XML 21 R9.htm IDEA: XBRL DOCUMENT v3.24.2.u1
Equity Method Investment In ARO Equity Method Investment In ARO
 6 Months Ended
Jun. 30, 2024
Equity Method Investments and Joint Ventures [Abstract]  
Equity Method Investment In ARO Equity Method Investment in ARO
Background
    
ARO is a 50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates jackup drilling rigs in Saudi Arabia. As of June 30, 2024, ARO owns nine jackup rigs and leases nine rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO.

The shareholder agreement governing the joint venture (the "Shareholder Agreement") specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups, the first of which, Kingdom 1, was delivered and commenced operations in the fourth quarter of 2023, and the second, Kingdom 2, was delivered in the second quarter of 2024 and is expected to commence operations in the third quarter of 2024. ARO is expected to commit to orders for two additional newbuild jackups in the near term. In connection with these plans, we have a potential obligation to fund ARO for newbuild jackup rigs. See "Note 11 - Contingencies" for additional information.

Summarized Financial Information

The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs as well as the rigs leased from us. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. See additional discussion below regarding these related-party transactions.

Summarized financial information for ARO is as follows (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Revenues$124.2 $117.8 $262.5 $241.4 
Operating expenses
Contract drilling (exclusive of depreciation)94.1 95.0 192.4 185.9 
Depreciation19.7 15.6 38.7 30.6 
General and administrative5.5 5.7 11.3 10.3 
Operating income4.9 1.5 20.1 14.6 
Other expense, net13.4 8.8 26.5 19.2 
Provision (benefit) for income taxes(1.8)— 1.9 1.9 
Net Loss$(6.7)$(7.3)$(8.3)$(6.5)
June 30, 2024December 31, 2023
Cash and cash equivalents$131.7 $92.9 
Other current assets157.8 184.0 
Non-current assets1,214.4 1,081.0 
Total assets$1,503.9 $1,357.9 
Current liabilities$173.2 $136.0 
Non-current liabilities1,172.2 1,056.8 
Total liabilities$1,345.4 $1,192.8 

Equity in Earnings (Losses) of ARO

We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income (loss), adjusted for basis differences as discussed below, in Equity in earnings (losses) of ARO in our Condensed Consolidated Statements of Operations.

Our equity method investment in ARO was recorded at its estimated fair value in fresh start accounting upon emergence from bankruptcy in 2021. We computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's U.S. GAAP financial statements ("basis differences") at that date. These basis differences primarily related to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms relative to market terms as of the measurement date.

Basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the Equity in earnings (losses) of ARO in our Condensed Consolidated Statements of Operations. The amortization of those basis differences is combined with our 50% interest in ARO's net income (loss). A reconciliation of those components is presented below (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
50% interest in ARO net loss$(3.4)$(3.7)$(4.2)$(3.3)
Amortization of basis differences3.1 3.0 6.3 5.9 
Equity in earnings (losses) of ARO$(0.3)$(0.7)$2.1 $2.6 

Related-Party Transactions

During the three and six months ended June 30, 2024, revenues recognized by us related to the Lease Agreements were $12.6 million and $31.6 million, respectively. During the three and six months ended June 30, 2023, revenues recognized by us related to the Lease Agreements were $16.8 million and $35.6 million, respectively.
Our balances related to the ARO lease agreements were as follows (in millions):

June 30, 2024December 31, 2023
Amounts receivable (1)
$27.9 $10.2 
Contract liabilities(2)
$22.2 $15.9 
Accounts payable(2)
$13.9 $57.7 

(1)Amounts receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets.
(2)The per day bareboat charter amount in the Lease Agreements is subject to adjustment based on actual performance of the respective rig and therefore, the corresponding contract liabilities are subject to adjustment during the lease term. Upon completion of the lease term, such amount becomes a payable to or a receivable from ARO. As a result of the Net Settlement Agreement, as defined below, a portion of our accounts payable to ARO was reduced by $50.7 million in June of 2024.

During 2017 and 2018, the Company contributed assets to ARO in exchange for 10-year Notes Receivable from ARO. The Notes Receivable, as amended in December 2023, bear interest based on a one-year term SOFR, set as of the end of the year prior to the applicable year, plus 2.10%. The Notes Receivable from ARO were adjusted to their estimated fair value in fresh start accounting upon emergence from bankruptcy in 2021 and the resulting discount to the principal amount is being amortized using the effective interest method to interest income over the remaining terms of the notes.

Under the Shareholder Agreement, a contract liability is created when amounts which the Company bills in accordance with its Lease Agreements are in excess of lease revenues earned. These contract liabilities are required to be settled in cash. In June 2024, the Company and ARO executed a net settlement agreement (the “Net Settlement Agreement”) whereby $50.7 million of accounts payable due to ARO, which related to lease revenue adjustments resulting from the actual performance of rigs leased to ARO between 2018 and early 2023, was net settled against a portion of the Notes Receivable from ARO retroactive to January 1, 2024. As a result of the Net Settlement Agreement, the aggregate principal balance of the Notes Receivable from ARO was reduced to $352.0 million and we recognized non-cash interest income of $13.9 million related to the discount attributable to the partial settlement in the second quarter of 2024.

The principal amount and discount of the Notes Receivable from ARO were as follows (in millions):

June 30, 2024December 31, 2023
Principal amount$352.0 $402.7 
Discount(92.8)(120.4)
Carrying value$259.2 $282.3 
Interest receivable(1)(2)
$12.2 $— 

(1)Our interest receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets.
(2)We collected our 2023 interest on the Notes Receivable from ARO in cash prior to December 31, 2023, and as such, there was no interest receivable from ARO as of December 31, 2023.
Interest income earned on the Notes Receivable from ARO was as follows (in millions):

Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Interest income$5.2 $7.6 $12.2 $15.1 
Non-cash amortization (1)(2)
20.6 7.0 27.6 14.0 
Total interest income on the Notes Receivable from ARO$25.8 $14.6 $39.8 $29.1 

(1)Represents the amortization of the discount on the Notes Receivable from ARO using the effective interest method to interest income over the term of the notes.
(2)The three and six months ended June 30, 2024, includes non-cash interest income of $13.9 million related to the discount attributable to the Net Settlement Agreement.