5. Goodwill and Intangible Assets

Goodwill — Goodwill by operating segment as of December 31, 2016 and 2015 and changes for the years then ended are as follows (in thousands):

	Contract		Pressure
	Drilling		Pumping			Total

Balance December 31, 2014	$	86,234	$	124,561		$	210,795
Changes to goodwill	—			(124,561	)		(124,561	)
Balance December 31, 2015		86,234		—			86,234
Changes to goodwill	—			—			—
Balance December 31, 2016	$	86,234	$	—		$	86,234

There were no accumulated impairment losses related to goodwill in the contract drilling operating segment as of December 31, 2016 or 2015.

Goodwill is evaluated at least annually as of December 31, or when circumstances require, 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. The Company first determines whether it is more likely than not that the fair value of a reporting unit is less than its carrying value after considering qualitative, market and other factors, and if so, the resulting goodwill impairment is determined using a two-step quantitative impairment test. From time to time, the Company may perform the first step of the quantitative testing for goodwill impairment in lieu of performing the qualitative assessment. The first step of the quantitative testing 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 quantitative testing 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. If this resulting fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized in the amount of such shortfall.

In connection with its annual goodwill impairment assessment as of December 31, 2016, the Company determined based on an assessment of qualitative factors that it was more likely than not that the fair values of the Company’s contract drilling reporting unit was greater than its carrying amount and further testing was not necessary. In making this determination, the Company considered the demand experienced during 2016 for its contract drilling business. The Company also considered the current and expected levels of commodity prices for oil and natural gas, which influence its overall level of business activity in this reporting unit, as well as its operating results for 2016 and forecasted operating results for 2017. Lastly, management considered the Company’s overall market capitalization at December 31, 2016 and the significant amount of calculated excess of the fair value of the Company’s reporting unit over its carrying value from its 2015 quantitative impairment assessment of goodwill.

During the third quarter of 2015, oil prices declined and averaged $46.42 per barrel, reaching a new low for 2015 of $38.22 per barrel in August 2015. In light of these lower oil prices in August, the Company lowered its expectations with respect to future activity levels in both the contract drilling and pressure pumping businesses. As a result of the Company’s revised expectations of the duration of the lower oil and natural gas commodity price environment and the related deterioration of the markets for its contract drilling and pressure pumping services, the Company performed a quantitative Step 1 impairment assessment of its goodwill as of September 30, 2015. In completing the Step 1 assessment, the fair value of each reporting unit was estimated using both the income and market valuation methods. The estimate of fair value for each reporting unit required the use of significant unobservable inputs, representative of a Level 3 fair value measurement. The inputs included assumptions related to the future performance of the Company’s contract drilling and pressure pumping reporting units, such as future oil and natural gas prices and projected demand for the Company’s services, and assumptions related to discount rates, long-term growth rates and control premiums.

Based on the results of the Step 1 goodwill impairment test as of September 30, 2015, the fair value of the contract drilling reporting unit exceeded its carrying value by approximately 15%, and management concluded that no impairment was indicated in its contract drilling reporting unit; however, impairment was indicated in its pressure pumping reporting unit. In the third quarter of 2015, the Company recognized an impairment charge of $125 million associated with the impairment of all of the goodwill in its pressure pumping reporting unit.

In connection with its annual impairment asset at December 31, 2015, the Company performed a quantitative Step 1 impairment assessment of the goodwill in its contract drilling reporting unit. In completing the Step 1 assessment, the fair value of the contract drilling reporting unit was estimated using both the income and market valuation methods. The estimate of the fair value of the reporting unit required the use of significant unobservable inputs, representative of a Level 3 fair value measurement. The inputs included assumptions related to the future performance of the Company’s contract drilling reporting unit, such as future oil and natural gas prices and projected demand for the Company’s services, and assumptions related to discount rates, long-term growth rates and control premiums. Based on the results of the quantitative Step 1 impairment assessment of its goodwill as of December 31, 2015, the fair value of the contract drilling reporting unit exceeded its carrying value by approximately 16%, and management concluded that no impairment was indicated in its contract drilling reporting unit.

In connection with its annual goodwill impairment assessment as of December 31, 2014, the Company 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 respective carrying amounts and no further testing was deemed necessary. In making this determination, the Company considered the continued demand experienced during 2014 for its contract drilling and pressure pumping businesses. The Company also considered the current and expected levels of commodity prices for oil and natural gas, which influence its overall level of business activity in these reporting units. Additionally, operating results for 2014 and forecasted operating results for 2015 were also taken into account. Lastly, management considered the Company’s overall market capitalization at December 31, 2014 and the large amount of calculated excess of the fair values of the Company’s reporting units over their respective carrying values from its 2013 quantitative impairment assessment.

The Company has undertaken extensive efforts in the past several years to upgrade its fleet of equipment and believes that it is well-positioned 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. In the event that market conditions were to remain weak for a protracted period, the Company may be required to record an impairment of goodwill in its contract drilling reporting unit in future periods, and any 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 a pressure pumping business. 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 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 was recorded in each of the years ended December 31, 2016, 2015 and 2014, associated with customer relationships.

The Company concluded that no triggering events necessitating an impairment assessment of these customer relationships had occurred in 2016, 2015 or 2014. The assessment of the recoverability of the pressure pumping asset group included the customer relationship intangible asset, and no impairment was indicated.

The gross carrying amount and accumulated amortization of the customer relationships as of December 31, 2016 and 2015 are as follows (in thousands):

	2016							2015
	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount

Customer relationships	$	25,500	$	(22,768	)	$	2,732	$	25,500	$	(19,125	)	$	6,375