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Note 8 - Asset Held for Sale, Asset Sales and Asset Impairments

12 Months Ended

Dec. 31, 2020

(8)

ASSETS HELD FOR SALE, ASSET SALES AND ASSET IMPAIIMENTS

In previous years, we sought opportunities to dispose of our older vessels when market conditions warranted and opportunities would arise. As a result, vessel dispositions would vary from year to year, and gains (losses) on sales of assets would also fluctuate significantly from period to period. The majority of our vessels were sold to buyers with whom we do not compete in the offshore energy industry. We continue to employ that strategy, but to a lesser extent. In the fourth quarter of 2019, we made a strategic decision to reduce the size of our fleet and to remove assets that were not considered to be part of our long-term plans. As a result, we evaluated our fleet for vessels to be considered for disposal and identified 46 (approximately 20% of our total vessels at the time) vessels to be classified as held for sale. Beginning late in the first quarter of 2020, the industry and world economies were affected by a global pandemic and a concurrent reduction in the demand for and the price of crude oil (see discussion below in this Note 8). The pandemic and oil price impact severely affected the oil and gas industry and caused us to expand our disposal program to include more vessels. In the second and fourth quarters of 2020, we added 32 vessels to our assets held for sale. During 2020, we sold a total of 53 of the vessels that were classified as held for sale, moved two vessels back into our active fleet and have 23 vessels remaining in the held for sale account as of December 31, 2020. See the following tables for additions and dispositions related to assets held for sale as well as net gains on sales of vessels and impairments recorded when the assets were valued at net realizable value upon classification as held for sale.

Following is the activity in assets held for sale during the years ended December 31:

(Dollars in thousands)	Number of Vessels			2020		Number of Vessels		2019		Number of Vessels		2018

Beginning balance	46		$	39,287		—	$	—		—	$	—
Additions	32			97,664		46		66,033		—		—
Sales	(53	)		(26,877	)	—		—		—		—
Reactivation	(2	)		(500	)	—		—		—		—
Impairment	—			(75,177	)	—		(26,746	)	—		—
Ending balance	23		$	34,397		46	$	39,287		—	$	—

Following is the summary of vessel sales and the gains on sales of vessels for the years ended December 31:

(Dollars in thousands)	2020		2019		2018

Vessels sold from active fleet		3		40		38
Gain on sale of active vessels, net	$	1,217	$	2,434	$	10,935

Vessels sold from assets held for sale		53		—		—
Gain on vessels sold from assets held for sale, net	$	6,384	$	—	$	—
Total vessels sold		56		40		38
Total gain on sales of vessels, net	$	7,601	$	2,434	$	10,935

During the year December 31, 2020, we recorded $75.2 million in impairment related to our 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 two 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. We generally value vessels that will be sold rather than recycled at the midpoint of a value range based on sales agreements or using comparative sales in the marketplace. We do not separate our asset impairment expense by segment because of the significant movement of our assets between segments.

In conjunction with our review of conditions that would indicate potential impairment in the value of our assets, we identified certain obsolete marine service and vessel supplies and parts inventory and charged $2.9 million and $5.2 million, respectively, of impairment expense for the years ended December 31, 2020 and 2019. 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 2011, we contracted with a Brazilian shipyard to construct a vessel that was not completed. We initiated arbitration proceedings seeking completion of the hull or rescission of the contract and the return of funds. In response, the shipyard initiated a separate lawsuit seeking the amounts due under the contract. As of the fresh-start date, we recorded $1.8 million in other assets which represented the unimpaired balance of the construction costs that were expected to be returned to us once the dispute was resolved. During 2019, our final appeal was denied and the case was remanded back to the original courts. Our local counsel informed us that it was now more likely that not that the shipyard would prevail in the dispute and that we would be liable for the additional payment of $4.0 million. As a result, a $5.8 million expense was recorded in the fourth quarter of 2019. In 2020 the dispute with the shipyard was settled. We conveyed the ownership of the partially completed vessel to the shipyard in exchange for a release of any and all obligations under the contract with the shipyard. Accordingly, a $4.0 million credit was recorded in the fourth quarter of 2020, as no additional amounts are payable under the contract to the shipyard.

Impairments incurred during the last three years are primarily the result of our customers' reduction in offshore exploration and production expenditures caused by the ongoing and sustained low levels of crude oil and natural gas prices as well as our efforts to reduce the oversupply of vessels which currently exists in the offshore supply vessel market through the sale and recycling of vessels.

Following is a summary of impairment of vessels in our active fleet, assets held for sale, marine service and vessel supplies and other impairment and costs during the years ended December 31:

(Dollars in thousands)	Number of Vessels		2020		Number of Vessels		2019	Number of Vessels		2018

Active vessels	—	$	—		—	$	—	56	$	61,132
Assets held for sale	47		75,177		35		26,746	—		—
Obsolete inventory	—		2,959		—		5,223	—		—
Other	—		(4,027	)	—		5,804	—		—
Total impairment and other expense		$	74,109			$	37,773		$	61,132

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 imposed 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 remainder of the year. 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. During the third quarter conditions related to the pandemic and oil price environment did not worsen from the second quarter and in the fourth quarter industry conditions marginally improved compared with the third quarter. As a result, we did not identify additional events or conditions that would require us to perform a Step 1 evaluation during either quarter. We will continue to monitor the expected future cash flows and the fair market value of our asset groups for impairment.

Please refer to Note (1) for a discussion of our accounting policy for accounting for the impairment of long-lived assets.