
The earnings of foreign subsidiaries as of December 31, 2019 were reinvested to
fund our international operations. If in the future we decide to repatriate
earnings, the Company may be required to pay taxes on those amounts, which could
reduce the liquidity of the Company at that time.
We do not have any unconsolidated special-purpose entities, off-balance sheet
financing arrangements or guarantees of third-party financial obligations. As of
December 31, 2019 , we have no energy, commodity, or foreign currency derivative
contracts.
Cash Flow Activity
We had cash, cash equivalents, and restricted cash of $105.0 million and $59.0
million at December 31, 2019 and December 31, 2018 , respectively. The following
table provides a summary of our cash flow activity:
Successor Predecessor
Nine Months Ended Three Months Ended Year Ended
December 31, March 31, December 31,
Dollars in thousands 2019 2019 2018
Operating Activities $ 61,639 $ 14,914 $ (17,050 )
Investing Activities (70,315 ) (9,130 ) (69,214 )
Financing Activities (35,658 ) 84,510 3,706
Net change in cash, cash equivalents and
restricted cash $ (44,334 ) $
90,294
Operating Activities Cash flows from operating activities were a source of cash of$61.6 million and$14.9 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and a use of cash of$17.1 million for the year endedDecember 31, 2018 . Cash flows from operating activities in each period were largely impacted by our operating results and changes in working capital. Changes in working capital were a use of cash of$20.7 million and a source of cash of$17.1 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and a use of cash of$23.6 million for the year endedDecember 31, 2018 . 35 --------------------------------------------------------------------------------
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It is our intention to utilize our operating cash flows to fund maintenance and growth of our rental tool assets and drilling rigs. Given the oil and natural gas services market over the past few years, our short-term focus is to preserve liquidity by managing our costs and capital expenditures. While the overall market for oilfield services remains challenging, we are beginning to see a market recovery that is expected to increase our earnings, working capital and capital spending as we pursue attractive investment opportunities. Investing Activities Cash flows from investing activities were a use of cash of$70.3 million and$9.1 million for the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , respectively, and$69.2 million for the year endedDecember 31, 2018 . Cash flows used in investing activities during the nine months endedDecember 31, 2019 , and the three months endedMarch 31, 2019 , included capital expenditures of$71.1 million and$9.2 million , respectively, and$70.6 million for the year endedDecember 31, 2018 , which were primarily used for tubular and other products for our rental tools services business and rig-related maintenance. Capital expenditures for 2020 are estimated to range from$85.0 million and$95.0 million and will primarily be directed to our rental tools services business inventory and maintenance capital for our drilling services business. Future capital spending will be evaluated based upon adequate return requirements and available liquidity. Financing Activities Cash flows from financing activities were a use of$35.7 million for the nine months endedDecember 31, 2019 , primarily related to the$35.2 million prepayment of the Term Loan (as defined below). Cash flows from financing activities were a source of cash of$84.5 million for the three months endedMarch 31, 2019 , primarily related to proceeds from the rights offering of$95.0 million , partially offset by the payment of amounts borrowed under debtor in possession financing of$10.0 million . Cash flows from financing activities were a source of cash of$3.7 million for the year endedDecember 31, 2018 primarily related to amounts borrowed against the DIP Facility of$10.0 million and payments of$3.6 million ,$1.4 million and$1.0 million for dividends on the Predecessor's Preferred Stock, debt issuance cost related to the Fifth Amendment to the 2015 Secured Credit Agreement and debtors-in-possession financing costs respectively. Debt Summary As ofDecember 31, 2019 , our principal amount of debt was related to the$177.9 million Term Loan, due 2024. Successor Credit Facility OnMarch 26, 2019 , pursuant to the terms of the Plan, we and certain of our subsidiaries, entered into a credit agreement with the lenders party thereto (the "Credit Facility Lenders"),Bank of America, N.A ., as administrative agent andBank of America, N.A . andDeutsche Bank Securities Inc. as joint lead arrangers and joint bookrunners, providing for a revolving credit facility (as amended and restated by the Amended and Restated Credit Agreement (as defined below), the "Credit Facility") with initial aggregate commitments in the amount of$50.0 million , guaranteed by certain of our subsidiaries. Availability under the Credit Facility is subject to a monthly borrowing base calculation and, prior to the Amended and Restated Credit Agreement, was based on eligible domestic rental equipment and eligible domestic accounts receivable. The Credit Facility provides for a$30.0 million sublimit of the aggregate commitments that is available for the issuance of letters of credit. Prior to the Amended and Restated Credit Agreement, the Credit Facility required us to maintain minimum liquidity of$25.0 million , defined as cash in our liquidity account not to exceed$10.0 million and availability under the borrowing base, allowed for an increase to the aggregate commitments by up to an additional$75.0 million , subject to certain conditions, matured onMarch 26, 2023 , and bore interest either at a rate equal to: • LIBOR plus an applicable margin that varies from 2.25 percent to 2.75 percent per annum or
• a base rate plus an applicable margin that varies from 1.25 percent to
1.75 percent per annum.
Prior to the Amended and Restated Credit Agreement, we were required to pay a
commitment fee of 0.5 percent per annum on the actual daily unused portion of
the current aggregate commitments under the Credit Facility. We are required to
pay customary letter of credit and fronting fees under the Credit Facility.
The Credit Facility also contains customary affirmative and negative covenants,
including, among other things, as to compliance with laws (including
environmental laws and anti-corruption laws), delivery of quarterly and annual
consolidated financial statements and monthly borrowing base certificates,
conduct of business, maintenance of property, maintenance of insurance,
restrictions on the incurrence of liens, indebtedness, asset dispositions,
fundamental changes, restricted payments, and other customary covenants.
Additionally, the Credit Facility contains customary events of default and
remedies for credit
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facilities of this nature. If we do not comply with the financial and other covenants in the Credit Facility, the Credit Facility Lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Credit Facility, and any outstanding unfunded commitments may be terminated. As ofDecember 31, 2019 , we were in compliance with all the financial covenants under the Credit Facility. OnOctober 8, 2019 , we entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement"), which amended and restated the Credit Facility. As a result of the Amended and Restated Credit Agreement: (1) the Credit Facility matures onOctober 8, 2024 , subject to certain restrictions, including the refinancing of the Company's Term Loan Agreement (as defined below), (2) our annual borrowing costs under the Credit Facility are lowered by reducing • the interest rate to (a) LIBOR plus a range of 1.75 percent to 2.25 percent (based on availability) or (b) a base rate plus a range of 0.75 percent to 1.25 percent (based on availability), and • the unused commitment fee to a range of 0.25 percent to 0.375 percent (based on utilization),
(3) a
coverage ratio requirement of 1.0x when excess availability is less than
the greater of
• 20.0 percent of the lesser of commitments and the borrowing base and
•
(4) an additional borrower was allowed to be included in the borrowing base
upon completion of a field examination,
(5) the calculation of the borrowing base was revised by, among other things,
excluding eligible domestic rental equipment and including 90 percent of
investment grade eligible domestic accounts receivable,
(6) the Company was allowed to grant a second priority lien on non-working
capital assets in the event of a refinancing of the Term Loan Agreement,
(7) the amount allowed for an increase to the aggregate commitments was
reduced from $75.0 million to $50.0 million , and
(8) we were permitted to make a voluntary prepayment of $35.0 million on our
Term Loan on
the calculation of our fixed charge coverage ratio.
As ofDecember 31, 2019 , the borrowing base availability under the Credit Facility was$40.2 million , which was further reduced by$9.3 million in supporting letters of credit outstanding, resulting in availability under the Credit Facility of$30.9 million . As ofDecember 31, 2019 , debt issuance costs of$1.5 million ($1.3 million , net of amortization) are being amortized over the term of the Credit Facility on a straight-line basis. Successor Term Loan, DueMarch 2024 OnMarch 26, 2019 , pursuant to the terms of the Plan, we and certain of our subsidiaries entered into a second lien term loan credit agreement (the "Term Loan Agreement") with the lenders party thereto (the "Term Loan Lenders") andUMB Bank, N.A. , as administrative agent, providing for term loans (the "Term Loan") in the amount of$210.0 million , guaranteed by certain of our subsidiaries. The Term Loan matures onMarch 26, 2024 . The Term Loan bears interest at a rate of 13.0 percent per annum, payable quarterly on the first day of each January, April, July, and October, beginningJuly 1, 2019 , with 11.0 percent paid in cash and 2.0 percent paid in kind and capitalized by adding such amount to the outstanding principal. We may voluntarily prepay all or a part of the Term Loan and, under certain conditions we are required to prepay all or a part of the Term Loan, in each case, at a premium (1) on or prior to 6 months after the closing date of 0 percent; (2) from 6 months and on or prior to two years after the closing date of 6.50 percent; (3) from two years and on or prior to three years after the closing date of 3.25 percent; and (4) from three years after the closing date and thereafter of 0 percent. OnSeptember 20, 2019 , we made a voluntary prepayment on the Term Loan of$35.0 million in principal, plus$1.0 million in interest associated with the principal payment. Since the prepayment occurred within the first six months from the closing date, no premium was applicable on the prepayment. As ofDecember 31, 2019 , the Term Loan balance was$177.9 million . 37 --------------------------------------------------------------------------------
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The Term Loan is subject to mandatory prepayments and customary reinvestment rights. The mandatory prepayments include prepayment requirements with respect to a change of control, asset sales and debt issuances, in each case subject to certain exceptions or conditions. The Term Loan Agreement also contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements, conduct of business, maintenance of property, maintenance of insurance, restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments and other customary covenants. Additionally, the Term Loan Agreement contains customary events of default and remedies for facilities of this nature. If we do not comply with the covenants in the Term Loan Agreement, the Term Loan Lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Term Loan Agreement. As ofDecember 31, 2019 , we were in compliance with all the financial covenants under the Term Loan Agreement. Predecessor 6.75% Senior Notes, DueJuly 2022 OnJanuary 22, 2014 , we issued$360.0 million aggregate principal amount of the 6.75% Notes pursuant to the 6.75% Notes Indenture. The 6.75% Notes were general unsecured obligations of the Company and ranked equal in right of payment with all of our existing and future senior unsecured indebtedness. The 6.75% Notes were jointly and severally guaranteed by all of our subsidiaries that guaranteed indebtedness under the Second Amended and Restated Senior Secured Credit Agreement, as amended from time-to-time ("2015 Secured Credit Agreement") and our 7.50% Notes. Interest on the 6.75% Notes was payable onJanuary 15 andJuly 15 of each year, beginningJuly 15, 2014 . Debt issuance costs related to the 6.75% Notes were approximately$7.6 million . After the commencement of the Chapter 11 Cases, the carrying amount of debt was adjusted to the claim amount and all unamortized debt issuance costs prior to the commencement of the Chapter 11 Cases were fully expensed. Predecessor 7.50% Senior Notes, DueAugust 2020 OnJuly 30, 2013 , we issued$225.0 million aggregate principal amount of the 7.50% Notes pursuant to the 7.50% Notes Indenture. The 7.50% Notes were general unsecured obligations of the Company and ranked equal in right of payment with all of our existing and future senior unsecured indebtedness. The 7.50% Notes were jointly and severally guaranteed by all of our subsidiaries that guaranteed indebtedness under the 2015 Secured Credit Agreement and the 6.75% Notes. Interest on the 7.50% Notes was payable onFebruary 1 andAugust 1 of each year, beginningFebruary 1, 2014 . Debt issuance costs related to the 7.50% Notes were approximately$5.6 million . After the commencement of the Chapter 11 Cases, the carrying amount of debt was adjusted to the claim amount and all unamortized debt issuance costs prior to the commencement of the Chapter 11 Cases were fully expensed. The commencement of the Chapter 11 Cases constituted an event of default that accelerated the Company's obligations under the indentures governing the 6.75% Notes and the 7.50% Notes. However, any efforts to enforce such payment obligations were automatically stayed under the provisions of the Bankruptcy Code. The principal balance on the 6.75% Notes and 7.50% Notes of$360.0 million and$225.0 million , respectively, had been reclassed from long-term debt to liabilities subject to compromise as ofDecember 31, 2018 . See also Note 2 - Chapter 11 Emergence for further details. As previously disclosed in our Current Report on Form 8-K filed with theSEC onMarch 26, 2019 , our obligations with respect to the Senior Notes as well as our subsidiaries' obligations under their respective guarantees under the 6.75% Notes Indenture and the 7.50% Notes Indenture (and the Senior Notes) were cancelled and extinguished as provided in the Plan. From and afterMarch 26, 2019 , neither the Company nor its subsidiaries have any continuing obligations under the 6.75% Notes Indenture and 7.50% Notes Indenture or with respect to the Senior Notes or the guarantees related thereto except to the extent specifically provided in the Plan. Predecessor 2015 Secured Credit Agreement OnJanuary 26, 2015 , we entered into the 2015 Secured Credit Agreement. The 2015 Secured Credit Agreement was originally comprised of a$200.0 million revolving credit facility (the "Revolver"). The 2015 Secured Credit Agreement formerly included financial maintenance covenants, including a leverage ratio, consolidated interest coverage ratio, senior secured leverage ratio, and asset coverage ratio, many of which were suspended beginning inSeptember 2015 . We executed various amendments which, among other things: (1) modified the credit facility to an asset-based lending structure, (2) reduced the size of the Revolver to$80.0 million , (3) eliminated the financial maintenance covenants previously in effect and replaced them with a minimum liquidity covenant of$30.0 million and a monthly borrowing base calculation, (4) allowed for the refinancing of our existing Senior Notes with either secured or unsecured debt, (5) added the ability for the Company to designate certain of its subsidiaries as "Designated Borrowers", and (6) permitted the Company to make restricted payments in the form of certain equity interests. 38 --------------------------------------------------------------------------------
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OnOctober 25, 2018 , we entered into a Consent Agreement and a Cash Collateral Agreement, whereby we could open bank accounts not subject to the 2015 Secured Credit Agreement for the purpose of depositing cash to secure certain letters of credit. OnOctober 30, 2018 , we deposited$10.0 million into a cash collateral account to support the letters of credit outstanding, which is included in the restricted cash balance on the consolidated balance sheet as ofDecember 31, 2018 . Our obligations under the 2015 Secured Credit Agreement were guaranteed by substantially all of our direct and indirect domestic subsidiaries, other than immaterial subsidiaries and subsidiaries generating revenues primarily outsidethe United States , each of which has executed guaranty agreements, and were secured by first priority liens on our accounts receivable, specified rigs including barge rigs in theGulf of Mexico ("GOM") and land rigs inAlaska , certainU.S. -based rental equipment of the Company and its subsidiary guarantors and the equity interests of certain of the Company's subsidiaries. In addition to the liquidity covenant and borrowing base requirements, the 2015 Secured Credit Agreement contains customary affirmative and negative covenants, such as limitations on indebtedness and liens, and restrictions on entry into certain affiliate transactions and payments (including certain payments of dividends). All of the Company's obligations under the 2015 Secured Credit Agreement were paid prior to the commencement of the Chapter 11 Cases, and the 2015 Secured Credit Agreement, including the Revolver thereunder, was terminated concurrently with the commencement of the Chapter 11 Cases. See also Note 2 - Chapter 11 Emergence for further details. Unamortized debt issuance costs were fully expensed upon termination of the 2015 Secured Credit Agreement. 39 --------------------------------------------------------------------------------
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Other Matters Business Risks See Item 1A. Risk Factors, for a discussion of risks related to our business. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to fair value of assets, bad debt, materials and supplies obsolescence, property and equipment, income taxes, workers' compensation and health insurance and contingent liabilities for which settlement is deemed to be probable. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that such estimates are reasonable, actual results could differ from these estimates. We believe the following are our most critical accounting policies as they can be complex and require significant judgments, assumptions and/or estimates in the preparation of our consolidated financial statements. Other significant accounting policies are summarized in Note 1 - Summary of Significant Accounting Policies of the consolidated financial statements. Fair Value Measurements For purposes of recording fair value adjustments for certain financial and non-financial assets and liabilities, and determining fair value disclosures, we estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation technique requires inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (Level 1), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (Level 2) and (3) unobservable inputs that require significant judgment for which there is little or no market data (Level 3). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable. Impairment of Property, Plant, and Equipment We evaluate the carrying amounts of long-lived assets for potential impairment when events occur or circumstances change that indicate the carrying values of such assets may not be recoverable. For example, evaluations are performed when we experience sustained significant declines in utilization and dayrates, and we do not contemplate recovery in the near future. In addition, we evaluate our assets when we reclassify property and equipment to assets held for sale or as discontinued operations as prescribed by accounting guidance related to accounting for the impairment or disposal of long-lived assets. We determine recoverability by evaluating the undiscounted estimated future net cash flows. When impairment is indicated, we measure the impairment as the amount by which the assets carrying value exceeds its fair value. Management considers a number of factors such as estimated future cash flows, appraisals and current market value analysis in determining fair value. Assets are written down to fair value if the concluded current fair value is below the net carrying value. Asset impairment evaluations are, by nature, highly subjective. They involve expectations about future cash flows generated by our assets and reflect management's assumptions and judgments regarding future industry conditions and their effect on future utilization levels, dayrates and costs. The use of different estimates and assumptions could result in materially different carrying values of our assets. Intangible Assets Our intangible assets are related to customer relationships, trade names and developed technology, and are amortized over a period of approximately three, five and six years, respectively. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss. Accrual forSelf-Insurance 40
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Substantially all of our operations are subject to hazards that are customary for oil and natural gas drilling operations, including blowouts, reservoir damage, loss of production, loss of well control, lost or stuck drill strings, equipment defects, cratering, oil and natural gas well fires and explosions, natural disasters, pollution, mechanical failure and damage or loss during transportation. Some of our fleet is also subject to hazards inherent in marine operations, either while on-site or during mobilization, such as capsizing, sinking, grounding, collision, damage from severe weather and marine life infestations. These hazards could result in damage to or destruction of drilling equipment, personal injury and property damage, suspension of operations or environmental damage, which could lead to claims by third parties or customers, suspension of operations and contract terminations. We have had accidents in the past due to some of these hazards. Our contracts provide for varying levels of indemnification between ourselves and our customers, including with respect to well control and subsurface risks. We seek to obtain indemnification from our customers by contract for certain of these risks. We also maintain insurance for personal injuries, damage to or loss of equipment and other insurance coverage for various business risks. To the extent that we are unable to transfer such risks to customers by contract or indemnification agreements, we seek protection through insurance. However, these insurance or indemnification agreements may not adequately protect us against liability from all of the consequences of the hazards described above. Moreover, our insurance coverage generally provides that we assume a portion of the risk in the form of an insurance coverage deductible. Based on the risks discussed above, we estimate our liability in excess of insurance coverage and accrue for these amounts in our consolidated financial statements. Accruals related to insurance are based on the facts and circumstances specific to the insurance claims and our past experience with similar claims. The actual outcome of insured claims could differ significantly from the amounts estimated. We accrue actuarially determined amounts in our consolidated balance sheet to cover self-insurance retentions for workers' compensation, employers' liability, general liability, automobile liability and health benefits claims. These accruals use historical data based upon actual claim settlements and reported claims to project future losses. These estimates and accruals have historically been reasonable in light of the actual amount paid on claims. As the determination of our liability for insurance claims could be material and is subject to significant management judgment and in certain instances is based on actuarially estimated and calculated amounts, management believes that accounting estimates related to insurance accruals are critical. Accounting for Income Taxes We are aU.S. company and we operate through our various foreign legal entities and their branches and subsidiaries in numerous countries throughout the world. Consequently, our tax provision is based upon the tax laws and rates in effect in the countries in which our operations are conducted and income is earned. The income tax rates imposed and methods of computing taxable income in these jurisdictions vary. Therefore, as part of the process of preparing the consolidated financial statements, we are required to estimate the income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes. Our effective tax rate for financial statement purposes will continue to fluctuate from year to year as our operations are conducted in different taxing jurisdictions. Current income tax expense represents either liabilities expected to be reflected on our income tax returns for the current year, nonresident withholding taxes or changes in prior year tax estimates which may result from tax audit adjustments. Our deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities reported on the consolidated balance sheet. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In order to determine the amount of deferred tax assets or liabilities, as well as the valuation allowances, we must make estimates and assumptions regarding amounts and sources of future taxable income, where rigs will be deployed and other matters. Changes in these estimates and assumptions, as well as changes in tax laws, could require us to adjust the deferred tax assets and liabilities or valuation allowances, including as discussed below. Our ability to realize the benefit of our deferred tax assets requires that we achieve certain future earnings levels prior to expiration. Evaluations of the realizability of deferred tax assets are, by nature, highly subjective. They involve expectations about future operations and reflect management's assumptions and judgments regarding future industry conditions and their effect on future utilization levels, dayrates and costs. The use of different estimates and assumptions could result in materially different determinations of our ability to realize deferred tax assets. In the event that our earnings performance projections do not indicate that we will be able to benefit from our deferred tax assets, valuation allowances are established following the "more likely than not" criteria. We periodically evaluate our ability to utilize our deferred tax assets and, in accordance with accounting guidance related to accounting for income taxes, will record any resulting adjustments that may be required to deferred income tax expense in the period for which an existing estimate changes. We do not currently provide for deferred taxes on unremitted earnings of our foreign subsidiaries as such earnings were reinvested to fund our international operations. If the unremitted earnings were to be distributed, we could be subject to taxes and 41 --------------------------------------------------------------------------------
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foreign withholding taxes though it is not practicable to determine the resulting liability, if any, that would result on the distribution of such earnings. We annually review our position and may elect to change our future tax position. We apply the accounting standards related to uncertainty in income taxes. This accounting guidance requires that management make estimates and assumptions affecting amounts recorded as liabilities and related disclosures due to the uncertainty as to final resolution of certain tax matters. Because the recognition of liabilities under this interpretation may require periodic adjustments and may not necessarily imply any change in management's assessment of the ultimate outcome of these items, the amount recorded may not accurately reflect actual outcomes. Revenue Recognition Contract drilling revenues and expenses, comprised of daywork drilling contracts, call-outs against master service agreements and engineering and related project service contracts, are recognized as services are performed and collection is reasonably assured. For certain contracts, we receive payments contractually designated for the mobilization of rigs and other drilling equipment. Mobilization payments received, and direct costs incurred for the mobilization, are deferred and recognized over the term of the related drilling contract; however, costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. Reimbursements received for out-of-pocket expenses are recorded as both revenues and direct costs. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met. Revenues from rental activities are recognized ratably over the rental term which is generally less than six months. Our project related services contracts include engineering, consulting, and project management scopes of work and revenue is typically recognized on a time and materials basis. Allowance for Doubtful Accounts The allowance for doubtful accounts is estimated for losses that may occur resulting from disputed amounts and the inability of our customers to pay amounts owed. We estimate the allowance based on historical write-off experience and information about specific customers. We review individually, for collectability, all balances over 90 days past due as well as balances due from any customer with respect to which we have information leading us to believe that a risk exists for potential collection. Legal and Investigative Matters As ofDecember 31, 2019 , we have accrued an estimate of the probable and estimable costs for the resolution of certain legal and investigation matters. We have not accrued any amounts for other matters for which the liability is not probable and reasonably estimable. Generally, the estimate of probable costs related to these matters is developed in consultation with our legal advisors. The estimates take into consideration factors such as the complexity of the issues, litigation risks and settlement costs. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, our future financial results may be adversely affected. Recent Accounting Pronouncements For a discussion of the new accounting pronouncements that have had or are expected to have an effect on our consolidated financial statements, see Note 19 - Recent Accounting Pronouncements in Item 8. Financial Statements and Supplementary Data. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. 42 --------------------------------------------------------------------------------
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