NOBLE CORPORATION PLC The following discussion is intended to assist you in understanding our
financial position at
The following discussion should be read in conjunction with the consolidated financial statements and related notes contained in this Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 filed by Noble and Finco.
Executive Overview
Noble is a leading offshore drilling contractor for the oil and gas industry. We provide contract drilling services to the international oil and gas industry with our global fleet of mobile offshore drilling units. Our business strategy is centered around providing efficient, reliable and safe offshore drilling services to our customers. The Business Combination with Maersk Drilling created one of the youngest and highest specification fleets of global scale in the industry, with diversification across asset classes, geographic regions and customers. The Combined company has a track record of industry-leading utilization; coupled with an unwavering commitment to best-in-class safety performance and customer satisfaction. We strive to be a leader in industry innovation and first-mover in sustainability. Our fleet consists predominately of technologically advanced units, equipped with sophisticated systems and components prepared to execute our customers' increasingly complicated offshore drilling programs safely and with greater efficiency. We are primarily focused on the ultra-deepwater market and the harsh, and ultra-harsh environment jackup markets, which typically are more technically challenging markets in which to operate. We emphasize safe operations, environmental stewardship, and superior performance through a structured management system, the employment of qualified and well-trained crews and onshore support staff, the care of our surroundings and the neighboring communities where we operate, and other activities advancing our environmental sustainability, social responsibility, and good governance. We also manage rig operating costs through the implementation and continuous improvement of innovative systems and processes, which includes the use of data analytics and predictive maintenance technology. As of the filing date of this Annual Report on Form 10-K, our fleet of 32 drilling rigs consisted of 19 floaters and 13 jackups strategically deployed worldwide. We typically employ each drilling unit under an individual contract, and many contracts are awarded based upon a competitive bidding process. We report our contract drilling operations as a single reportable segment, Contract Drilling Services, which reflects how we manage our business. The mobile offshore drilling units comprising our offshore rig fleet operate in a global market for contract drilling services and are often redeployed to different regions due to changing demands of our customers, which consist primarily of large, integrated, independent and government-owned or controlled oil and gas companies throughout the world.
For the year ended
•operating revenues totaling
•net income of
•net cash provided by operating activities totaling
•successful completion of the Business Combination with Maersk Drilling; and
•nothing drawn down on the Revolving Credit Facility as of
Demand for our services is driven by the offshore exploration and development
programs of oil and gas operators, which in turn are influenced by many factors.
Those factors include, but are not limited to, the price and price stability of
oil and gas, the relative cost and carbon footprint of offshore resources within
each operator's broader energy portfolio, global
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--------------------------------------------------------------------------------macroeconomic conditions, world energy demand, the operator's strategy toward renewable energy sources, environmental considerations and governmental policies.
Over the last decade, the offshore drilling industry has experienced significant volatility and change, which has meaningfully impacted both the supply of, and demand for, offshore rigs. After several years of a significantly oversupplied rig market, industry conditions had started to gradually improve in 2019, which was evidenced by increasing utilization and improving dayrates. However, in the first half of 2020, this gradual recovery was abruptly halted as oil prices experienced concurrent supply and demand shocks. The supply shock was driven by production disagreements among OPEC+ members that resulted in a sudden and a significant oversupply of oil, and the demand shock by the onset of the global COVID-19 pandemic that resulted in a meaningful reduction in global economic activity and produced significant uncertainty among our customers. This had a negative impact on both utilization and dayrates for the offshore drilling industry and led to further financial challenges for many drilling and other service companies. However, by early 2021, oil prices returned to pre-pandemic levels and continued to rise throughout 2021. During 2022, oil prices generally remained at levels that were supportive of offshore exploration and development activity. While the ongoingRussia -Ukraine conflict and related sanctions, inflationary pressures and the subsequent government and central bank efforts to curb inflation, recession concerns, and supply chain disruptions did create some uncertainty relating to future global energy demand, global rig demand increased in 2022. This rise was the result of the combination of growing confidence in commodity prices remaining at or above current levels, heightened focus on energy security, recent multi-year underinvestment in the development and exploration of hydrocarbons, and relative attractiveness of offshore plays with respect to both cost and a carbon emissions perspective resulted in an overall increase in global rig demand in 2022. This had a positive impact on both utilization and day rates for certain of our rig classes.
Recent Events
Business Combination with Maersk Drilling. On the Closing Date, pursuant to the Business Combination Agreement, Noble completed the Offer and the Compulsory Purchase was completed inmid-November 2022 , at which time Maersk Drilling became a wholly owned subsidiary of Noble. OnOctober 5, 2022 , Noble and Shelf Drilling (North Sea ), Ltd. and Shelf Drilling, Ltd. (together, "Shelf Drilling") completed the sale by Noble and the purchase by Shelf Drilling (the "Rig Transaction") of five jackup rigs (the "Remedy Rigs") and all related support and infrastructure (collectively, and together with the related offshore and onshore personnel and related operations, the "Divestment Business"), for a purchase price of$375 million in cash.
For additional information on the Business Combination, see "Note 4- Acquisitions and Divestitures" to our consolidated financial statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Listing. The Noble Cayman Shares, which traded under the symbol "NE" on theNew York Stock Exchange (the "NYSE"), were suspended from trading on the NYSE prior to the open of trading on the Merger Effective Date. The Ordinary Shares began regular-way trading on the NYSE using Noble Cayman's trading history under the symbol "NE" immediately following the suspension of trading of the Noble Cayman Shares on the Merger Effective Date. In addition, the Ordinary Shares were listed and began trading on Nasdaq Copenhagen under the symbol "NOBLE" in connection with the closing of the Business Combination.
Outlook
During 2022, oil prices generally remained at levels that were supportive of offshore exploration and development activity. While the ongoingRussia -Ukraine conflict and related sanctions, inflationary pressures and the subsequent government and central bank efforts to curb inflation, recession concerns, and supply chain disruptions did create some uncertainty relating to future global energy demand, global rig demand increased in 2022.
The global rig supply has come down from historic highs as Noble and other offshore drilling contractors have retired less capable and idle assets. Concurrently, the incoming supply of newbuild offshore drilling rigs has diminished materially, with several newbuild rigs stranded in shipyards. However, we expect many of these stranded newbuild rigs may make their way into the global market over the next few years.
Although the market outlook in our business varies by geographical region and
water depth, we remain encouraged by the recovery in the ultra-deepwater floater
market, with overall demand having increased from 2020 lows. Our customers
continue to focus on the highest specification floaters, which represents the
majority of our floater fleet. We have also
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experienced an overall increase in the global jack-up market, with the
The energy transition from hydrocarbons to renewables poses a challenge to the oil and gas sector and our market. Energy rebalancing trends have accelerated in recent years as evidenced by promulgated or proposed government policies and commitments by many of our customers to further invest in sustainable energy sources. Our industry could be further challenged as our customers rebalance their capital investments more towards alternative energy sources. However, at the same time, there continues to be a global dependence on the combustion of hydrocarbons to provide reliable and affordable energy. Low-cost and low-emission barrels are still necessary to meet energy needs, both current and future. Global energy demand is predicted to increase over the coming decades, and we expect that offshore oil and gas will continue to play an important and sustainable role in meeting this demand.
We expect inflationary pressures and supply chain disruptions to persist, and potentially accelerate, which has led or may lead to increased costs of services.
Contract Drilling Services Backlog
We maintain a backlog of commitments for contract drilling services. Our contract drilling services backlog reflects estimated future revenues attributable to signed drilling contracts. While backlog did not include any letters of intent as ofDecember 31, 2022 , in the past we have included in backlog certain letters of intent that we expect to result in binding drilling contracts. As ofDecember 31, 2022 , contract drilling services backlog totaled approximately$3.9 billion , which represents approximately 57 percent of available days for 2023. We calculate backlog for any given unit and period by multiplying the full contractual operating dayrate for such unit by the number of days remaining in the period, and include certain assumptions based on the terms of certain contractual arrangements, discussed in the notes to the table below. The reported contract drilling services backlog does not include amounts representing revenues for mobilization, demobilization and contract preparation, which are not expected to be significant to our contract drilling services revenues, amounts constituting reimbursables from customers or amounts attributable to uncommitted option periods under drilling contracts or letters of intent. Backlog herein also has not been adjusted for the non-cash amortization related to favorable customer contract intangibles which were recognized on the Emergence Effective Date. 49 --------------------------------------------------------------------------------
The table below presents the amount of our contract drilling services backlog and the percent of available operating days committed for the periods indicated:
Year Ending December 31, (1)
Total 2023 2024 2025
(In thousands)
Contract Drilling Services Backlog
Floaters (2) (3) $ 2,707,142 $ 1,358,491 $ 839,562 $ 509,089
Jackups 1,188,128 298,843 273,579 235,148
Total $ 3,895,270 $ 1,657,334 $ 1,113,141 $ 744,237
Percent of Available Days Committed (4)
Floaters (3) 57 % 33 % 19 %
Jackups 56 % 34 % 24 %
Total 57 % 33 % 21 %
(1)Represents a twelve-month period beginning January 1 . Some of our drilling
contracts provide customers with certain early termination rights and, in
limited cases, those termination rights require minimal or no notice and minimal
financial penalties.
(2)One of our long-term drilling contracts with Shell, the Noble Globetrotter
II, contains a dayrate adjustment mechanism that utilizes an average of market
rates that match a set of distinct technical attributes and is subject to a
modest discount, beginning on the fifth-year anniversary of the contract and
continuing every six months thereafter. The contract now has a contractual
dayrate floor of $275,000 per day. The dayrate for this rig will not be lower
than the higher of (i) the contractual dayrate floor or (ii) the market rate as
calculated under the adjustment mechanism.
(3)Noble entered into a multi-year Commercial Enabling Agreement (the "CEA")
with ExxonMobil in February 2020 . Under the CEA, dayrates earned by each rig
will be updated twice per year to the projected market rate at the time the new
rate goes into effect, subject to a scale-based discount and a performance bonus
that appropriately aligns the interests of Noble and ExxonMobil. Under the CEA,
the table above includes awarded and remaining term of two years and 11 months
related to each of the four following rigs: the Noble Tom Madden, Noble Bob
Douglas , Noble Don Taylor and Noble Sam Croft . Under the CEA, ExxonMobil may
reassign terms among rigs.
(4)Percent of available days committed is calculated by dividing the total number of days our rigs are operating under contract for such period by the product of the number of our rigs, including cold-stacked rigs, and the number of calendar days in such period.
The amount of actual revenues earned and the actual periods during which revenues are earned may be materially different than the backlog amounts and backlog periods presented in the table above due to various factors, including, but not limited to, shipyard and maintenance projects, unplanned downtime, the operation of market benchmarks for dayrate resets, achievement of bonuses, weather conditions, reduced standby or mobilization rates and other factors that result in applicable dayrates lower than the full contractual operating dayrate. In addition, amounts included in the backlog may change because drilling contracts may be varied or modified by mutual consent or customers may exercise early termination rights contained in some of our drilling contracts or decline to enter into a drilling contract after executing a letter of intent. As a result, our backlog as of any particular date may not be indicative of our actual operating results for the periods for which the backlog is calculated. See Part I, Item 1A, "Risk Factors-Risks Related to Our Business and Operations-Our current backlog of contract drilling revenue may not be ultimately realized."
As of
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--------------------------------------------------------------------------------Results of Operations
Results for the year ended
Net income for the year endedDecember 31, 2022 was$168.9 million , or$1.73 per diluted share, on operating revenues of$1.4 billion . Net income for the Prior Year Successor Period was$102.0 million , or$1.51 per diluted share, on operating revenues of$770.3 million . Net income for the Prior Year Predecessor Period was$250.2 million , or$0.98 per diluted share, on operating revenues of$77.5 million . As a result of Noble conducting all of its business through Finco and its subsidiaries, the financial position and results of operations for Finco, and the reasons for material changes in the amount of revenue and expense items for the year endedDecember 31, 2022 and the Prior Year Successor Period and the Prior Year Predecessor Period would be the same as the information presented below regarding Noble in all material respects, with the exception of operating income (loss), the gain on bargain purchase and reorganization cost, net. For the year endedDecember 31, 2022 , Finco's operating income was$75.6 million higher than that of Noble. For the Prior Year Successor Period and the Prior Year Predecessor Period, Finco's operating income was$47.7 million and$0.3 million higher than that of Noble, respectively. The operating income (loss) difference is primarily a result of expenses related to legal costs and administration attributable to Noble for operations support and stewardship-related services. Key Operating Metrics Operating results for our contract drilling services segment are dependent on three primary metrics: operating days, dayrates and operating costs. We also track rig utilization, which is a function of operating days and the number of rigs in our fleet. For more information on operating costs, see "-Contract Drilling Services" below.
The following table presents the average rig utilization, operating days and average dayrates for our rig fleet for the periods indicated.
Average Rig Utilization (1) Operating Days (2) Average Dayrates (2)
Successor Predecessor Successor Predecessor Successor Predecessor
Period From Period From
Period From February 6 , Period From Period From January 1, 2021
February 6, 2021 Period From January 2021 through January 1, 2021 Year Ended February 6, 2021 through
Year Ended through December 1, 2021 through Year Ended December 31 , through February December 31 , through December February 5 ,
December 31, 2022 31, 2021 February 5, 2021 December 31, 2022 2021 5, 2021 2022 31, 2021 2021
Floaters (3) 77 % 71 % 86 % 3,654 2,561 216 $ 273,500 $ 208,443 $ 231,745
Jackups (3) 77 % 68 % 58 % 2,751 2,545 252 119,251 88,742 95,212
Total 77 % 70 % 68 % 6,405 5,106 468 $ 207,240 $ 148,780 $ 158,228
(1)We define utilization for a specific period as the total number of days our
rigs are operating under contract, divided by the product of the total number of
our rigs, including cold stacked rigs, and the number of calendar days in such
period. Information reflects our policy of reporting on the basis of the number
of available rigs in our fleet.
(2)An operating day is defined as a calendar day during which a rig operated
under a drilling contract. We define average dayrates as revenue from contract
drilling services earned per operating day. Average dayrates have not been
adjusted for the non-cash amortization related to favorable and unfavorable
customer contract intangibles.
(3)Calculations in the table include the rigs acquired in connection with the
Business Combination Agreement after the Closing Date of October 3, 2022 .
Calculations in the above table exclude the five jackups sold in the fourth
quarter of 2022 in connection with the Rig Transaction, following the closing of
the sale on October 5, 2022 .
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Contract Drilling Services
The following table presents the operating results for our contract drilling
services segment for the period indicated (dollars in thousands):
Successor Predecessor
Period From Period From
February 6, 2021 January 1, 2021
Year ended through through
December 31,
2022 December 31, 2021 February 5, 2021
Operating revenues:
Contract drilling services $ 1,332,841 $ 708,131 $ 74,051
Reimbursables and other (1) 81,006 62,194 3,430
$ 1,413,847 $ 770,325 $ 77,481
Operating costs and expenses:
Contract drilling services $ 897,096 $ 639,442 $ 46,965
Reimbursables (1) 64,427 55,832 2,737
Depreciation and amortization 146,879 89,535 20,622
General and administrative 82,177 62,476 5,727
Merger and integration costs 84,668 24,792 -
Gain on sale of operating assets, net (90,230) (185,934) -
Hurricane losses and (recoveries), net 60 23,350 -
1,185,077 709,493 76,051
Operating income (loss) $ 228,770 $ 60,832 $ 1,430
(1)We record reimbursements from customers for out-of-pocket expenses as
operating revenues and the related direct costs as operating expenses. Changes
in the amount of these reimbursables generally do not have a material effect on
our financial position, results of operations or cash flows.
Contract Drilling Services Revenues
Successor Predecessor
Period From Period from
February 6, 2021 January 1, 2021
Year ended through through
December 31, 2022 December 31, 2021 February 5, 2021
Floaters Jackups Floaters Jackups Floaters Jackups
Contract drilling services revenues $ 997.8 $ 335.0 $ 482.3 $ 225.8 $ 50.1 $ 24.0
Contract drilling services costs $ 600.2 $ 296.9 $ 368.7 $ 270.7 $ 25.8 $ 21.2
Average Rig Utilization 76.7 % 77.3 % 71 % 68 % 86 % 58 %
Operating Days 3,654 2,751 2,561 2,545 216 252
Average Dayrates $ 273,500 $ 119,251 $ 208,443 $ 88,742 $ 231,745 $ 95,212
Total rigs - Beginning 12 8 7 12 7 12
- Acquired 8 10 7 - - -
- Disposed (1) (5) (2) (4) - -
- Ending 19 13 12 8 7 12
Floaters. During the year ended December 31, 2022 , floaters generated revenue of
$997.8 million , as compared to $482.3 million in the Prior Year Successor
Period. The increase in revenue is mainly attributable to (i) $170.8 million
contributed by
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rigs acquired in the Business Combination with Maersk Drilling; (ii) $193.7
million due to an increase in average day rate in the current period; and (iii)
$144.1 million due to increased demand in the current period. Partly off-setting
these increases were (i) $20 million from rigs with fewer operating days in the
current period and (ii) the divestiture of a semi-submersible in early 2022.
Additionally, contract drilling revenue for the current period increased $42.0
million due to the non-cash amortization related to customer contract
intangibles which were recognized on the Effective Date, as well as contract
intangibles and contract liabilities recognized in connection with the Business
Combination with Maersk Drilling.
Jackups. During the year ended December 31, 2022 , jackups generated revenue of
$335.0 million , as compared to $225.8 million in the Prior Year Successor
Period. The increase in revenue is mainly attributable to (i) $103.6 million
provided by rigs acquired in the Business Combination with Maersk Drilling; and
(ii) $82.4 million from additional operating days in the current period. These
increases were offset by (i) $1.5 million for the divestiture of the Remedy
Rigs; (ii) $73.9 million for the divestiture of the jackup fleet located in
Saudi Arabia ; (iii) $3.4 million from rigs with few operating days in the
current period; and (iv) $4.8 million from net changes in dayrates.
Additionally, contract drilling revenue for the current period increased $6.8
million due to the non-cash amortization related to customer contract
intangibles which were recognized in connection with the Business Combination
with Maersk Drilling.
Floaters and Jackups (Prior Year Predecessor Period). During the Prior Year
Predecessor Period, contract drilling services revenues totaled $50.1 million
for our floaters and $24.0 million for our jackups. All six contracted floaters
and seven of our eight contracted jackups operated for the entire period. This
was offset by one contracted jackup not operating for the full period, which was
on suspension.
Operating Costs and Expenses
Floaters. During the year ended December 31, 2022 , total contract drilling
services costs related to floaters was $600.2 million . Contract drilling
services costs related to floaters totaled $368.7 million in the Prior Year
Successor Period. The primary drivers of the increase are: (i) eight additional
floaters acquired in the Business Combination with Maersk Drilling in the fourth
quarter of 2022; (ii) five additional floaters acquired in April 2021 from
Pacific Drilling; (iii) additional available days in the current year compared
to the Prior Year Successor Period; and iv) increased crew and material costs
across the fleet due to inflation. These increases were offset by the
divestiture of a semi-submersible unit in early 2022 and two units in the Prior
Year Successor Period.
Jackups. During the year ended December 31, 2022 , contract drilling services
costs related to jackups was $296.9 million . Contract drilling services costs
related to jackups totaled $270.7 million in the Prior Year Successor Period.
During the year ended December 31, 2022 , cost increases are primarily related
to: (i) the 10 jackups acquired in conjunction with the Business Combination
with Maersk Drilling in October 2022 and (ii) increased crew and material costs
across the fleet due to inflation. These increases were partly offset by the
reduction of expenses after the sale of the four jackups in Saudi Arabia in the
fourth quarter of 2021 and five Remedy Rigs in October 2022 .
Floaters and Jackups (Prior Year Predecessor Period). During the Prior Year
Predecessor Period, contract drilling services costs totaled $25.8 million for
our floaters and $21.2 million for our jackups. Reduced operating costs in the
period was a result of 4 rigs being stacked during the entire period.
Depreciation and Amortization. Depreciation and amortization totaled $146.9
million and $89.5 million during the year ended December 31, 2022 , and the Prior
Year Successor Period respectively. Depreciation increased by $57.4 million in
2022 primarily due to $47.9 million related to 18 rigs and related equipment
acquired in the Business Combination. Additionally, the rigs acquired in the
Pacific Drilling Merger had a full year of depreciation expense in 2022. The
increase is offset by six rigs sold in 2022 and two drillships and four jackup
rigs sold in 2021. Depreciation for the Prior Year Predecessor Period was $20.6
million .
General and Administrative Expenses. General and administrative expenses totaled
$82.2 million and $62.5 million during the year ended December 31, 2022 , and the
Prior Year Successor Period, respectively. The increase is primarily due to
increased personnel costs, innovation costs and professional fees. General and
administrative expenses totaled $5.7 million for the Prior Year Predecessor
Period.
Merger and Integration Costs. During the year ended December 31, 2022 , Noble
incurred $84.7 million of merger and integration costs primarily in connection
with the Business Combination with Maersk Drilling. During the Prior Year
Successor Period, Noble incurred $24.8 million of merger and integration costs
in connection with the Pacific Drilling Merger and the Business Combination with
Maersk Drilling. For additional information, see "Note 4- Acquisitions and
Divestitures" and "Note 5- Merger and Integration Costs" to our consolidated
financial statements included in Part II, Item 8 of this Annual Report on Form
10-K.
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Gain on Sale of Operating Assets, Net. During the year ended December 31, 2022 ,
Noble recognized a gain, net of transaction costs, of $90.2 million in
connection with the sale of the Divestment Business and the Noble Clyde
Boudreaux. Noble recorded a gain of $185.9 million and Finco recorded a gain of
$187.5 million resulting from the sale of five jackup rigs during the Prior Year
Successor Period. For additional information, see "Note 4- Acquisitions and
Divestitures" and "Note 7- Property and Equipment" to our consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Hurricane Losses and Recoveries, Net. Noble incurred $22.0 million of costs
during the year ended December 31, 2022 , which primarily related to additional
costs as a result of the Hurricane Ida incident, which was offset by insurance
recoveries of $21.9 million . Noble incurred $30.9 million of costs and received
recoveries of $7.5 million from our insurance in connection to damages sustained
from Hurricane Ida during the Prior Year Successor Period. For additional
information, see "Note 7- Property and Equipment" to our consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Other Income and Expenses
Interest Expense. Interest expense totaled $42.7 million and $31.7 million for
the year ended December 31, 2022 , and the Prior Year Successor Period,
respectively. The year ended December 31, 2022 included interest expense on our
Second Lien Notes, Revolving Credit Facility, DNB Credit Facility and DSF Credit
Facility (each as defined herein) acquired in the Business Combination with
Maersk Drilling. The Prior Year Successor Period includes interest expense on
our then newly issued Second Lien Notes as well as borrowings under our
Revolving Credit Facility, slightly offset by capitalized interest of $2.0
million . Interest expense for the Prior Year Predecessor Period was $0.2
million . For additional information, see "Note 9- Debt" to our consolidated
financial statements included in Part II, Item 8 of this Annual Report on Form
10-K.
Gain on Bargain Purchase. Noble recognized a $62.3 million gain on the bargain
purchase of Pacific Drilling during the Prior Year Successor Period. For
additional information, see "Note 4- Acquisitions and Divestitures" to our
consolidated financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
Income Tax Provision (Benefit). We recorded income tax expense of
During the year endedDecember 31, 2022 , our tax provision included tax benefits of$42.1 million related to a release of valuation allowance inGuyana and Luxembourg,$1.3 million related primarily to other deferred tax adjustments, and$6.6 million related to a reduction in legacy Maersk tax contingencies primarily due to favorable foreign exchange movements. Such tax benefits were offset by tax expenses of$2.3 million related to the sale of the Remedy Rigs,$10.8 million related to contract fair value amortization, and various recurring items comprised ofGuyana excess withholding tax on gross revenue of$34.7 million and annual current and deferred tax expense accrual of$24.9 million primarily in Luxembourg,Switzerland ,U.S ,Norway , andGhana . During the Prior Year Successor Period, our tax provision included tax benefits of$24.2 million related to US and non-US reserve releases,$12.6 million related to a US tax refund,$22.8 million related to deferred tax assets previously not recognized,$1.9 million related to recognition of a non-US refund claim and$1.2 million related primarily to deferred tax adjustments. Such tax benefits were offset by tax expenses of$21.2 million related to various recurring items primarily comprised ofGuyana withholding tax on gross revenue and$42.0 million related to non-US tax reserves. During the Prior Year Predecessor Period, our income tax provision included a tax benefit of$1.7 million related to non-US reserve release and tax expense of$2.5 million related to fresh start and reorganization adjustments, and other recurring tax expenses of approximately$2.6 million . 2021 Compared to 2020 Information related to a comparison of our results of operations for the Prior Year Successor Period and the Prior Year Predecessor Period, on the one hand, compared to our fiscal year endedDecember 31, 2020 , on the other hand, is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSEC onFebruary 17, 2022 .
Liquidity and Capital Resources
Senior Secured Revolving Credit Facility As ofDecember 31, 2022 , we had no loans outstanding and$21.1 million of letters of credit issued under our senior secured revolving credit agreement (the "Revolving Credit Facility") and an additional$8.7 million in letters of credit and 54 -------------------------------------------------------------------------------- surety bonds issued under bilateral arrangements. For additional information about our Revolving Credit Facility, see "Note 9- Debt" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Second Lien Notes Indenture As ofDecember 31, 2022 , we had outstanding$173.7 million aggregate principal amount of our Second Lien Notes. Interest on the Second Lien Notes accrues, at Finco's option, at a rate of: (i) 11% per annum, payable in cash; (ii) 13% per annum, with 50% of such interest to be payable in cash and 50% of such interest to be payable by issuing additional Second Lien Notes ("PIK Notes"); or (iii) 15% per annum, with the entirety of such interest to be payable by issuing PIK Notes. Finco pays interest semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencingAugust 15, 2021 . For accrual purposes, we have assumed we will make the next interest payment in cash and have accrued at a rate of 11%; however, the actual interest election will be made no later than the record date for such interest payment. For additional information about our Second Lien Notes, see "Note 9- Debt" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Debt Open Market Repurchases InAugust 2022 , we purchased$1.6 million aggregate principal amount of our Second Lien Notes for approximately$1.8 million , plus accrued interest, as open market repurchases and recognized a loss of approximately$0.2 million . In the fourth quarter of 2022, we purchased$40.7 million aggregate principal amount of our Second Lien Notes for approximately$46.2 million , plus accrued interest, as open market repurchases and recognized a loss of approximately$4.4 million . New DNB Credit Facility OnNovember 22, 2022 , Noble entered into a Term Facility Agreement among Maersk Drilling, as the borrower, the Company, as parent guarantor, certain subsidiaries of Maersk Drilling thereto as guarantors, and the lenders identified therein, withDNB Bank ASA ,New York Branch acting as Agent. OnDecember 22, 2022 , the Utilisation Date (as defined in the New DNB Credit Facility) occurred under the New DNB Credit Facility, and Maersk Drilling borrowed the full$350.0 million available thereunder. See "Note 9- Debt" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. DSF Credit Facility As ofDecember 31, 2022 , Maersk Drilling had$149.7 million of outstanding term loans under the DSF Credit Facility, which were paid in full with cash on hand onFebruary 23, 2023 . See "Note 9- Debt" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Sources and Uses of Cash Our principal sources of capital in 2022 were cash generated from operating activities. Cash on hand during 2022 was primarily used for the following:
•normal recurring operating expenses;
•repurchases or repayments of debt and interest;
•fees and expenses related to merger and integration costs of the Business Combination; and
•capital expenditures.
Currently, our anticipated cash flow needs, both in the short-term (fiscal year 2023) and long-term (beyond fiscal year 2023), may include the following:
•normal recurring operating expenses;
•planned and discretionary capital expenditures;
•repurchase, redemptions, or repayments of debt and interest;
•fees and expenses related to merger and integration costs of the Business Combination; •share repurchases and dividends; and
•certain contractual cash obligations and commitments.
We may, from time to time, redeem, repurchase or otherwise acquire our
outstanding Second Lien Notes through open market purchases, tender offers or
pursuant to the terms of such securities. We may seek to fund any such
redemptions, repurchases or acquisitions of the Second Lien notes through the
issuances of long-term debt securities or other similar instruments, subject to
market conditions or other factors.
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We currently expect to fund our cash flow needs with cash generated by our
operations, cash on hand, proceeds from sales of assets, or borrowings under our
credit facilities and we believe this will provide us with sufficient ability to
fund our cash flow needs over the next 12 months. Subject to market conditions
and other factors, we may also issue equity or long-term debt securities to fund
our cash flow needs and for other purposes.
Net cash provided by operating activities was $281.0 million for the year ended
December 31, 2022 and $51.6 million for the Prior Year Successor Period, while
net cash used in operating activities was $45.4 million for the Prior Year
Predecessor Period. The current year ended December 31, 2022 and the Prior Year
Successor Period benefited from a cash inflow from operating assets and
liabilities, while the Prior Year Predecessor Period had a cash outflow from
operating assets and liabilities. We had working capital of $384.7 million at
December 31, 2022 and $207.3 million at December 31, 2021 .
Net cash provided by investing activities was $375.8 million for the year ended
December 31, 2022 , and $207.9 million during the Prior Year Successor Period
while net cash used in investing activities was $14.4 million during the Prior
Year Predecessor Period. The current year includes proceeds from the sale of the
Remedy Rigs and cash acquired in the Business Combination with Maersk Drilling.
The 2021 Successor period includes proceeds from the sale of for rigs in Saudi
Arabia in November 2021 , cash acquired from the Pacific Drilling merger and
proceeds from the sale of two rigs in late June 2021 .
Net cash used in financing activities was $367.8 million for the year ended
December 31, 2022 , and $176.8 million for the Prior Year Successor Period and
$191.2 million for the Prior Year Predecessor Period. During the year ended
December 31, 2022 , Noble refinanced part of the assumed debt from the Business
Combination, resulting in a net pay down of $277.3 million . In the year ended
2022, we utilized approximately $48.1 million of cash to repurchase
$42.3 million aggregate principal amount of our Second Lien Notes plus accrued
interest, as open market repurchases and recognized a loss of approximately
$4.6 million . The Prior Year Successor Period included net payments on our
Revolving Credit Facility. The Prior Year Predecessor Period included the
repayment of Legacy Noble's credit facility, issuances of the Second Lien Notes
and borrowings on the Revolving Credit Facility. The Compulsory Purchase was
completed in the fourth quarter of 2022, at a cost of $69.9 million , paid in DKK
and 4.1 million shares issued.
At
Capital Expenditures Capital expenditures totaled$193.6 million ,$159.9 million , and$10.3 million , for the year endedDecember 31, 2022 , the Prior Year Successor Period and the Prior Year Predecessor Period, respectively. Capital expenditures for the year endedDecember 31, 2022 consisted of the following: •$111.0 million for sustaining capital; •$45.0 million in major projects, including subsea and other related projects; and •$37.6 million for rebillable capital and contract modifications. Our total capital expenditure estimate for 2023, net of client reimbursables, is expected to range between$325 million and$365 million , of which approximately$210 to$230 million is currently anticipated to be spent for sustaining capital. We anticipate additional capital costs to repair the Noble Regina Allen, however, we are in the process of completing an insurance claim for reimbursement to cover the majority of the costs. From time to time we consider possible projects that would require expenditures that are not included in our capital budget, and such unbudgeted expenditures could be significant. In addition, while liquidity and preservation of capital remains our top priority, we will continue to evaluate acquisitions of drilling units from time to time. Share Capital As ofMarch 6, 2023 , there were 134,820,112 Ordinary Shares outstanding. In addition, as ofMarch 6, 2023 , 6,203,133 Tranche 1 Warrants, 5,547,974 Tranche 2 Warrants and 2,774,204 Tranche 3 Warrants were outstanding and exercisable. We also have 2,075,225 Ordinary Shares authorized and reserved for issuance pursuant to equity awards under the Noble Corporation plc 2022 Long-Term Incentive Plan. The declaration and payment of dividends require the authorization of the Board of Directors of Noble. Such dividends may be paid only out of Noble's "distributable reserves" on its statutory balance sheet in accordance with law. Therefore, Noble is not permitted to pay dividends out of share capital, which includes share premium. The payment of future dividends will depend on our results of operations, financial condition, cash requirements, future business prospects, contractual and 56 --------------------------------------------------------------------------------
indenture restrictions and other factors deemed relevant by our Board of Directors; however, at this time, we do not expect to pay any dividends in the foreseeable future.
Share Repurchases Under law, the Company is only permitted to purchase its own Ordinary Shares by way of an "off-market purchase" in a plan approved by shareholders. Such may be paid only out of Noble's "distributable reserves" on its statutory balance sheet in accordance with law. As of the date of this report, we have shareholder authority to repurchase up to 15% per annum of the issued share capital of the Company as of the beginning of each fiscal year for a five-year period (subject to an overall aggregate maximum of 20,601,161 Ordinary Shares). During the year endedDecember 31, 2022 , we repurchased 407,477 of our Ordinary Shares, which were subsequently cancelled. Summary of Contractual Cash Obligations and Commitments We have$175.9 million of long-term tax reserves for uncertain tax positions, including interest and penalties, which are included in "Other liabilities" due to the difficulty in making reasonably reliable estimates of the timing of cash settlements to taxing authorities. See "Note 14- Income Taxes" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. AtDecember 31, 2022 ,$159.7 million of long-term debt will be due in the next twelve months and$513.1 million will be due subsequent to 2023. See "Note 9- Debt" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. We may seek to refinance all or a portion of our long-term debt obligations, including the Revolving Credit Facility, the Second Lien Notes and the New DNB Credit Facility, though any such refinancing transactions are subject to market and other conditions and there are no assurances that we will complete any such transactions, in whole or in part, or as to the amount or timing of any such transactions. AtDecember 31, 2022 ,$12.1 million of pension obligations will be due in the next twelve months and the remainder of$121.7 million will be due subsequent to 2023. See "Note 15- Employee Benefit Plans" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. In addition,$9.5 million is due on a long-term basis under the Danish Holiday Act of 2020. For a description of our operating lease obligations, refer to "Note 13- Leases" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. AtDecember 31, 2022 , we had other commitments that we are contractually obligated to fulfill with cash if the obligations are called. These obligations include letters of credit that guarantee our performance as it relates to our drilling contracts, tax and other obligations in various jurisdictions. These letters of credit obligations are not normally called, as we typically comply with the underlying performance requirement. AtDecember 31, 2022 ,$14.1 million letters of credit and commercial commitments will be due in the next twelve months and the remainder of$15.7 million will be due subsequent to 2023.
Guarantees of
Finco has issued the Second Lien Notes due 2028. The Second Lien Notes are fully
and unconditionally guaranteed, jointly and severally, on a senior secured
second-priority basis, by the direct and indirect subsidiaries of Finco that are
Credit Parties under the Revolving Credit Facility (the "Guarantors"). The
guarantees are unconditional, irrevocable, joint and several senior obligations
of each Guarantor and rank equally in right of payment with all future senior
indebtedness of such Guarantor and effectively senior to all of such Guarantor's
unsecured senior indebtedness.
The Second Lien Notes and such guarantees are secured by second priority liens
on the collateral securing the obligations under the Revolving Credit Facility,
including, among other things, (i) a pledge of the equity interests in Finco,
(ii) pledges of the equity interests in the Guarantors and (iii) a lien on
substantially all of the assets of Finco and the Guarantors (including the
equity interests in substantially all of the other direct subsidiaries of Finco
and the Guarantors), in each case, subject to certain exceptions and limitations
(collectively, the "Collateral"). The Collateral also includes mortgages on
certain rigs owned by the Guarantors. None of Pacific Drilling, Maersk Drilling
or any of their respective current subsidiaries is a subsidiary guarantor of the
Revolving Credit Facility or the Second Lien Notes. The Collateral does not
include (i) any assets of, or equity interests in, Pacific Drilling or any of
its current subsidiaries, or (ii) any assets of, or equity interests in, Maersk
Drilling or any of its current subsidiaries.
Second Lien Note Guarantees
The guarantees by the Guarantors are unconditional, irrevocable, joint and
several senior obligations of each Guarantor and rank equally in right of
payment with all future senior indebtedness of such Guarantor and effectively
senior to all of
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such Guarantor's unsecured senior indebtedness. The guarantees rank senior in
right of payment to any existing and future subordinated obligations of such
Guarantor and are effectively junior to any obligations of such Guarantor that
are secured by senior liens on the Collateral or secured by assets which do not
constitute Collateral. Under the indenture governing the Second Lien Notes, a
Guarantor may be released and relieved of its obligations under its guarantee
under certain circumstances, including: (1) upon Finco's exercise of legal
defeasance in accordance with the relevant provisions of the indenture governing
the Second Lien Notes, (2) in the event of any sale or other disposition of all
of the capital stock of any Guarantor in compliance with the provisions of the
indenture governing the Second Lien Notes, (3) upon the dissolution or
liquidation of a Guarantor, (3) with the requisite consent of the noteholders,
(4) if such Guarantor is properly designated as an unrestricted subsidiary in
accordance with the indenture governing the Second Lien Notes, (5) upon the
release or discharge of the Guarantor's obligations under its guarantee or (6)
with respect to certain future immaterial guarantors, upon a written notice from
Finco to the trustee for the Second Lien Notes.
Finco is a holding company with no significant operations or material assets
other than the direct and indirect equity interests it holds in the Guarantors
and other non-guarantor subsidiaries. Finco conducts its operations primarily
through its subsidiaries. As a result, its ability to pay principal and interest
on the Second Lien Notes is dependent on the cash flow generated by its
subsidiaries and their ability to make such cash available to Finco by dividend
or otherwise. The earnings of Finco's subsidiaries will depend on their
financial and operating performance, which will be affected by general economic,
industry, financial, competitive, operating, legislative, regulatory and other
factors beyond Finco's control. Any payments of dividends, distributions, loans
or advances to Finco by its subsidiaries could also be subject to restrictions
on dividends under applicable local law in the jurisdictions in which such
subsidiaries operate. In the event that Finco does not receive sufficient
distributions from its subsidiaries, or to the extent that the assets of the
Guarantors are insufficient, Finco may be unable to make payments on the Second
Lien Notes.
Pledged Equity of Affiliates
Pursuant to the terms of the Second Lien Notes collateral documents, the
collateral agent under the indenture governing the Second Lien Notes may pursue
remedies, or pursue foreclosure proceedings on the Collateral (including the
equity of the Guarantors and certain other direct subsidiaries of Finco and the
Guarantors), following an event of default under the indenture governing the
Second Lien Notes. The collateral agent's ability to exercise such remedies is
limited by the intercreditor agreement for so long as any priority lien debt is
outstanding.
The pledged equity of the Guarantors constitutes substantially all of the
securities of those of our affiliates which have been pledged to secure the
obligations under the Second Lien Notes. The value of the pledged equity is
subject to fluctuations based on factors that include, among other things,
general economic conditions and the ability to realize on the collateral as part
of a going concern and in an orderly fashion to available and willing buyers and
not under distressed circumstances. There is no trading market for the pledged
equity interests.
Under the terms of the documents governing the Second Lien Notes (the "Second
Lien Notes Documents"), Finco and the Guarantors will be entitled to the release
of the Collateral from the liens securing the Second Lien Notes under one or
more circumstances, including (1) to the extent required by or pursuant to the
terms of the Second Lien Notes Documents; (2) to the extent that proceeds
continue to constitute Collateral, in the event that Collateral is sold,
transferred, disbursed or otherwise disposed of to third parties; or (3) as
otherwise provided in the Second Lien Notes Documents, including the release of
the priority lien on such Collateral. Upon the release of any Guarantor from its
guarantee, if any, in accordance with the terms of the indenture governing the
Second Lien Notes, the lien on any pledged equity interests issued by such
Guarantor and on any assets of such Guarantor will automatically terminate.
Guarantor Summarized Financial Information
The summarized financial information below reflects the combined accounts of the
Guarantors and the non-consolidated accounts of Finco (collectively, the
"Obligors"), for the dates and periods indicated. The financial information is
presented on a combined basis and intercompany balances and transactions between
entities in the Obligor group have been eliminated.
58
--------------------------------------------------------------------------------Summarized Balance Sheet Information:
Successor
December 31, 2022 December 31, 2021
Current assets $ 481,455 $ 362,440
Amounts due from non-guarantor subsidiaries, current 5,979,081 5,162,678
Noncurrent assets 1,050,406 1,265,785
Amounts due from non-guarantor subsidiaries, noncurrent 377,609 646,778
Current liabilities 206,623 199,178
Amounts due to non-guarantor subsidiaries, current 6,556,672 5,296,570
Noncurrent liabilities 251,942 281,230
Amounts due to non-guarantor subsidiaries, noncurrent 111,190 168,873
Summarized Statement of Operations Information:
Successor (1) Predecessor (2)
Obligors Obligors
Period From Period From
Year February 6, 2021 January 1, 2021
Ended through through
December 31,
2022 December 31, 2021 February 5, 2021
Operating revenues $ 999,796 $ 664,741 $ 70,584
Operating costs and expenses 731,736 481,179 63,255
Income (loss) before income taxes 368,820 164,112 (2,303,528)
Net income (loss) 348,910 149,935 (2,318,932)
(1)Includes operating revenue of $21.1 million , operating costs and expenses of
$53.8 million and other income of $127.5 million attributable to transactions
with non-guarantor subsidiaries for the year ended December 31, 2022 . Includes
operating revenue of $31.3 million , operating costs and expenses of $17.1
million and other expense of $26.3 million attributable to transactions with
non-guarantor subsidiaries for the Prior Year Successor Period.
(2)Includes operating revenue of $3.8 million , operating costs and expenses of
$1.1 million and other expense of $(1.2) million attributable to transactions
with non-guarantor subsidiaries for the Prior Year Predecessor Period.
Environmental Matters
We are subject to numerous international, federal, state and local laws and regulations relating to the protection of the environment and of human health and safety. For a discussion of the most significant of these laws and regulations, see Part I, Item 1,"Business-Governmental Regulations and Environmental Matters."
Continuing political and social attention to the issue of global climate change
has resulted in a broad range of proposed or promulgated laws focusing on
greenhouse gas reduction and related public disclosures. The costs of
implementing these rules and continuing compliance and disclosure could be
substantial. These proposed or promulgated laws apply or could apply in
countries where we have interests or may have interests in the future. Laws in
this field continue to evolve, and while it is not possible to accurately
estimate either a timetable for implementation or our future compliance or
reporting costs relating to implementation, such laws, if enacted, could have a
material impact on our results of operations and financial condition. Climate
change could also increase the frequency and severity of adverse weather
conditions, including hurricanes, typhoons, cyclones, winter storms and rough
seas. If such effects were to occur, they could have an adverse impact on our
operations. For a discussion of climate change, see "Business-Governmental
Regulations and Environmental Matters-Climate Change."
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In addition, increasing social attention to ESG matters and climate change has
resulted in demands for action related to climate change and energy rebalancing
matters, such as promoting the use of substitutes to fossil fuel products,
encouraging the divestment of fossil fuel equities, and pressuring lenders and
other financial services companies to limit or curtail activities with fossil
fuel companies. Initiatives to incentivize a shift away from fossil fuels could
reduce demand for hydrocarbons, thereby reducing demand for our services and
causing a material adverse effect on our earnings, cash flows and financial
condition. For further discussion of these risks, see Part I, Item 1A, "Risk
Factors-Regulatory and Legal Risks-Increasing attention to environmental, social
and governance matters and climate change may impact our business and financial
results."
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States ("US GAAP"), which require us
to make estimates that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from our estimates and assumptions and any such differences could be
material to our consolidated financial statements. The following accounting
policies involve critical accounting estimates because they are particularly
dependent on estimates and assumptions made by Noble about matters that are
inherently uncertain.
Recoverability of Assets
We evaluate our property and equipment and intangible assets for impairment
whenever there are changes in facts that suggest that the value of the asset is
not recoverable. An impairment loss is recognized when and to the extent that an
asset's carrying value exceeds its estimated fair value. To the extent actual
results do not meet our estimated assumptions for a given rig, piece of
equipment or intangible customer contract, we may take an impairment loss in the
future. In determining the fair value of the assets, we make significant
assumptions and estimates regarding future market conditions. Typical
assumptions used in our estimate include current market conditions, timing of
future contract awards and expected operating dayrates, operating costs,
utilization rates, discount rates, capital expenditures, market values,
weighting of market values, reactivation costs, estimated economic useful lives
and marketability of a unit.
During the years ended December 31, 2022 and 2021, no impairment charges were
recognized. During the year ended December 31, 2020 , we recognized non-cash,
before-tax impairment charges of $3.9 billion , related to certain rigs and
related capital spares. These impairments were driven by factors such as
customer suspensions of drilling programs, contract cancellations, a further
reduction in the number of new contract opportunities, capital spare equipment
obsolescence, and our belief that a drilling unit is no longer marketable and is
unlikely to return to service.
Impairment assessment inherently involves management judgments as to assumptions
about expected future cash flows and the impact of market conditions on those
assumptions. Due to the many variables inherent in this estimation, differences
in assumptions may have a material effect on the results of our impairment
analysis.
Income Taxes
We estimate income taxes and file tax returns in each of the taxing
jurisdictions in which we operate and are required to file a tax return. At the
end of each year, an estimate for income taxes is recorded in the financial
statements. Tax returns are generally filed in the subsequent year. A
reconciliation of the estimate to the final tax return is done at that time,
which will result in changes to the original estimate. We believe that our tax
return positions are appropriately supported, but tax authorities can challenge
certain of our tax positions.
We currently operate, and have in the past operated, in a number of countries
throughout the world and our tax returns filed in those jurisdictions are
subject to review and examination by tax authorities within those jurisdictions.
We recognize uncertain tax positions that we believe have a greater than 50
percent likelihood of being sustained upon challenge by a tax authority. We
cannot predict or provide assurance as to the ultimate outcome of any existing
or future assessments. A change in judgment related to the expected ultimate
resolution of uncertain tax positions will be recognized in earnings in the
quarter of such change. We believe that our reserve for uncertain tax positions,
including related interest and penalties, is adequate. As of December 31, 2022 ,
the Company had $175.9 million of long-term tax reserves for unrecognized tax
benefits, including interest and penalties, which are included in "Other
liabilities". The amounts ultimately paid upon resolution of audits could be
materially different from the amounts previously included in our income tax
expense and, therefore, could have a material impact on our tax provision, net
income and cash flows.
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Our gross deferred tax asset balance at year-end reflects the application of our
income tax accounting policies and is based on management's estimates, judgments
and assumptions regarding realizability. If it is more likely than not that a
portion of the deferred tax assets will not be realized in a future period, the
deferred tax assets will be reduced by a valuation allowance based on
management's estimates. In evaluating our ability to recover our deferred tax
assets, in full or in part, we consider all available positive and negative
evidence, including our past operating results, and our forecast of future
earnings, future taxable income and prudent and feasible tax planning
strategies. The assumptions utilized in determining future taxable income
require significant judgment. Although we believe our assumptions, judgments and
estimates are reasonable, changes in tax laws or our interpretation of tax laws
and the resolution of any tax audits could have a material impact our
consolidated financial statements.
Claims Reserves
We maintain various levels of self-insured retention for certain losses
including property damage, loss of hire, employment practices liability,
employers' liability and general liability, among others. We accrue for property
damage and loss of hire charges on a per event basis.
Employment practices liability claims are accrued based on actual claims during
the year. Maritime employer's liability claims are generally estimated using
actuarial determinations. General liability claims are estimated by our internal
claims department by evaluating the facts and circumstances of each claim
(including incurred but not reported claims) and making estimates based upon
historical experience with similar claims. The amount of our loss reserves for
personal injury and protection claims is based on an analysis performed by a
third-party actuary which uses our historical loss patterns and trends as well
as industry data to estimate the unpaid loss and allocated loss adjustment
expense. Claim severity experienced in each year, ranging from minor incidents
to permanent disability or injuries requiring extensive medical care, is a key
driver of the variability around our reserve estimates. These estimates are
further subject to uncertainty because the ultimate disposition of claims
incurred is subject to the outcome of events which have not yet transpired.
Accordingly, we may be required to increase or decrease our reserve levels. At
December 31, 2022 , loss reserves for personal injury and protection claims
totaled $35.3 million , of which $15.5 million is included in "Other current
liabilities" and $19.8 million in "Other long-term liabilities" in the
accompanying Consolidated Balance Sheets. At December 31, 2021 , loss reserves
for personal injury and protection claims totaled $14.8 million and is included
in "Other current liabilities" in the accompanying Consolidated Balance Sheets.
Pension Plans
Accounting for employee benefit plans involves numerous assumptions and
estimates. Discount rate and expected return on plan assets are two critical
assumptions in measuring the cost and benefit obligation of the Company's
pension plans, which we evaluate when the plans are re-measured. Other
assumptions include the healthcare cost trend rate and employee demographic
factors such as retirement patterns, mortality, turnover and rate of
compensation increase.
The discount rate enables us to state expected future cash payments for benefits
as a present value on the measurement date. A lower discount rate increases the
present value of benefit obligations and increases pension expense. The discount
rates used to calculate the net present value of future benefit obligations for
our US plans is based on the average of current rates earned on long-term bonds
that receive a Moody's rating of "Aa" or better. We have determined that the
timing and amount of expected cash outflows on our plans reasonably match this
index. For our non-US plan, the discount rate used to calculate the net present
value of future benefit obligations is determined by using a yield curve of high
quality bond portfolios with an average maturity approximating that of the
liabilities. A one percentage point change in the assumed discount rate would
change total pension income for 2023 by approximately $2.0 million . A one
percentage point decrease in the assumed discount rate would increase the
projected benefit obligation at December 31, 2022 by approximately $27.5
million . A one percentage point increase in the assumed discount rate would
decrease the projected benefit obligation by approximately $1.6 million and
$22.7 million , respectively.
To determine the expected long-term rate of return on the plan assets, we
consider the current level of expected returns on risk free investments
(primarily government bonds), the historical level of risk premium associated
with the other asset classes in which the portfolio is invested and the
expectations for future returns of each asset class. The expected return for
each asset class was then weighted based on the target asset allocation to
develop the expected long-term rate of return on assets for the portfolio.
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Business Combinations We follow the acquisition method of accounting for business combinations. Assets acquired and liabilities assumed are recognized at the date of acquisition at their respective estimated fair value. Any excess of the purchase price over the fair value amounts assigned to assets and liabilities is recorded as goodwill. To the extent the estimated fair value of the net assets acquired exceeded the purchase price, we recognize a bargain purchase gain. Changes in these judgments or estimates can have a material impact on the valuation of the respective assets and liabilities acquired and our results of operations in periods after acquisition. The allocation of the purchase price may be modified up to one year after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. Our estimates of fair value of the acquired property and equipment and contract intangibles require us to use significant unobservable inputs, representative of a Level 3 fair value measurement, such as assumptions related to future marketability of each unit in light of the current market conditions and its current technical specifications, timing of future contract awards and expected operating dayrates, operating costs, rig utilization rates, tax rates, discount rate, capital expenditures, synergies, market values, estimated economic useful lives of the rigs and, in certain cases, management's belief that a drilling unit is no longer marketable and is unlikely to return to service in the near to medium term. It can be difficult to determine the fair value based on the cyclical nature of our business, demand for offshore drilling rigs in different markets and changes in economic conditions.
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