Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2011

7. Goodwill and Intangible Assets

Goodwill — Goodwill by operating segment as of September 30, 2011 and changes for the nine months then ended are as follows (in thousands):


	January 1, Balance		Changes to Goodwill		September 30, Balance
Contract Drilling:
Goodwill	$	86,234	$	—	$	86,234
Accumulated impairment losses		—		—		—

Net goodwill in contract drilling segment		86,234		—		86,234


Pressure Pumping:
Goodwill		67,575		—		67,575
Accumulated impairment losses		—		—		—

Net goodwill in pressure pumping segment		67,575		—		67,575


Total goodwill	$	153,809	$	—	$	153,809

Goodwill by operating segment as of September 30, 2010 and changes for the nine months then ended are as follows (in thousands):


	January 1, Balance		Changes to Goodwill		September 30, Balance
Contract Drilling:
Goodwill	$	86,234	$	—	$	86,234
Accumulated impairment losses		—		—		—

Net goodwill in contract drilling segment		86,234		—		86,234


Total goodwill	$	86,234	$	—	$	86,234

Goodwill of $67.6 million was recorded in the fourth quarter of 2010 as a result of the Company’s acquisition of the pressure pumping business of Key Energy Services, Inc. on October 1, 2010. Approximately $53.2 million of this goodwill is expected to be deductible for tax purposes.

Goodwill is evaluated at least annually on December 31 to determine if the fair value of recorded goodwill has decreased below its carrying value. For purposes of impairment testing, goodwill is evaluated at the reporting unit level. The Company’s reporting units for impairment testing have been determined to be its operating segments. In the event that market conditions weaken in the future, the Company may be required to record impairments of goodwill in its contract drilling or pressure pumping reporting units, and such impairment could be material.

Intangible Assets — Intangible assets of $26.9 million were recorded in the pressure pumping operating segment in connection with the Company’s acquisition of a pressure pumping business on October 1, 2010. As a result of the purchase price allocation, the Company recorded intangible assets related to a non-compete agreement and the customer relationships acquired. These intangible assets were recorded at fair value on the date of acquisition.

The non-compete agreement has a term of three years from October 1, 2010. The value of this agreement was estimated using a with and without scenario where cash flows were projected through the term of the agreement assuming the agreement is in place and compared to cash flows assuming the non-compete agreement was not in place. The intangible asset associated with the non-compete agreement is being amortized on a straight-line basis over the three-year term of the agreement. Amortization expense of $117,000 and $350,000 was recorded in the three and nine months ended September 30, 2011, respectively, associated with the non-compete agreement.

The value of the customer relationships was estimated using a multi-period excess earnings model to determine the present value of the projected cash flows associated with the customers in place at the time of the acquisition and taking into account a contributory asset charge. The resulting intangible asset is being amortized on a straight-line basis over seven years. Amortization expense of $911,000 and $2.7 million was recorded in the three and nine months ended September 30, 2011, respectively, associated with customer relationships.

The following table sets forth the activity with respect to intangible assets for the nine months ended September 30, 2011 (in thousands):


	January 1, Balance			Amortization			September 30, Balance

Non-compete agreement	$	1,400		$	—		$	1,400
Accumulated amortization		(116	)		(350	)		(466	)

Net non-compete agreement		1,284			(350	)		934


Customer relationships		25,500			—			25,500
Accumulated amortization		(910	)		(2,732	)		(3,642	)

Net customer relationships		24,590			(2,732	)		21,858


Total intangible assets, net (excluding goodwill)	$	25,874		$	(3,082	)	$	22,792

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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