PACIFIC DRILLING S.A., 20-F filed on 4/2/2018
Annual and Transition Report (foreign private issuer)
v3.8.0.1
Document and Entity Information
12 Months Ended
Dec. 31, 2017
shares
Document And Entity Information [Abstract]  
Document Type 20-F
Amendment Flag false
Document Period End Date Dec. 31, 2017
Document Fiscal Year Focus 2017
Document Fiscal Period Focus FY
Entity Registrant Name PACIFIC DRILLING S.A.
Entity Central Index Key 0001517342
Current Fiscal Year End Date --12-31
Entity Well-Known Seasoned Issuer No
Entity Current Reporting Status Yes
Entity Filer Category Non-accelerated Filer
Entity Voluntary Filers No
Entity Common Stock, Shares Outstanding 21,338,602
v3.8.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenues      
Contract drilling $ 319,716 $ 769,472 $ 1,085,063
Costs and expenses      
Operating expenses (244,089) (290,038) (431,261)
General and administrative expenses (87,134) (63,379) (55,511)
Depreciation expense (278,949) (275,901) (243,457)
Total costs and expenses (610,172) (629,318) (730,229)
Loss from construction contract rescission     (40,155)
Operating income (loss) (290,456) 140,154 314,679
Other income (expense)      
Interest expense (178,983) (189,044) (156,361)
Gain on debt extinguishment   36,233  
Reorganization items (6,474)    
Other expense (5,544) (2,393) (3,217)
Income (loss) before income taxes (512,303) (15,050) 155,101
Income tax expense (12,863) (22,107) (28,871)
Net income (loss) $ (525,166) $ (37,157) $ 126,230
Earnings (loss) per common share, basic (Note 10) (in dollars per share) $ (24.64) $ (1.76) $ 5.97
Weighted-average number of common shares, basic (Note 10) 21,315 21,167 21,145
Earnings (loss) per common share, diluted (Note 10) (in dollars per share) $ (24.64) $ (1.76) $ 5.97
Weighted-average number of common shares, diluted (Note 10) 21,315 21,167 21,156
v3.8.0.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]      
Net income (loss) $ (525,166) $ (37,157) $ 126,230
Other comprehensive income (loss):      
Unrealized loss on available-for-sale securities (485)    
Reclassification adjustment for other-than-temporary impairment on available-for-sale securities realized in net income 485    
Unrecognized loss on derivative instruments (565) (6,290) (14,889)
Reclassification adjustment for loss on derivative instruments realized in net income (Note 12) 5,265 8,798 10,440
Reclassification adjustment for loss on derivative instruments realized in property and equipment (Note 12)   1,789 1,164
Total other comprehensive income (loss) 4,700 4,297 (3,285)
Total comprehensive income (loss) $ (520,466) $ (32,860) $ 122,945
v3.8.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2017
Dec. 31, 2016
Assets:    
Cash and cash equivalents $ 308,948 $ 585,980
Restricted cash 8,500 40,188
Accounts receivable, net 40,909 94,622
Materials and supplies 87,332 95,679
Deferred costs, current 14,892 10,454
Prepaid expenses and other current assets 14,774 13,892
Total current assets 475,355 840,815
Property and equipment, net 4,652,001 4,909,873
Long-term receivable 202,575 202,575
Other assets 33,030 44,944
Total assets 5,362,961 5,998,207
Liabilities and shareholders’ equity:    
Accounts payable 11,959 17,870
Accrued expenses 36,174 45,881
Long-term debt, current   496,790
Accrued interest 6,088 14,164
Deferred revenue, current 23,966 45,755
Total current liabilities 78,187 620,460
Long-term debt, net of current maturities   2,648,659
Deferred revenue 12,973 32,233
Other long-term liabilities 32,323 30,655
Total liabilities not subject to compromise 123,483 3,332,007
Liabilities subject to compromise 3,087,677  
Commitments and contingencies
Shareholders’ equity:    
Common shares, $0.01 par value per share, 5,000,000 shares authorized, 22,551 shares issued and 21,339 and 21,184 shares outstanding as of December 31, 2017 and December 31, 2016, respectively 213 212
Additional paid-in capital 2,366,464 2,360,398
Accumulated other comprehensive loss (14,493) (19,193)
Retained earnings (accumulated deficit) (200,383) 324,783
Total shareholders’ equity 2,151,801 2,666,200
Total liabilities and shareholders’ equity $ 5,362,961 $ 5,998,207
v3.8.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]    
Common shares, par value (in dollars per share) $ 0.01 $ 0.01
Common shares, shares authorized 5,000,000 5,000,000
Common shares, shares issued 22,551 22,551
Common shares, shares outstanding 21,339 21,184
v3.8.0.1
Consolidated Statements of Shareholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Common Shares
Additional Paid-In Capital
Treasury Shares
Accumulated Other Comprehensive Loss
Retained Earnings
Total
Beginning Balance (in shares) at Dec. 31, 2014 21,579   1,698      
Beginning Balance at Dec. 31, 2014 $ 217 $ 2,371,390 $ (8,240) $ (20,205) $ 235,710 $ 2,578,872
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) 101   (101)      
Shares issued under share-based compensation plan $ 1 (537)       (536)
Shares repurchased (in shares) (559)   559      
Shares repurchased     $ (21,760)     (21,760)
Share-based compensation   12,534       12,534
Other comprehensive income (loss)       (3,285)   (3,285)
Net income (loss)         126,230 126,230
Ending Balance (in shares) at Dec. 31, 2015 21,121   2,156      
Ending Balance at Dec. 31, 2015 $ 218 2,383,387 $ (30,000) (23,490) 361,940 2,692,055
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) 63   (63)      
Shares issued under share-based compensation plan $ 1 (90)       (89)
Cancellation of treasury shares (in shares)     (726)      
Cancellation of treasury shares $ (7) (29,993) $ 30,000      
Share-based compensation   7,094       7,094
Other comprehensive income (loss)       4,297   4,297
Net income (loss)         (37,157) $ (37,157)
Ending Balance (in shares) at Dec. 31, 2016 21,184   1,367     21,184
Ending Balance at Dec. 31, 2016 $ 212 2,360,398   (19,193) 324,783 $ 2,666,200
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) 155   (155)      
Shares issued under share-based compensation plan $ 1 (200)       (199)
Modification of unvested awards from equity to liability   553       553
Share-based compensation   6,819       6,819
Other comprehensive income (loss)       4,700   4,700
Net income (loss)         (525,166) $ (525,166)
Ending Balance (in shares) at Dec. 31, 2017 21,339   1,212     21,339
Ending Balance at Dec. 31, 2017 $ 213 $ 2,366,464   $ (14,493) $ (200,383) $ 2,151,801
v3.8.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flow from operating activities:      
Net income (loss) $ (525,166) $ (37,157) $ 126,230
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:      
Depreciation expense 278,949 275,901 243,457
Amortization of deferred revenue (46,829) (67,053) (86,276)
Amortization of deferred costs 11,689 13,945 25,951
Amortization of deferred financing costs 24,889 18,786 11,278
Amortization of debt discount 940 1,279 1,015
Write-off of deferred financing costs 30,846   5,965
Loss from construction contract rescission     38,084
Deferred income taxes 7,409 15,494 9,840
Share-based compensation expense 6,819 7,094 12,534
Gain on debt extinguishment   (36,233)  
Other-than-temporary impairment of available-for-sale securities 6,829    
Reorganization items 5,315    
Changes in operating assets and liabilities:      
Accounts receivable 53,713 73,428 62,977
Materials and supplies 6,187 2,564 (2,583)
Prepaid expenses and other assets (20,457) (29,276) (10,840)
Accounts payable and accrued expenses 38,214 (24,843) (18,712)
Deferred revenue 5,780 35,175 3,226
Net cash provided by (used in) operating activities (114,873) 249,104 422,146
Cash flow from investing activities:      
Capital expenditures (36,645) (52,625) (181,458)
Purchase of available-for-sale securities (6,000)    
Net cash used in investing activities (42,645) (52,625) (181,458)
Cash flow from financing activities:      
Payments for shares issued under share-based compensation plan (199) (89) (536)
Proceeds from long-term debt   450,000 315,000
Payments on long-term debt (146,473) (110,832) (581,083)
Payments for financing costs (4,530) (25,423) (4,070)
Purchases of treasury shares     (21,760)
Net cash provided by (used in) financing activities (151,202) 313,656 (292,449)
Increase (decrease in cash and cash equivalents (308,720) 510,135 (51,761)
Cash, cash equivalents and restricted cash, beginning of period 626,168 116,033 167,794
Cash, cash equivalents and restricted cash, end of period $ 317,448 $ 626,168 $ 116,033
v3.8.0.1
Nature of Business
12 Months Ended
Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Nature of Business

Note 1—Nature of Business

Pacific Drilling S.A. and its subsidiaries (“Pacific Drilling,” the “Company,” “we,” “us” or “our”) is an international offshore drilling contractor committed to being the preferred provider of offshore drilling services to the oil and natural gas industry through the use of high-specification floating rigs. Our primary business is to contract our fleet to drill wells for our clients.

v3.8.0.1
Bankruptcy Proceeding and Liquidity
12 Months Ended
Dec. 31, 2017
Bankruptcy Proceeding and Liquidity  
Bankruptcy Proceeding and Liquidity

Note 2—Bankruptcy Proceeding and Liquidity

Bankruptcy Proceeding—On November 12, 2017 (the “Petition Date”), Pacific Drilling S.A. and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).  We have received approval from the Bankruptcy Court to jointly administer the cases under the caption In re Pacific Drilling S.A.  No trustee has been appointed and we will continue to operate as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Bankruptcy Court also granted us relief for a variety of “first day” motions to continue to operate our business in the normal course. The approved motions gave us the authority to, among other things, continue to pay employee wages and benefits without interruption, to utilize our current cash management system, and to pay certain foreign and critical vendors for goods and services provided prior to the Petition Date.

As a result of the Bankruptcy Petitions, the realization of assets and the satisfaction of liabilities are subject to uncertainty. Although the filing of the Bankruptcy Petitions triggered defaults under all of our existing debt obligations, creditors are stayed from taking any action against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code. While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to applicable orders of the Bankruptcy Court), for amounts other than those reflected in the accompanying consolidated financial statements. Further, any restructuring plan may impact the amounts and classifications of assets and liabilities reported in our consolidated financial statements.

As of December 31, 2017, we have segregated liabilities and obligations whose treatment and satisfaction were dependent on the outcome of our reorganization under the Chapter 11 proceedings and have classified these items as liabilities subject to compromise on our consolidated balance sheets. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities of the Debtors, as well as all pending litigation against the Debtors, were stayed while they are subject to the Chapter 11 proceedings. The ultimate amount and treatment for these types of liabilities will be subject to the claims resolution processes in our Chapter 11 proceedings and any restructuring plan confirmed by the Bankruptcy Court. Liabilities subject to compromise include only those liabilities that are obligations of the Debtors and exclude the obligations of the Company's non-debtor subsidiaries. Liabilities subject to compromise may vary significantly from the stated amounts of claims filed with the Bankruptcy Court.

As of December 31, 2017, the components of liabilities subject to compromise are as follows:

 

 

 

 

December 31, 2017

 

(in thousands)

2017 Senior Secured Notes

$

439,364

2018 Senior Secured Term Loan B

 

718,125

2013 Revolving Credit Facility

 

475,000

Senior Secured Credit Facility

 

661,478

2020 Senior Secured Notes

 

750,000

Accrued interest

 

39,618

Accounts payable and other estimated allowed claims

 

4,092

Total liabilities subject to compromise

$

3,087,677

See Note 6 for further discussion of the 2017 Senior Secured Notes, 2018 Senior Secured Term Loan B, 2013 Revolving Credit Facility, Senior Secured Credit Facility, 2020 Senior Secured Notes.

In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11 proceedings as reorganization items in our consolidated statements of operations. The components of reorganization items are as follows:

 

 

 

 

Year Ended

 

December 31, 2017

 

 

(in thousands)

Professional fees

$

6,447

Revision of estimated claims

 

27

Total reorganization items

$

6,474

Liquidity—Our liquidity fluctuates depending on a number of factors, including, among others, our contract backlog, our revenue efficiency and the timing of accounts receivable collection as well as payments for operating costs and other obligations. Market conditions in the offshore drilling industry in recent years have led to materially lower levels of spending for offshore exploration and development by our current and potential customers on a global basis while at the same time the supply of available drillships has increased, which in turn has negatively affected our revenue, profitability and cash flows.

 

Primary sources of funds for our short-term liquidity needs are expected to be our cash flow generated from operating activities and existing cash, cash equivalents and restricted cash balances. As of December 31, 2017, we had $308.9 million of cash and cash equivalents and $8.5 million of restricted cash. As part of our “first day” relief in the Chapter 11 proceedings, the Bankruptcy Court granted us authority to use property that may be deemed to be “cash collateral” of our prepetition lenders within the meaning of Section 363(a) of the Bankruptcy Code, which may include a portion of our cash flow generated from operating activities. We do not have additional borrowing capacity under any of our outstanding credit facilities, though we may seek “debtor in possession” financing with the approval of the Bankruptcy Court in the future if required.

We have significant indebtedness. Our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. Our financial condition, the defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt about our ability to continue as a going concern. However, the consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of our Chapter 11 proceedings. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported amounts of income and expenses could be required and could be material.

v3.8.0.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]  
Significant Accounting Policies

Note 3—Significant Accounting Policies

Bankruptcy Accounting—Our consolidated financial statements included herein have been prepared as if we are a going concern and reflect the application of Accounting Standards Codification (“ASC”) 852, Reorganizations, issued by the Financial Accounting Standards Board (“FASB”). ASC 852 requires that financial statements for periods subsequent to the Chapter 11 filing distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, we classify liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the reorganization under the Chapter 11 proceedings as liabilities subject to compromise on our consolidated balance sheets at December 31, 2017. In addition, we classify all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11 proceedings as reorganization items in our consolidated statements of operations. See Note 2.

Our consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 proceedings. In particular, the consolidated financial statements do not purport to show: (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders’ equity accounts of any changes that may be made to our capitalization; or (iv) the effect on operations of any changes that may be made to our business.

Principles of Consolidation—Our consolidated financial statements include the accounts of Pacific Drilling S.A. and consolidated subsidiaries that we control by ownership of a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate all intercompany transactions and balances in consolidation.

We are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), with Derotech Offshore Services Limited (“Derotech”), a privately-held Nigerian registered limited liability company. Derotech owns 51% of PIDWAL and PIDWAL has a 50.1% ownership interest in two of our rig holding subsidiaries, Pacific Bora Ltd. and Pacific Scirocco Ltd. PIDWAL’s interest in the rig holding subsidiaries is held through a holding company of PIDWAL, Pacific Drillship Nigeria Limited (“PDNL”). Derotech will not accrue the economic benefits of its interest in PIDWAL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Likewise, PIDWAL will not accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. PIDWAL and PDNL are variable interest entities for which we are the primary beneficiary. Accordingly, we consolidate all interests of PIDWAL and PDNL and no portion of their operating results is allocated to the noncontrolling interest. See Note 17.

In addition to the joint venture agreement, we are a party to marketing and logistic services agreements with Derotech and an affiliated company of Derotech. During the years ended December 31, 2017, 2016 and 2015, we incurred fees of $2.7 million, $8.7 million and $13.9 million, respectively, under such agreements.

Accounting Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, financial instruments, depreciation of property and equipment, impairment of long-lived assets, long-term receivable, liabilities subject to compromise, reorganization items, income taxes, share-based compensation and contingencies. We base our estimates and assumptions on historical experience and on various other factors we believe are 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. Actual results could differ from such estimates.

Revenues and Operating Expenses—Contract drilling revenues are recognized as earned, based on contractual dayrates. In connection with drilling contracts, we may receive fees for preparation and mobilization of equipment and personnel or for capital improvements to rigs. Fees and incremental costs incurred directly related to contract preparation and mobilization along with reimbursements received for capital expenditures are deferred and amortized to revenue over the primary term of the drilling contract. The cost incurred for reimbursed capital expenditures are depreciated over the estimated useful life of the asset. We may also receive fees upon completion of a drilling contract that are conditional based on the occurrence of an event, such as demobilization of a rig. These conditional fees and related expenses are reported in income upon completion of the drilling contract. If receipt of such fees is not conditional, they are recognized as revenue over the primary term of the drilling contract. Amortization of deferred revenue and deferred mobilization costs are recorded on a straight-line basis over the primary drilling contract term, which is consistent with the general pace of activity, level of services being provided and dayrates being earned over the life of the contract.

Cash and Cash Equivalents—Cash equivalents are highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash.

Restricted Cash—As of December 31, 2017 and 2016, our consolidated balance sheets included $8.5 million in restricted cash used as cash collateral under our treasury management services agreement with a financial institution. As of December 31, 2016, restricted cash also included $31.7 million pledged to the lenders under a debt agreement as cash collateral. See Note 6.

Accounts Receivable—We record trade accounts receivable at the amount we invoice our clients. We provide an allowance for doubtful accounts, as necessary, based on a review of outstanding receivables, historical collection information and existing economic conditions. We do not generally require collateral or other security for receivables. As of December 31, 2017 and 2016, we had $2.6 million and $0 in allowance for doubtful accounts, respectively.

Available-for-sale Securities—We record our investment in available-for-sale securities at fair value with unrealized gains and losses, net of tax, in accumulated other comprehensive loss on our consolidated balance sheets. We report realized gains or losses and any unrealized losses that are determined to be other than temporary in our consolidated statements of operations. See Note 11.

Materials and Supplies—Materials and supplies held for consumption are carried at average cost, net of allowances for excess or obsolete materials and supplies of $11.1 million and $7.3 million as of December 31, 2017 and 2016, respectively.

Property and Equipment—High-specification drillships are recorded at cost of construction, including any major capital improvements, less accumulated depreciation and if applicable, impairment. Other property and equipment is recorded at cost and consists of purchased software systems, furniture, fixtures and other equipment. Ongoing maintenance, routine repairs and minor replacements are expensed as incurred.

Interest is capitalized based on the costs of new borrowings attributable to qualifying new construction or at the weighted-average cost of debt outstanding during the period of construction. We capitalize interest costs for qualifying new construction from the point borrowing costs are incurred for the qualifying new construction and cease when substantially all the activities necessary to prepare the qualifying asset for its intended use are complete.

Property and equipment are depreciated to their salvage value on a straight-line basis over the estimated useful lives of each class of assets. Our estimated useful lives of property and equipment are as follows:

 

 

 

 

    

Years

Drillships and related equipment

 

15-35

Other property and equipment

 

2-7

 

We review property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable. Potential impairment indicators include steep declines in commodity prices and related market conditions, actual or expected declines in rig utilization, increases in idle time or significant damage to the property and equipment that adversely affects the extent and manner of its use. We assess impairment using estimated undiscounted cash flows for the property and equipment being evaluated by applying assumptions regarding future operations, market conditions, dayrates, utilization and idle time. An impairment loss is recorded in the period if the carrying amount of the asset is not recoverable. During 2017, 2016 and 2015, there were no long-lived asset impairments.

Deferred Financing Costs—Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest rate method over the term of the applicable long-term debt. As of December 31, 2017, all deferred financing costs have been written off. See Note 6.

Foreign Currency Transactions—The consolidated financial statements are stated in U.S. dollars. We have designated the U.S. dollar as the functional currency for our foreign subsidiaries in international locations because we contract with clients, purchase equipment and finance capital using the U.S. dollar. Transactions in other currencies have been translated into U.S. dollars at the rate of exchange on the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the transaction date is included as an exchange gain or loss. Monetary assets and liabilities denominated in currencies other than U.S. dollars are reported at the rates of exchange prevailing at the end of the reporting period. During 2017, 2016 and 2015, foreign exchange losses were $0.7 million, $0.5 million and $3.6 million, respectively, and recorded in other expense within our consolidated statements of operations.

Earnings per Share—Basic earnings per common share (“EPS”) is computed by dividing the net income by the weighted-average number of common shares outstanding for the period. Basic and diluted EPS are retrospectively adjusted for the effects of stock dividends or stock splits. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS. In May 2016, shareholders at our Extraordinary General Meeting approved a 1-for-10 reverse stock split of our common shares (the “Reverse Stock Split”). All share and per share information in the accompanying financial statements has been restated retroactively to reflect the Reverse Stock Split.

Fair Value Measurements—We estimate fair value at the 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 techniques require inputs that are categorized using a three-level hierarchy 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 input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

Share-Based Compensation—The grant date fair value of share-based awards granted to employees is recognized as an employee compensation expense over the requisite service period on a straight-line basis. For share-based awards to be settled in cash, compensation expense is remeasured each period with a cumulative adjustment to compensation cost based on changes in our share price. The amount of compensation expense recognized is adjusted to reflect the number of awards for which the related vesting conditions are expected to be met using estimated forfeitures. The amount of compensation expense ultimately recognized is based on the number of awards that do meet the vesting conditions at the vesting date.

Derivatives—We apply cash flow hedge accounting to interest rate swaps that are designated as hedges of the variability of future cash flows. The derivative financial instruments are recorded on our consolidated balance sheets at fair value as either assets or liabilities. Changes in the fair value of derivatives designated as cash flow hedges, to the extent the hedge is effective, are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings.

Hedge effectiveness is measured on an ongoing basis to ensure the validity of the hedges based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. Hedge accounting is discontinued prospectively if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item.

For interest rate hedges related to interest capitalized in the construction of fixed assets, other comprehensive income is released to earnings as the asset is depreciated over its useful life. For all other interest rate hedges, other comprehensive income is released to earnings as interest expense is accrued on the underlying debt.

Contingencies—We record liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the probable loss can be reasonably estimated. Once established, we adjust the estimated contingency loss accrual for changes in facts and circumstances that alter our previous assumptions with respect to the likelihood or amount of loss.

Income Taxes—Income taxes are provided based upon the tax laws and rates in the countries in which our subsidiaries are registered and where their operations are conducted and income and expenses are earned and incurred, respectively. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable enacted tax rates in effect the year in which the asset is realized or the liability is settled. A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. We recognize interest and penalties related to uncertain tax positions in income tax expense.

Recently Adopted Accounting Standards

Deferred Taxes — On November 20, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance, however, does not change the existing requirement that only permits offsetting within a tax jurisdiction. We adopted the standard prospectively effective January 1, 2017, which resulted in the reclassification of our deferred tax balances from current to long-term on our consolidated balance sheets. Our adoption of the standard did not have a material effect on our consolidated financial statements and related disclosures.

Share-based Payments — On March 30, 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires recognition of the income tax effects of equity awards in the income statement when the awards vest or are settled. The standard also allows employers to withhold shares upon settlement of an award for an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award. The standard permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. We adopted the standard effective January 1, 2017, using estimated forfeitures to recognize expense for share-based payment awards. Our adoption of the standard did not have a material effect on our consolidated financial statements and related disclosures.

Recently Issued Accounting Standards

Revenue Recognition — On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard replaces most existing revenue recognition guidance under GAAP.

Effective January 1, 2018, we account for the services provided within our drilling contracts as a single performance obligation composed of a series of distinct goods or services, which will be satisfied over time. We determine the total transaction price for each individual contract by estimating both fixed and variable consideration expected to be earned over the term of the contract. Consideration that does not relate to a distinct good or service, such as mobilization, demobilization, and contract preparation revenue, is allocated across the single performance obligation and recognized ratably over the term of the contract. All other components of consideration within a contract, including the dayrate revenue, continue to be recognized in the period when the services are performed. Our revenue recognition under ASU 2014-09 differs from our previous revenue recognition pattern only as it relates to demobilization revenue. Demobilization revenue, which was recognized upon completion of a contract under previous GAAP, is estimated at contract inception and recognized over the term of the contract under ASU 2014-09. We plan to adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective approach whereby we will record the cumulative effect of applying the new standard to all outstanding contracts as of January 1, 2018 as an adjustment to opening retained earnings. We do not expect this adjustment to be material.

Classification and Measurement of Financial Instruments — On January 25, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value through earnings, and eliminates the available-for-sale classification for equity securities with readily determinable fair values. The standard requires entities to record a cumulative-effect adjustment on their balance sheets as of the beginning of the fiscal year of adoption. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.

Leases — On February 25, 2016, the FASB issued ASU 2016-02, Leases, which (a) requires lessees to recognize a right-of-use asset and liability for virtually all leases, and (b) updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards. The update, which permits early adoption, is effective for annual and interim periods beginning after December 15, 2018. Under the updated accounting standards, we believe that our drilling contracts contain a lease component, and our adoption of the updates, therefore, may require that we separately recognize revenues associated with the lease and services components. Additionally, for transactions in which we are considered a lessee, we will recognize a lease liability and a right-of-use asset based on our portfolio of leases upon adoption. We expect to adopt the standard effective January 1, 2019 using the modified retrospective approach. Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract-specific facts and circumstances, and such effect could introduce variability to the timing of our revenue recognition relative to current accounting standards. We are currently evaluating the requirements to determine the effect such requirements may have on our consolidated financial statements and related disclosures.

Measurement of Credit Losses on Financial Instruments — On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. This update is effective for annual and interim periods beginning after January 1, 2020. We are currently evaluating the effect the standard may have on our consolidated financial statements and related disclosures.

Tax Accounting for Intra-Entity Asset Transfers — On October 24, 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. The standard requires a modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.

Scope of Modification Accounting for Stock Compensation — On May 10, 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted the standard effective January 1, 2018.

Modification of Accounting for Hedging Activities — On August 28, 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedging Activities, which eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The new guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. We adopted the standard effective January 1, 2018.

v3.8.0.1
Property and Equipment
12 Months Ended
Dec. 31, 2017
Property, Plant and Equipment [Abstract]  
Property and Equipment

Note 4—Property and Equipment

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2017

    

2016

 

 

 

(in thousands)

Drillships and related equipment

 

$

5,911,792

 

$

5,891,860

Other property and equipment

 

 

20,566

 

 

20,360

Property and equipment, cost

 

 

5,932,358

 

 

5,912,220

Accumulated depreciation

 

 

(1,280,357)

 

 

(1,002,347)

Property and equipment, net

 

$

4,652,001

 

$

4,909,873

 

During the years ended December 31, 2017, 2016 and 2015, we capitalized interest costs of $0,  $0 and $37.1 million, respectively.

v3.8.0.1
Loss from Construction Contract Rescission
12 Months Ended
Dec. 31, 2017
Contractors [Abstract]  
Loss from Construction Contract Rescission

Note 5—Loss from Construction Contract Rescission

On January 25, 2013, we entered into a contract with Samsung Heavy Industries Co., Ltd. (“SHI”) for the construction of an eighth drillship, the Pacific Zonda, which provided for a purchase price of approximately $517.5 million and an original delivery date of March 31, 2015 (the “Construction Contract”). On October 29, 2015, we exercised our right to rescind the Construction Contract due to SHI’s failure to timely deliver the drillship in accordance with the contractual specifications. The carrying value of the newbuild at the date of rescission was $315.7 million, consisting of (i) advance payments in the aggregate of $181.1 million paid by us to SHI, (ii) purchased equipment, (iii) internally capitalized construction costs and (iv) capitalized interest.

On November 25, 2015, SHI formally commenced an arbitration proceeding against us in accordance with the Construction Contract. On November 30, 2015, we made demand under the third party refund guarantee accompanying the Construction Contract for the amount of our advance payments made under the Construction Contract, plus interest. Any payment under the refund guarantee is suspended until an award under the arbitration is obtained.

As of December 31, 2017 and 2016, we owned $75.0 million in purchased equipment for the Pacific Zonda recorded in property and equipment, a majority of which remains on board the Pacific Zonda subject to return to us by SHI. During the year ended December 31, 2015, we incurred $2.0 million in crew costs directly associated with the Pacific Zonda subsequent to our rescission of the Construction Contract. The resulting net loss recognized in the year ended December 31, 2015 was $40.2 million, which is included in “loss from construction contract rescission” in our consolidated statements of operations.

Based on our assessment of the facts and circumstances of the rescission, we believe the recovery of the advance payments and accrued interest in the amount of $202.6 million is probable, and is thus presented as a long-term receivable on our consolidated balance sheets at December 31, 2017 and 2016, respectively.

v3.8.0.1
Debt
12 Months Ended
Dec. 31, 2017
Debt Disclosure [Abstract]  
Debt

Note 6—Debt

Debt, net of debt discounts, consists of the following:

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2017

    

 

2016

 

 

(in thousands)

Debt Obligations:

 

 

 

 

 

 

2017 Senior Secured Notes

 

$

439,364

 

$

438,880

2018 Senior Secured Term Loan B

 

 

718,125

 

 

722,706

2013 Revolving Credit Facility

 

 

475,000

 

 

500,000

Senior Secured Credit Facility

 

 

661,478

 

 

777,326

2020 Senior Secured Notes

 

 

750,000

 

 

750,000

Less: unamortized deferred financing costs

 

 

 —

 

 

(43,463)

Total debt

 

 

3,043,967

 

 

3,145,449

Less: liabilities subject to compromise

 

 

(3,043,967)

 

 

 —

Less: current portion of long-term debt

 

 

 —

 

 

(496,790)

Total long-term debt

 

$

 —

 

$

2,648,659

 

On November 12, 2017, the Debtors filed the Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code. The filing of the Bankruptcy Petitions constituted an event of default with respect to the 2017 Senior Secured Notes, 2018 Senior Secured Term Loan B, 2013 Revolving Credit Facility, Senior Secured Credit Facility and 2020 Senior Secured Notes (as defined below). As a result, the corresponding pre-petition secured indebtedness became immediately due and payable and any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 proceedings. As of December 31, 2017, all debt is classified as liabilities subject to compromise on our consolidated balance sheets.

 

2017 Senior Secured Notes

In November 2012, Pacific Drilling V Limited (“PDV”), an indirect, wholly-owned subsidiary of the Company, and the Company, as guarantor, completed a private placement of $500.0 million in aggregate principal amount of 7.25% senior secured notes due 2017 (the “2017 Senior Secured Notes”). The 2017 Senior Secured Notes bore interest at 7.25% per annum, payable semiannually on June 1 and December 1, with a scheduled maturity on December 1, 2017.

The 2017 Senior Secured Notes are secured by a first-priority security interest (subject to certain exceptions) in the Pacific Khamsin, and substantially all of the other assets of PDV, including an assignment of earnings and insurance proceeds related to the Pacific Khamsin.

During the year ended December 31, 2016, we repurchased $60.6 million of our 2017 Senior Secured Notes.

Senior Secured Credit Facility

In February 2013, Pacific Sharav S.à r.l. and Pacific Drilling VII Limited (collectively, the “SSCF Borrowers”) and the Company, as guarantor, entered into a senior secured credit facility agreement, as amended and restated (the “SSCF”), to finance the construction, operation and other costs associated with the Pacific Sharav and the Pacific Meltem (the “SSCF Vessels”). The SSCF is primarily secured on a first priority basis by liens on the SSCF Vessels, and by an assignment of earnings and insurance proceeds relating thereto.

In 2015, we completed the final drawdown under this facility, resulting in a cumulative total drawdown of $985.0 million. Following the final drawdown, the SSCF consisted of two principal tranches: (i) a Commercial Tranche of $492.5 million provided by a syndicate of commercial banks and (ii) a Garanti — Instituttet for Eksportkreditt (“GIEK”) Tranche of $492.5 million guaranteed by GIEK, comprised of two sub-tranches: (x) an Eksportkreditt Norge AS (“EKN”) sub-tranche of $246.3 million and (y) a bank sub-tranche of $246.3 million.

Borrowings under (A) the Commercial Tranche bear interest at London Interbank Offered Rate (“LIBOR”) plus a margin of 3.75%, (B) the EKN sub-tranche bear interest, at our option, at (i) LIBOR plus a margin of 1.5% (which margin may be reset on May 31, 2019) or (ii) at a Commercial Interest Reference Rate of 2.37% and (C) the bank sub-tranche bear interest at LIBOR plus a margin of 1.5%. Borrowings under both sub-tranches are also subject to a guarantee fee of 2% per annum. Interest is payable quarterly.

The Commercial Tranche has a scheduled maturity on May 31, 2019. Loans made with respect to the Pacific Sharav under the GIEK Tranche have a scheduled maturity on May 12, 2026. Loans made with respect to the Pacific Meltem under the GIEK Tranche have a scheduled maturity on November 24, 2026. The GIEK Tranche contains a put option exercisable if the Commercial Tranche is not refinanced or renewed on or before February 28, 2019. If the GIEK Tranche put option is exercised, each SSCF Borrower must prepay, in full, the portion of all outstanding loans that relate to the GIEK Tranche, on or before May 31, 2019, without any premium, penalty or fees of any kind. The SSCF requires semiannual amortization payments of $39.9 million; however, we will not make these payments during the pendency of our Chapter 11 proceedings.

As of December 31, 2016, we had pledged $31.7 million as collateral to the SSCF lenders to comply with the loan to rig value covenant. The pledged amount was classified as restricted cash on our consolidated balance sheets at December 31, 2016. During 2017, we applied the cash collateral to the principal installment due in May 2017.

2020 Senior Secured Notes

On June 3, 2013, we completed a $750.0 million private placement of 5.375% senior secured notes due 2020 (the “2020 Senior Secured Notes”).

The 2020 Senior Secured Notes bear interest at 5.375% per annum, payable semiannually on June 1 and December 1, with a scheduled maturity on June 1, 2020.

The 2020 Senior Secured Notes are guaranteed by each of our subsidiaries that own the Pacific Bora, the Pacific Mistral, the Pacific Scirocco and the Pacific Santa Ana (the “Shared Collateral Vessels”), each of our subsidiaries that own or previously owned equity or similar interests in a Shared Collateral Vessel-owning subsidiary, and certain other of our subsidiaries that are parties to charters in respect of the Shared Collateral Vessels, and will be guaranteed by certain other future subsidiaries.

The 2020 Senior Secured Notes are secured, on an equal and ratable, first priority basis, with the obligations under the Senior Secured Term Loan B (as defined below), the 2013 Revolving Credit Facility (as defined below) and certain future obligations, subject to payment priorities in favor of lenders under the 2013 Revolving Credit Facility pursuant to the terms of an intercreditor agreement (the “Intercreditor Agreement”), by liens on the Shared Collateral Vessels, a pledge of the equity of the entities that own the Shared Collateral Vessels, assignments of earnings and insurance proceeds with respect to the Shared Collateral Vessels, and certain other assets of the subsidiary guarantors (collectively, the “Shared Collateral”).

2018 Senior Secured Institutional Term Loan – Term Loan B

On June 3, 2013, we entered into a $750.0 million senior secured institutional term loan maturing 2018 (the “Senior Secured Term Loan B”). The Senior Secured Term Loan B bears interest, at our election, at either (1) LIBOR, which will not be less than a floor of 1% plus a margin of 3.5% per annum, or (2) a rate of interest per annum equal to (i) the prime rate for such day, (ii) the sum of the federal funds rate plus 0.5% or (iii) 1% per annum above the one-month LIBOR, whichever is the highest rate in each case plus a margin of 2.5% per annum. Interest is payable quarterly. The Senior Secured Term Loan B requires quarterly amortization payments of $1.9 million and has a scheduled maturity on June 3, 2018; however, we will not make these payments during the pendency of our Chapter 11 proceedings.

The Senior Secured Term Loan B is secured by the Shared Collateral and subject to the terms and provisions of the Intercreditor Agreement.

2013 Revolving Credit Facility

On June 3, 2013, we entered into a $500.0 million senior secured revolving credit facility with a scheduled maturity on June 3, 2018 (as amended, the “2013 Revolving Credit Facility”). The 2013 Revolving Credit Facility is secured by the Shared Collateral and subject to the provisions of the Intercreditor Agreement. The 2013 Revolving Credit Facility permitted loans to be extended up to a maximum sublimit of $475.0 million and permitted letters of credit to be issued up to a maximum sublimit of $300.0 million, subject to a $475.0 million overall facility limit.

Borrowings under the 2013 Revolving Credit Facility bear interest, at our option, at either (1) LIBOR plus a margin ranging from 3.25% to 3.75% based on our leverage ratio, or (2) a rate of interest per annum equal to (i) the prime rate for such day, (ii) the sum of the federal funds rate plus 0.5% or (iii) 1% per annum above the one-month LIBOR, whichever is the highest rate in each case plus a margin ranging from 2.25% to 2.75% per annum based on our leverage ratio. Undrawn commitments accrue a fee ranging from 1.3% to 1.5% per annum based on our leverage ratio. Interest is payable quarterly. Outstanding but undrawn letters of credit accrue a fee at a rate equal to the margin on LIBOR loans minus 1%.

Interest Expense

We have not accrued interest expenses that we believe are not probable of being treated as an allowed claim in the Chapter 11 proceedings. During the year ended December 31, 2017, contractual interest related to the 2017 Senior Secured Notes, the 2020 Senior Secured Notes and the Senior Secured Term Loan B that would have been accrued absent the Bankruptcy Petitions was $12.0 million.

Deferred Financing Costs

During the year ended December 31, 2017, $30.8 million of deferred financing costs previously recorded within our consolidated balance sheets were written off as an expense.

 

 

 

v3.8.0.1
Income Taxes
12 Months Ended
Dec. 31, 2017
Income Tax Disclosure [Abstract]  
Income Taxes

Note 7—Income Taxes

Pacific Drilling S.A., a holding company and Luxembourg resident, is subject to Luxembourg corporate income tax and municipal business tax at a combined rate of 27.1% for the year ended December 31, 2017, and 29.2% for the years ended December 31, 2016 and 2015. Qualifying dividend income and capital gains on the sale of qualifying investments in subsidiaries are exempt from Luxembourg corporate income tax and municipal business tax. Consequently, Pacific Drilling S.A. expects dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from Luxembourg corporate income tax and municipal business tax.

Income taxes have been provided based on the laws and rates in effect in the countries in which our operations are conducted or in which our subsidiaries are considered residents for income tax purposes. Our income tax expense or benefit arises from our mix of pretax earnings or losses, respectively, in the international tax jurisdictions in which we operate. Because the countries in which we operate have different statutory tax rates and tax regimes with respect to one another, there is no expected relationship between the provision for income taxes and our income or loss before income taxes.

Income (loss) before income taxes consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31, 

 

 

2017

    

 

2016

    

 

2015

 

    

 

(in thousands)

Luxembourg

 

$

349

 

 

$

190,849

 

 

$

94,558

United States

 

 

1,301

 

 

 

3,855

 

 

 

4,812

Other jurisdictions

 

 

(513,953)

 

 

 

(209,754)

 

 

 

55,731

Income (loss) before income taxes

 

$

(512,303)

 

 

$

(15,050)

 

 

$

155,101

 

The components of income tax (provision) / benefit consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31, 

 

    

2017

    

 

2016

    

 

2015

 

 

 

(in thousands)

Current income tax benefit (expense):

 

 

 

 

 

 

 

 

 

 

 

Luxembourg

 

$

(2,287)

 

 

$

53

 

 

$

(1,107)

United States

 

 

(3,202)

 

 

 

(1,874)

 

 

 

(2,347)

Other foreign

 

 

35

 

 

 

(4,792)

 

 

 

(15,577)

Total current

 

$

(5,454)

 

 

$

(6,613)

 

 

$

(19,031)

Deferred tax benefit (expense):

 

 

 

 

 

 

 

 

 

 

 

Luxembourg

 

$

321

 

 

$

(2,893)

 

 

$

(2,908)

United States

 

 

(6,145)

 

 

 

(448)

 

 

 

(1,071)

Other foreign

 

 

(1,585)

 

 

 

(12,153)

 

 

 

(5,861)

Total deferred

 

$

(7,409)

 

 

$

(15,494)

 

 

$

(9,840)

Income tax expense

 

$

(12,863)

 

 

$

(22,107)

 

 

$

(28,871)

 

A reconciliation between the Luxembourg statutory rate of 27.1% for the year ended December 31, 2017 and 29.2% for the years ended December 31, 2016 and 2015 and our effective tax rate is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31, 

 

    

2017

    

2016

    

2015

Statutory rate

 

 

27.1

%

 

 

29.2

%

 

 

29.2

%

Effect of tax rates different than the Luxembourg statutory tax rate

 

 

(19.2)

%

 

 

(13.2)

%

 

 

(22.5)

%

Change in valuation allowance

 

 

(8.0)

%

 

 

(85.1)

%

 

 

10.6

%

Changes in unrecognized tax benefits

 

 

(0.8)

%

 

 

(75.9)

%

 

 

1.9

%

Equity based compensation shortfall

 

 

(1.2)

%

 

 

(7.0)

%

 

 

1.4

%

Change in enacted statutory tax rates

 

 

(0.5)

%

 

 

%

 

 

%

Adjustments related to prior years

 

 

0.1

%

 

 

5.1

%

 

 

(2.0)

%

Effective tax rate

 

 

(2.5)

%

 

 

(146.9)

%

 

 

18.6

%

 

The components of deferred tax assets and liabilities consists of the following:

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2017

    

2016

 

 

 

(in thousands)

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$

52,568

 

$

26,190

Depreciation and amortization

 

 

35,873

 

 

25,109

Accrued payroll expenses

 

 

4,595

 

 

9,471

Deferred revenue

 

 

2,189

 

 

5,744

Other

 

 

1,119

 

 

1,622

Deferred tax assets

 

 

96,344

 

 

68,136

Less: valuation allowance

 

 

(86,495)

 

 

(45,766)

Total deferred tax assets

 

$

9,849

 

$

22,370

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

Depreciation and amortization

 

$

(6,505)

 

$

(7,465)

Deferred expenses

 

 

(1,459)

 

 

(8,598)

Other

 

 

(88)

 

 

(1,083)

Total deferred tax liabilities

 

$

(8,052)

 

$

(17,146)

 

 

 

 

 

 

 

Net deferred tax assets

 

$

1,797

 

$

5,224

 

As of December 31, 2017 and 2016, the Company had gross deferred tax assets of $52.6 million and $26.2 million, respectively, related to loss carry forwards in various worldwide tax jurisdictions. The majority of the loss carry forwards have no expiration.

A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017 and 2016, the valuation allowance for deferred tax assets was $86.5 million and $45.8 million, respectively. During the year ended December 31, 2017, the increase in our valuation allowance primarily resulted from net operating losses, for which it is uncertain if a tax benefit will be realized. The newly enacted U.S. tax legislation reduced our net deferred tax assets as of December 31, 2017 by an immaterial amount, and is not expected to have a material impact on our income tax expense in future years.

We consider the earnings of certain of our subsidiaries to be indefinitely reinvested. Accordingly, we have not provided for taxes on these unremitted earnings. Should we make distributions from the unremitted earnings of these subsidiaries, we would be subject to taxes payable in certain jurisdictions. As of December 31, 2017, the amount of indefinitely reinvested earnings was approximately $24.1 million, and if all of these indefinitely reinvested earnings were distributed, we would be subject to estimated taxes of approximately $7.2 million.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. As of December 31, 2017, we had $38.9 million of unrecognized tax benefits which were included in other long-term liabilities on our consolidated balance sheets and would impact our consolidated effective tax rate if realized. To the extent we have income tax receivable balances available to utilize against amounts payable for unrecognized tax benefits, we have presented such receivable balances as a reduction to other long-term liabilities on our consolidated balance sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2017

    

2016

 

 

 

(in thousands)

Balance, beginning of year

 

$

34,027

 

$

24,914

Increases in unrecognized tax benefits as a result of tax positions taken during current year

 

 

4,833

 

 

9,113

Balance, end of year

 

$

38,860

 

$

34,027

 

As of December 31, 2017 and 2016, accrued interest and penalties totaled $0 and $4.8 million respectively, and were included in other long-term liabilities on our consolidated balance sheets. During the years ended December 31, 2017, 2016 and 2015, we recognized expense of $0,  $2.3 million, and $1.2 million associated with interest and penalties respectively. Interest and penalties are included in income tax expense in our consolidated statements of operations.

The Company is subject to taxation in various U.S., foreign, and state jurisdictions in which it conducts business. Tax years as early as 2011 remain subject to examination. As of December 31, 2017, the Company has ongoing tax audits in Nigeria and Brazil.

v3.8.0.1
Shareholders' Equity
12 Months Ended
Dec. 31, 2017
Equity [Abstract]  
Shareholders' Equity

Note 8—Shareholders’ Equity

In 2014, the Company’s shareholders approved, and the Board of Directors authorized, a share repurchase program for the repurchase of up to 0.8 million shares and up to $30.0 million. In 2015, we completed this repurchase program through cumulative buybacks of 0.7 million shares at an aggregate cost of $30.0 million. Repurchased shares of our common stock are held as treasury shares until they are reissued or retired.

In May 2016, shareholders at our Extraordinary General Meeting approved the cancellation of 0.7 million treasury shares that we repurchased under our share repurchase program. We accounted for this non-cash transaction by netting the treasury shares at total cost of $30.0 million against the statutory share capital of the cancelled shares and additional paid-in capital.

In May 2016, upon approval by shareholders at our Extraordinary General Meeting, a 1-for-10 reverse stock split of our common shares, the Reverse Stock Split became effective and our common shares began trading on a split-adjusted basis. On the effective date of the Reverse Stock Split, our shareholders received one new common share for every 10 common shares they owned. All share and per share information in the accompanying financial statements has been restated retroactively to reflect the Reverse Stock Split.

 

As of December 31, 2017, the Company’s share capital consists of 5.0 billion common shares authorized, $0.01 par value per share, 22.5 million common shares issued and 21.3 million common shares outstanding, of which approximately 70.3% is held by Quantum Pacific (Gibraltar) Limited.

v3.8.0.1
Share-Based Compensation
12 Months Ended
Dec. 31, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-Based Compensation

Note 9—Share-Based Compensation

We recorded share-based compensation expense and related tax benefit within our consolidated statements of operations as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

    

2017

    

2016

    

2015

 

 

 

(in thousands)

Operating expenses

 

$

416

 

$

658

 

$

4,650

General and administrative expenses

 

 

6,403

 

 

6,436

 

 

7,884

Share-based compensation expense

 

 

6,819

 

 

7,094

 

 

12,534

Tax benefit (a)

 

 

(1,147)

 

 

(2,011)

 

 

(2,690)

Total

 

$

5,672

 

$

5,083

 

$

9,844


(a)

The effects of tax benefit from share-based compensation expense are included within income tax expense in our consolidated statements of operations.

Stock Options

In 2011, the Board approved the creation of the Pacific Drilling S.A. 2011 Omnibus Stock Incentive Plan (the “2011 Stock Plan”), which provides for issuance of common stock options, as well as share appreciation rights, restricted shares, restricted share units and other equity based or equity related awards to directors, officers, employees and consultants. The Board also resolved that 0.7 million common shares of Pacific Drilling S.A. be reserved and authorized for issuance pursuant to the terms of the 2011 Stock Plan. In 2014, the Board approved an amendment to the 2011 Stock Plan increasing the number of common shares reserved and available for issuance from 0.7 million to 1.6 million.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model utilizing the assumptions noted in the table below. Given the insufficient historical data available regarding the volatility of the Company’s traded share price, expected volatility of the Company’s share price does not solely provide a reasonable basis for estimating volatility. Instead, the expected volatility utilized in our Black-Scholes valuation model is based on the volatility of the Company’s traded share price for the period available following the initial public offering of our shares and the implied volatilities from the expected volatility of a representative group of our publicly listed industry peer group for prior periods. Additionally, given the lack of historical data available, the expected term of the options is calculated using the simplified method because the historical option exercise experience of the Company does not provide a reasonable basis for estimating expected term. Options granted generally vest 25% annually over four years, have a 10-year contractual term and will be settled in shares of our stock. The risk free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.

During the years ended December 31, 2017 and 2016, there were no options granted. During the year ended December 31, 2015, the fair value of the options granted was calculated using the following weighted-average assumptions:

 

 

 

 

 

 

2015

 

    

Stock Options

Expected volatility

 

40.9

%

Expected term (in years)

 

6.25

 

Expected dividends

 

 —

 

Risk-free interest rate

 

1.7

%

 

A summary of option activity under the 2011 Stock Plan as of and for the year ended December 31, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of
Shares
Under
Option

    

 

Weighted-
Average
Exercise
Price

    

Weighted-
Average
Remaining
Contractual
Term

    

 

Aggregate
Intrinsic
Value

 

 

(in thousands)

 

 

(per share)

 

(in years)

 

 

(in thousands)

Outstanding — January 1, 2017

 

637

 

$

74.24

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 

Exercised

 

 —

 

 

 —

 

 

 

 

 

Cancelled or forfeited

 

(358)

 

 

81.62

 

 

 

 

 

Outstanding — December 31, 2017

 

279

 

$

64.76

 

6.7

 

$

 —

Exercisable — December 31, 2017

 

195

 

$

77.07

 

6.1

 

$

 —

 

The weighted-average grant date fair value of options granted during the year ended December 31, 2015 was $14.90 per option.

During the years ended December 31, 2017, 2016 and 2015, no options were exercised. As of December 31, 2017, total compensation costs related to nonvested option awards not yet recognized was $0.7 million and was expected to be recognized over 1.3 years.

Restricted Share Units

Pursuant to the 2011 Stock Plan, the Company has granted restricted share units to certain members of our Board of Directors, executives and employees that will be settled in shares of our stock and generally vest over a period of three to four years. The fair value of restricted share units is determined using the market value of our shares on the date of grant. During the second quarter of 2017, the Company converted all 0.3 million of unvested restricted share units granted in 2016 into cash-settled restricted share units. We accounted for the modification by transferring $0.6 million amortized expense from equity to liability.

A summary of restricted share units activity under the 2011 Stock Plan as of and for the year ended December 31, 2017 was as follows:

 

 

 

 

 

 

 

    

Number of
Restricted
Stock
Units

    

Weighted-Average
Grant-Date Fair
Value

 

 

(in thousands)

 

 

(per share)

Nonvested — January 1, 2017

 

580

 

$

18.14

Granted

 

 —

 

 

 —

Converted to liability awards

 

(277)

 

 

5.29

Vested

 

(214)

 

 

24.06

Cancelled or forfeited

 

(19)

 

 

37.70

Nonvested —  December 31, 2017

 

70

 

$

45.28

 

The weighted-average grant-date fair value of restricted share units granted was $5.29 and $36.40 per share for the years ended December 31, 2016 and 2015, respectively. The total grant-date fair value of the restricted share units vested was $5.2 million, $4.8 million and $9.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017, total compensation costs related to nonvested restricted share units not yet recognized was $1.5 million and is expected to be recognized over a weighted-average period of 1.1 years.

 

Cash-Settled Restricted Share Units

During the year ended December 31, 2017, pursuant to the 2011 Stock Plan, the Company granted 0.6 million of cash-settled restricted share units to certain of our executives and employees. The value of cash-settled restricted share units is determined based on our common share price on the vesting date and are paid in cash with no actual shares issued. Compensation expense of cash-settled restricted share units is remeasured each quarter with a cumulative adjustment to compensation cost during the period based on changes in our share price.

 

For executives, units vest if and when certain performance targets of the Company are met prior to the vesting dates. For other employees, units generally vest 33.3% annually over three years. During the year ended December 31, 2017, 0.2 million of cash-settled restricted share units vested and were settled for $0.5 million in cash, and 0.2 million units were forfeited. As of December 31, 2017, 0.5 million of unvested cash-settled restricted share units were outstanding.

v3.8.0.1
Earnings per Share
12 Months Ended
Dec. 31, 2017
Earnings Per Share [Abstract]  
Earnings per Share

Note 10—Earnings per Share

The following reflects the income and the share data used in the basic and diluted EPS computations:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

 

2017

    

2016

    

2015

 

 

 

(in thousands, except per share information)

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss), basic and diluted

 

$

(525,166)

 

$

(37,157)

 

$

126,230

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding, basic

 

 

21,315

 

 

21,167

 

 

21,145

Effect of share-based compensation awards

 

 

 —

 

 

 —

 

 

11

Weighted-average number of common shares outstanding, diluted

 

 

21,315

 

 

21,167

 

 

21,156

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(24.64)

 

$

(1.76)

 

$

5.97

Diluted

 

$

(24.64)

 

$

(1.76)

 

$

5.97

 

The following table presents the share effects of share-based compensation awards excluded from our computations of diluted EPS as their effect would have been anti-dilutive for the periods presented:

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

    

2017

    

2016

    

2015

 

 

(in thousands)

Share-based compensation awards

 

349

 

1,217

 

889

 

v3.8.0.1
Available-for-Sale Securities
12 Months Ended
Dec. 31, 2017
Available-for-Sale Securities  
Available-for-Sale Securities

Note 11—Available-for-Sale Securities

In June and August 2017, we received certain equity securities of Hyperdynamics Corporation (“Hyperdynamics”), consisting of 4,677,450 Hyperdynamics common shares and warrants to purchase 3,082,194 Hyperdynamics common shares issued to us as payment of a portion of our revenues due under a drilling contract with Hyperdynamics. These equity securities were classified as available-for-sale securities, recorded in prepaid expenses and other current assets on our consolidated balance sheets.

In September 2017, the share price of Hyperdynamics decreased significantly after it announced that its exploration well did not encounter hydrocarbons. In December 2017, Hyperdynamics filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. During the year ended December 31, 2017, we recognized an other-than-temporary impairment in our Hyperdynamics available-for-sale securities of $6.8 million, recorded in other expense in our consolidated statements of operations. As of December 31, 2017, the aggregate fair value and cost basis of our investment were $0.

v3.8.0.1
Derivatives
12 Months Ended
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives

Note 12—Derivatives

We are exposed to market risk from changes in interest rates and foreign exchange rates. From time to time, we may enter into a variety of derivative financial instruments in connection with the management of our exposure to fluctuations in interest rates and foreign exchange rates. We do not enter into derivative transactions for speculative purposes; however, for accounting purposes, certain transactions may not meet the criteria for hedge accounting.

In 2013, we entered into an interest rate swap as a cash flow hedge against future fluctuations in LIBOR with a notional value of $712.5 million. The interest rate swap did not amortize and had a scheduled maturity on December 3, 2017. On a quarterly basis, we paid a fixed rate of 1.56% and received the maximum of 1% or three-month LIBOR. As of September 30, 2017, we discontinued hedge accounting of the interest rate swap. The interest rate swap was terminated shortly after the Petition Date.

In 2013, we also entered into an interest rate swap as a cash flow hedge against future fluctuations in LIBOR with a notional value of $400.0 million. The interest rate swap did not amortize and had a scheduled maturity on July 1, 2018. On a quarterly basis, we paid a fixed rate of 1.66% and received three-month LIBOR. As of the Petition Date, we discontinued hedge accounting of the interest rate swap. The interest rate swap was terminated shortly after the Petition Date.

In 2014, we entered into a series of foreign currency forward contracts as a cash flow hedge against future exchange rate fluctuations between the Euro and U.S. dollar. We used the forward contracts to hedge Euro payments for forecasted capital expenditures. As of December 31, 2016, the forward contracts were fully settled. Upon settlement, we paid U.S. dollars and received Euros at forward rates ranging from $1.25 to $1.27. As a result of settling the effective hedge in 2016 and 2015, we incurred net cash outflows of $1.8 million and $1.2 million, respectively, and reclassified the amounts from accumulated other comprehensive income to property and equipment.

The following table provides data about the fair values of derivatives that were designated as hedge instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

Derivatives Designated as Hedging Instruments

    

Balance Sheet Location

    

2017

    

2016

 

 

 

 

 

(in thousands)

Short-term — Interest rate swaps

 

Accrued expenses

 

$

 —

 

$

(3,838)

Long-term — Interest rate swaps

 

Other long-term liabilities

 

 

 —

 

 

(84)

Total

 

 

 

$

 —

 

$

(3,922)

 

We have elected not to offset the fair value of derivatives subject to master netting agreements, but to report them on a gross basis on our consolidated balance sheets.

The following table summarizes the cash flow hedge gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in Cash Flow
Hedging Relationships

 

Gain (Loss) Recognized
in Other Comprehensive Income (“OCI”) for the
Year Ended December 31, 

 

Loss Reclassified
from Accumulated OCI into
Income for the
Year Ended December 31, 

 

Gain (Loss) Recognized in

Income (Ineffective Portion and

Amount Excluded from Effectiveness

Testing) for the

Year ended December 31, 

 

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

 

2017

 

2016

 

2015

 

 

(in thousands)

Interest rate swaps

 

$

4,700

 

$

2,713

 

$

(1,701)

 

$

5,265

 

$

8,798

 

$

10,440

 

$

 —

 

$

 —

 

$

 —

Foreign currency forward contracts

 

$

 —

$ -

$

1,584

$ -

$

(1,584)

 

$

 —

$ -

$

 —

$ -

$

 —

 

$

 —

$ -

$

 —

$ -

$

(296)

 

As of December 31, 2017, the estimated amount of net losses associated with derivative instruments that would be reclassified from accumulated other comprehensive loss to earnings during the next twelve months was $0.8 million. During the years ended December 31, 2017, 2016 and 2015, we reclassified $4.5 million, $8.0 million and $9.6 million to interest expense and $0.8 million, $0.8 million and $0.8 million to depreciation from accumulated other comprehensive loss, respectively.

v3.8.0.1
Fair Value Measurements
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 13—Fair Value Measurements

We estimated fair value by using appropriate valuation methodologies and information available to management as of December 31, 2017 and 2016. Considerable judgment is required in developing these estimates, and accordingly, estimated values may differ from actual results.

The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated their carrying value due to their short-term nature. It is not practicable to estimate the fair value of our receivable from SHI (see Note 5), SSCF debt and 2013 Revolving Credit Facility. The following table presents the carrying value and estimated fair value of our cash and cash equivalents and other debt instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

2017

 

2016

 

 

Carrying

 

Estimated Fair

 

Carrying

 

Estimated Fair

 

    

Value

    

Value

    

Value

    

Value

 

 

 

(in thousands)

Cash and cash equivalents

 

$

308,948

 

$

308,948

 

$

585,980

 

$

585,980

2017 Senior Secured Notes

 

 

439,364

 

 

243,847

 

 

438,880

 

 

208,698

2018 Senior Secured Term Loan B

 

 

718,125

 

 

290,841

 

 

722,706

 

 

256,931

2020 Senior Secured Notes

 

 

750,000

 

 

307,500

 

 

750,000

 

 

270,000

 

We estimate the fair value of our cash equivalents using significant other observable inputs, representative of a Level 2 fair value measurement, including the net asset values of the investments. As of December 31, 2017 and December 31, 2016, the aggregate carrying amount of our cash equivalents was $220.7 million and $0, respectively. We estimate the fair values of our variable-rate and fixed-rate debt using quoted market prices to the extent available and significant other observable inputs, which represent Level 2 fair value measurements.

The following table presents the carrying value and estimated fair value of our financial instruments recognized at fair value on a recurring basis: 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

Fair Value Measurements Using

 

 

Carrying

 

 

 

 

 

 

 

 

    

Value

    

Level 1

    

Level 2

    

Level 3

Liabilities:

 

 

(in thousands)

Interest rate swaps

 

$

(3,922)

 

 —

 

$

(3,922)

 

 —

 

We use an income approach to value assets and liabilities for outstanding interest rate swaps. These contracts are valued using a discounted cash flow model that calculates the present value of futu