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Note 7 - Assets Held for Sale, Asset Sales and Asset Impairments

12 Months Ended

Dec. 31, 2021

(7)

ASSETS HELD FOR SALE, ASSET SALES AND ASSET IMPAIRMENTS

In 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 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. 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 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 had 23 vessels remaining in the held for sale account as of December 31, 2020. We also sold three vessels from our active fleet in 2020. During 2021, we sold a total of nine vessels that were classified as held for sale, added seven vessels to our assets held for sale, moved three vessels back into our active fleet and have 18 vessels remaining in the held for sale account as of December 31, 2021. In addition, we sold 10 vessels from our active fleet in 2021. One of the vessel sales was to a third-party operator, Jackson Offshore, which has a person in senior management, Matthew Rigdon, its Chief Operating Officer, who is the son of Larry Rigdon, the chairman of our Board of Directors. This vessel was sold for proceeds of $11.4 million, all of which was collected in the second quarter of 2021, and we recognized a gain of $4.3 million on the sale. We realized proceeds from sales of vessels and other assets during the years ended December 31, 2021 and 2020 of $34.0 million and $38.3 million, respectively.

See the following tables for additions and dispositions related to assets held for sale as well as net gains (losses) 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:

(In Thousands, except number of vessels)	Number of Vessels			2021		Number of Vessels			2020		Number of Vessels		2019

Beginning balance	23		$	34,396		46		$	39,287		—	$	—
Additions	7			18,096		32			97,663		46		66,033
Sales	(9	)		(15,433	)	(53	)		(26,877	)	—		—
Reactivation	(3	)		(7,250	)	(2	)		(500	)	—		—
Impairment	—			(15,388	)	—			(75,177	)	—		(26,746	)
Ending balance	18		$	14,421		23		$	34,396		46	$	39,287

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

(In Thousands, except number of vessels)	2021			2020		2019

Vessels sold from active fleet		10			3		40
Gain on sale of active vessels, net	$	3,499		$	1,217	$	2,434

Vessels sold from assets held for sale		9			53		—
Gain (loss) on vessels sold from assets held for sale, net	$	(6,209	)	$	6,384	$	—
Total vessels sold		19			56		40
Total gain (loss) on sales of vessels, net	$	(2,710	)	$	7,601	$	2,434

During the years ended December 31, 2021, 2020, and 2019, we recorded $13.7 million, $75.2 million, and $26.7 million, respectively, in impairment related to our assets held for sale. In 2021, we recaptured $1.7 million of impairment charged in 2020 to a vessel that we reactivated in 2021. In 2020, we recaptured $1.0 million in impairment charged in 2019 to two vessels reactivated in 2020. Such recaptures are included in our total net impairment numbers disclosed here. We will from time to time reactivate vessels from assets held for sale back into the active fleet. Upon reactivation, we determine the appropriate fair value of the vessel and recapture any prior impairment expense to the extent the active fair value exceeds the assets held for sale net realizable value. The value assigned to the reactivated vessel is limited to its book value, adjusted for depreciation, prior to its classification as an asset 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 estimate the net realizable value of our assets held for sale using various methodologies including third party appraisals, sales comparisons, sales agreements and scrap yard tonnage prices. Estimates generally fall in ranges rather than exact numbers due to the nature of sales of offshore vessels and industry conditions. Our value ranges depend on our expectation of the ultimate disposition of the vessel. We will in all circumstances attempt to achieve maximum value for our vessels, but also recognize that certain vessels are more likely to be recycled, especially given the time and effort required to achieve a sale and the costs incurred to maintain a vessel while a searching for a buyer. We establish ranges that in many cases have scrap value as the low end of the range and an expected open market sale value at the top of the range. When there is no expectation within the range that is considered more likely than any other, we apply equal probability weighting to the low and high ends of the valuation range. 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 parts and supplies inventory and charged $1.9 million, $3.0 million and $5.2 million, respectively, of impairment expense for the years ended December 31, 2021, 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 than not, that the shipyard would prevail in the dispute and that we would be liable for an 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 all obligations under the contract with the shipyard. Accordingly, a $4.0 million credit was recorded in the fourth quarter of 2020 to impairment expense, 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 support 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:

(In Thousands, except number of vessels)	Number of Vessels		2021		Number of Vessels		2020		Number of Vessels		2019

Assets held for sale	8	$	15,388		47	$	75,177		35	$	26,746
Reactivation of asset held for sale	1		(1,650	)	—		—		—		—
Obsolete inventory	—		1,905		—		2,959		—		5,223
Other	—		—		—		(4,027	)	—		5,804
Total impairment and other expense		$	15,643			$	74,109			$	37,773

In the first quarter of 2020, the World Health Organization declared an outbreak of a coronavirus (COVID-19) to be a pandemic (the COVID-19 pandemic) and, in response, 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 throughout 2020 and 2021. With respect to our 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 crude oil prices. Combined, these conditions adversely affected our operations and business beginning in late March 2020 and continuing through the remainder 2020 and 2021. Our industry began to experience signs of recovery in the fourth quarter of 2021 and into the current year. The initial reduction in demand for hydrocarbons together with a decline in the price of crude oil at the outset of the pandemic, resulted in our primary customers, the oil and gas companies, making material reductions to their planned spending on offshore projects, compounding the effect of COVID-19 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, in the first two quarters of 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. Beginning with the third quarter of 2020, conditions related to the pandemic and oil price environment stabilized and in the fourth quarter industry conditions marginally improved. Similarly, during the year ended December 31, 2021, we have not seen any indications in the industry that would indicate impairment of any of our asset groups. As a result, we did not identify additional events or conditions that would require us to perform a Step 1 evaluation during 2021. 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.