Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2011

5.	Goodwill and Intangible Assets

Goodwill — Goodwill by operating segment as of December 31, 2011 and 2010 and changes for the years then ended are as follows (in thousands):


	Contract Drilling		Pressure Pumping		Total
Balance December 31, 2009	$	86,234	$	—	$	86,234
Acquisition		—		67,575		67,575

Balance December 31, 2010		86,234		67,575		153,809
Changes to goodwill		—		—		—

Balance December 31, 2011	$	86,234	$	67,575	$	153,809

Goodwill was recorded in connection with a business combination in 2010 as a result of the Company’s acquisition of the pressure pumping business of Key Energy Services, Inc. on October 1, 2010, as discussed further in Note 3. Approximately $53.2 million of this goodwill is expected to be deductible for tax purposes. There were no accumulated impairment losses as of December 31, 2011 or 2010.

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. Goodwill impairment is measured using a two-step impairment test. The first step is to compare the fair value of an entity’s reporting units to the respective carrying value of those reporting units. If the carrying value of a reporting unit exceeds its fair value the second step of the impairment test is performed whereby the fair value of the reporting unit is allocated to its identifiable tangible and intangible assets and liabilities with any remaining fair value representing the fair value of goodwill.

In connection with the Company’s annual goodwill impairment assessment as of December 31, 2010, the Company estimated its enterprise value based on the market capitalization of the Company as determined by reference to the closing price of the Company’s common stock during the fifteen days before and after year end. This enterprise value was allocated to the Company’s reporting units and it was determined that the fair values of the Company’s reporting units were in excess of their carrying value. As a result, the Company concluded that no impairment of goodwill was indicated as of December 31, 2010.

In September 2011, the FASB issued an accounting standards update which provides entities with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test described above is unnecessary. The provisions of this accounting standards update are effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011, however, early adoption is permitted. The Company elected to adopt the provisions of the new goodwill impairment accounting standard issued in September 2011 in connection with its annual impairment assessment of goodwill as of December 31, 2011 and determined based on an assessment of qualitative factors that it was more likely than not that the fair values of the Company’s reporting units were greater than their carrying amounts and further testing was not necessary.

In making this determination, the Company considered the continued demand experienced during 2011 for its services in the contract drilling and pressure pumping businesses. The Company also considered the level of commodity prices for crude oil and natural gas, which influence its overall level of business activity in these operating segments. Additionally, current year operating results and forecasted operating results for the coming year were also taken into account. The Company’s overall market capitalization and the large amount of calculated excess of the fair values of the Company’s reporting units over their carrying values and lack of significant changes in the key assumptions from its 2010 quantitative Step 1 assessment of goodwill were also considered. The Company has undertaken extensive efforts in the past several years to upgrade its fleet of equipment and believes that it is positioned well from a competitive standpoint to satisfy demand for high technology drilling of unconventional horizontal wells which should help mitigate decreases in demand for drilling conventional vertical wells that may result from recent decreases in natural gas prices. In the event that market conditions weaken, the Company may be required to record an impairment of goodwill in its contract drilling or pressure pumping reporting units in the future, and such impairment could be material.

Intangible Assets — Intangible assets were recorded in the pressure pumping operating segment in connection with the fourth quarter 2010 acquisition of the assets of the pressure pumping business discussed in Note 3. 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 $467,000 and $116,000 was recorded in the year ended December 31, 2011 and 2010, 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 $3.6 million and $910,000 was recorded in the year ended December 31, 2011 and 2010, respectively, associated with customer relationships.

The following table presents the gross carrying amount and accumulated amortization of intangible assets as of December 31, 2011 and 2010 (in thousands):


	2011							2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Non-compete agreement	$	1,400	$	(583	)	$	817	$	1,400	$	(116	)	$	1,284
Customer relationships		25,500		(4,553	)		20,947		25,500		(910	)		24,590

Total intangible assets	$	26,900	$	(5,136	)	$	21,764	$	26,900	$	(1,026	)	$	25,874

- 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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