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Note 15 - Asset Dispositions, Assets Held for Sale and Asset Impairments

9 Months Ended

Sep. 30, 2020

(15)

ASSET DISPOSITIONS, ASSETS HELD FOR SALE AND ASSET IMPAIRMENTS

In the fourth quarter of 2019, we evaluated our fleet for vessels to be considered for disposal and identified 46 vessels to be classified as held for sale. In the second quarter of 2020, we identified 22 additional vessels to be sold. The second quarter determination was largely a result of a worldwide downturn in the oil and gas industry precipitated by a global pandemic. In the first quarter of 2020, we sold 8 vessels that were held for sale and revalued the remaining 38 vessels to estimated net realizable value recording additional impairment expense of $10.2 million. In the second quarter of 2020, we sold 14 vessels that were held for sale and revalued the remaining 24 vessels to net realizable value recording additional impairment expense of $5.6 million. At June 30, 2020, when we identified the additional 22 vessels to be reclassified as assets held for sale, we recognized impairment expense of $49.9 million associated with those vessels. In the third quarter of 2020, we sold 22 vessels that were held for sale. At September 30, 2020, we have 24 vessels remaining in assets held for sale. See the following table for activity in our assets held for sale account:

(in thousands, except for number of vessels data)	Number of Vessels			Three Months Ended March 31, 2020			Number of Vessels			Three Months Ended June 30, 2020			Number of Vessels			Three Months Ended September 30, 2020			Number of Vessels			Nine Months Ended September 30, 2020
Beginning balance		46			39,287			38		$	26,142			46		$	29,064			46		$	39,287
Additions		—						22			15,931			—			—			22			15,931
Sales		(8	)		(2,938	)		(14	)		(7,408	)		(22	)		(9,901	)		(44	)		(20,247	)
Additional impairment		—			(10,207	)		—			(5,601	)		—			—			—			(15,808	)
Ending balance		38			26,142			46		$	29,064			24		$	19,163			24		$	19,163

During the nine months ended September 30, 2020, we have recorded $65.7 million in impairment related to our assets held for sale. In the three months ended September 30, 2020, we did not designate any additional vessels to be sold and did not record any additional impairment related to assets held for sale. We consider the valuation approach for our assets held for sale to be a Level 3 fair value measurement due to the level of estimation involved in valuing assets to be recycled or sold. We determined the fair value of the vessels held for sale using three methodologies depending on the vessel and on our planned method of disposition. We designated certain vessels to be recycled and valued those vessels using recycling yard pricing schedules based on dollars per ton. Other vessels were valued based on sales agreements or using comparative sales in the marketplace reduced by 10% to factor in the effects of completing a quick sale within the next twelve months. We do not separate our asset impairment expense by segment because of the significant movement of our assets between segments.

In 2020, we have sold 47 vessels, 44 of which were classified as assets held for sale and three of which were sold from the active fleet. We recognized gains on the asset sales of $5.3 million in the first quarter, $1.7 million in the second quarter, $0.5 million in the third quarter, and $7.5 million combined for the nine months ended September 30, 2020.

We evaluated our inventory as of September 30, 2020 and 2019 and charged $1.9 million and $5.2 million, respectively, to impairment expense for obsolete marine service and vessel supplies and parts inventory. We considered this valuation approach to be a Level 3 fair value measurement due to the level of estimation involved in valuing obsolete inventory.

In early 2020, it became evident that a novel coronavirus originating in Asia (COVID-19) could become a pandemic with worldwide reach. By mid- March, when the World Health Organization declared the outbreak to be a pandemic (the “COVID-19 pandemic”), much of the industrialized world had initiated severe measures to lessen its impact. The ongoing COVID-19 pandemic created significant volatility, uncertainty, and economic disruption during the first quarter of 2020. With respect to our particular sector, the COVID-19 pandemic resulted in a much lower demand for oil as national, regional, and local governments impose travel restrictions, border closings, restrictions on public gatherings, stay at home orders, and limitations on business operations in order to contain its spread. During this same time period, oil-producing countries struggled to reach consensus on worldwide production levels, resulting in both a market oversupply of oil and a precipitous fall in oil prices. Combined, these conditions adversely affected our operations and business beginning in the latter part of the first quarter of 2020 and continuing throughout the second and third quarters of 2020. We expect our operations and business in the remainder of 2020 to continue to be negatively impacted. The reduction in demand for hydrocarbons together with an unprecedented decline in the price of oil has resulted in our primary customers, the oil and gas companies, making material reductions to their planned spending on offshore projects, compounding the effect of the virus on offshore operations. Further, these conditions, separately or together, are expected to continue to impact the demand for our services, the utilization and/or rates we can achieve for our assets and services, and the outlook for our industry in general.

In the first and second quarters of 2020, we considered these events to be indicators that the value of our active offshore vessel fleet may be impaired. As a result, as of March 31, 2020 and June 30, 2020 , we performed Step 1 evaluations of our active offshore fleet under FASB Accounting Standards Codification 360, which governs the methodology for identifying and recording impairment of long-lived assets to determine if any of our asset groups have net book value in excess of undiscounted future net cash flows. Our evaluations did not indicate impairment of any of our asset groups. As of September 30, 2020, conditions related to the pandemic and oil price environment have not worsened from the second quarter. In addition, we have not significantly changed our outlook for our vessels since the second quarter forecast was updated to reflect the expected effect on our operations of the pandemic and reduced oil prices. As a result, we did not identify additional events or conditions that would require us to perform a Step 1 evaluation. We will continue to monitor the expected future cash flows and the fair market value of our asset groups for impairment.