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Noble Energy 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 001-07964

NOBLE ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

73-0785597

(State of incorporation)

 

(I.R.S. employer identification number)

 

 

 

100 Glenborough Drive, Suite 100

 

 

Houston, Texas

 

77067

(Address of principal executive offices)

 

(Zip Code)

 

(281) 872-3100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No x

Number of shares of common stock outstanding as of October 25, 2006: 173,814,393

 




PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Noble Energy, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

(Unaudited)

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

89,803

 

$

110,321

 

Accounts receivable - trade, net

 

605,380

 

566,206

 

Probable insurance claims

 

101,018

 

142,311

 

Deferred income taxes

 

143,510

 

237,045

 

Other current assets

 

116,584

 

119,628

 

Total current assets

 

1,056,295

 

1,175,511

 

Property, plant and equipment

 

 

 

 

 

Oil and gas properties (successful efforts method of accounting)

 

8,507,211

 

8,411,426

 

Other property, plant and equipment

 

77,610

 

69,869

 

 

 

8,584,821

 

8,481,295

 

Accumulated depreciation, depletion and amortization

 

(1,608,262

)

(2,282,379

)

Total property, plant and equipment, net

 

6,976,559

 

6,198,916

 

Other noncurrent assets

 

580,153

 

640,738

 

Goodwill

 

783,208

 

862,868

 

Total Assets

 

$

9,396,215

 

$

8,878,033

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable - trade

 

$

493,517

 

$

519,971

 

Derivative instruments

 

263,447

 

445,939

 

Income taxes

 

73,936

 

65,136

 

Asset retirement obligations

 

93,619

 

60,331

 

Other current liabilities

 

235,306

 

148,768

 

Total current liabilities

 

1,159,825

 

1,240,145

 

Deferred income taxes

 

1,706,728

 

1,201,191

 

Asset retirement obligations

 

130,639

 

278,540

 

Derivative instruments

 

422,384

 

757,509

 

Other noncurrent liabilities

 

271,861

 

279,971

 

Long-term debt

 

1,620,741

 

2,030,533

 

Total Liabilities

 

5,312,178

 

5,787,889

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Preferred stock - par value $1.00; 4,000,000 shares authorized, none issued

 

 

 

 

 

Common stock - par value $3.33 1/3; 250,000,000 shares authorized; 187,773,262 and 184,893,510 shares issued, respectively

 

625,910

 

616,311

 

Capital in excess of par value

 

2,016,619

 

1,945,239

 

Deferred compensation

 

 

(5,288

)

Accumulated other comprehensive loss

 

(184,916

)

(783,499

)

Treasury stock, at cost: 12,707,784 and 9,268,932 shares, respectively

 

(317,103

)

(148,476

)

Retained earnings

 

1,943,527

 

1,465,857

 

Total Shareholders’ Equity

 

4,084,037

 

3,090,144

 

Total Liabilities and Shareholders’ Equity

 

$

9,396,215

 

$

8,878,033

 

 

The accompanying notes are an integral part of these financial statements

2




 

Noble Energy, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

683,544

 

$

581,585

 

$

2,044,656

 

$

1,340,763

 

Income from equity method investees

 

33,810

 

22,829

 

108,901

 

61,267

 

Other revenues

 

23,965

 

27,674

 

72,339

 

83,713

 

Total Revenues

 

741,319

 

632,088

 

2,225,896

 

1,485,743

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Lease operating costs

 

76,928

 

63,433

 

238,307

 

146,673

 

Production and ad valorem taxes

 

30,697

 

24,304

 

83,663

 

51,125

 

Transportation costs

 

4,531

 

1,871

 

18,463

 

12,091

 

Exploration costs

 

30,904

 

77,253

 

92,327

 

126,508

 

Depreciation, depletion and amortization

 

165,765

 

111,653

 

458,878

 

277,829

 

General and administrative

 

40,657

 

29,346

 

113,716

 

69,326

 

Accretion of discount on asset retirement obligations

 

2,426

 

2,928

 

8,405

 

8,137

 

Interest, net of amount capitalized

 

28,556

 

29,045

 

95,642

 

59,030

 

(Gain) loss on derivative instruments

 

(6,315

)

(259

)

389,723

 

2,121

 

Gain on sale of assets

 

(200,676

)

(1,234

)

(211,691

)

(5,415

)

Other expense (income), net

 

22,880

 

52,612

 

89,008

 

98,295

 

Total Costs and Expenses

 

196,353

 

390,952

 

1,376,441

 

845,720

 

 

 

 

 

 

 

 

 

 

 

Income Before Taxes

 

544,966

 

241,136

 

849,455

 

640,023

 

Income Tax Provision

 

226,902

 

64,180

 

336,009

 

216,222

 

Net Income

 

$

318,064

 

$

176,956

 

$

513,446

 

$

423,801

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.80

 

$

1.01

 

$

2.91

 

$

2.89

 

Diluted

 

1.75

 

0.99

 

2.85

 

2.84

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

176,218

 

174,703

 

176,505

 

146,612

 

Diluted

 

181,077

 

178,747

 

180,158

 

149,164

 

 

The accompanying notes are an integral part of these financial statements

3




Noble Energy, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2006

 

2005

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

513,446

 

$

423,801

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization - oil and gas production

 

458,878

 

277,829

 

Depreciation, depletion and amortization - electricity generation

 

11,842

 

12,395

 

Dry hole expense

 

24,164

 

77,494

 

Impairment of operating assets

 

6,359

 

5,198

 

Amortization of unproved leasehold costs

 

15,180

 

12,766

 

Stock-based compensation expense

 

9,320

 

2,742

 

Gain on disposal of assets

 

(211,691

)

(5,415

)

Deferred income taxes

 

146,709

 

100,433

 

Accretion of discount on asset retirement obligations

 

8,405

 

8,137

 

Income from equity method investees

 

(108,901

)

(61,267

)

Dividends received from equity method investees

 

18,000

 

42,975

 

Deferred compensation adjustment

 

15,673

 

31,307

 

Loss on derivative instruments

 

430,328

 

2,121

 

Other

 

(7,093

)

31,055

 

Changes in operating assets and liabilities, net of effect of acquisition

 

 

 

 

 

Increase in accounts receivable

 

(41,222

)

(36,204

)

Decrease (increase) in other current assets

 

13,479

 

(30,690

)

Decrease (increase) in probable insurance claims

 

101,612

 

(2,552

)

(Decrease) increase in accounts payable

 

(29,246

)

30,527

 

(Decrease) increase in other current liabilities

 

(34,429

)

44,189

 

Net Cash Provided by Operating Activities

 

1,340,813

 

966,841

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Additions to property, plant and equipment

 

(1,030,430

)

(576,220

)

U.S. Exploration acquisition, net of cash acquired

 

(412,257

)

 

Patina Merger, net of cash acquired

 

 

(1,111,099

)

Proceeds from sale of property, plant and equipment

 

504,259

 

320

 

Investments in equity method investees

 

(5,126

)

(13,927

)

Distributions from equity method investees

 

116,521

 

3,581

 

Net Cash Used in Investing Activities

 

(827,033

)

(1,697,345

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Exercise of stock options

 

50,576

 

63,766

 

Tax benefits from stock-based awards

 

18,534

 

-

 

Cash dividends paid

 

(35,776

)

(14,788

)

Purchase of treasury stock

 

(192,632

)

-

 

Proceeds from credit facilities

 

300,000

 

2,010,000

 

Repayment of credit facilities

 

(605,000

)

(773,667

)

Repayment of term loans

 

(105,000

)

 

Proceeds from short-term borrowings

 

845,000

 

 

Repayment of short-term borrowings

 

(810,000

)

 

Repayment of Patina debt

 

 

(610,865

)

Net Cash (Used in) Provided by Financing Activities

 

(534,298

)

674,446

 

Decrease in Cash and Cash Equivalents

 

(20,518

)

(56,058

)

Cash and Cash Equivalents at Beginning of Period

 

110,321

 

179,794

 

Cash and Cash Equivalents at End of Period

 

$

89,803

 

$

123,736

 

 

The accompanying notes are an integral part of these financial statements

4




 

Noble Energy, Inc. and Subsidiaries

Consolidated Statements of Shareholders' Equity

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

Other

 

Treasury

 

 

 

Total

 

 

 

Common

 

Excess of

 

Deferred

 

Comprehensive

 

Stock,

 

Retained

 

Shareholders’

 

 

 

Stock

 

Par Value

 

Compensation

 

Loss

 

at Cost

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2006

 

$

616,311

 

$

1,945,239

 

$

(5,288

)

$

(783,499

)

$

(148,476

)

$

1,465,857

 

$

3,090,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

513,446

 

513,446

 

Adoption of SFAS No. 123(R)

 

 

(5,288

)

5,288

 

 

 

 

 

Stock-based compensation expense

 

 

9,320

 

 

 

 

 

9,320

 

Exercise of stock options

 

9,382

 

41,194

 

 

 

 

 

50,576

 

Tax benefits related to exercise of stock options

 

 

18,534

 

 

 

 

 

18,534

 

Issuance of restricted stock, net

 

217

 

(217

)

 

 

 

 

 

Cash dividends ($0.20 per share)

 

 

 

 

 

 

(35,776

)

(35,776

)

Purchases of treasury stock

 

 

 

 

 

(192,632

)

 

 

(192,632

)

Rabbi trust shares sold

 

 

7,837

 

 

 

24,005

 

 

31,842

 

Unrealized changes in fair value of cash flow hedges

 

 

 

 

197,239

 

 

 

197,239

 

Unrealized cash flow hedges recognized in net income

 

 

 

 

264,265

 

 

 

264,265

 

Realized cash flow hedges reclassified out of accumulated other comprehensive loss

 

 

 

 

136,890

 

 

 

136,890

 

Other

 

 

 

 

189

 

 

 

189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2006

 

$

625,910

 

$

2,016,619

 

$

 

$

(184,916

)

$

(317,103

)

$

1,943,527

 

$

4,084,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2005

 

$

417,152

 

$

291,458

 

$

(1,671

)

$

(14,787

)

$

(75,956

)

$

843,792

 

$

1,459,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

423,801

 

423,801

 

Patina Merger

 

185,568

 

1,576,799

 

 

 

(73,203

)

 

1,689,164

 

Stock issuance costs

 

 

(206

)

 

 

 

 

(206

)

Exercise of stock options

 

11,544

 

52,222

 

 

 

 

 

63,766

 

Tax benefits related to exercise of stock options

 

 

13,346

 

 

 

 

 

13,346

 

Issuance of restricted stock, net

 

566

 

7,301

 

(7,867

)

 

 

 

 

Amortization of restricted stock

 

 

 

2,742

 

 

 

 

2,742

 

Cash dividends ($0.10 per share)

 

 

 

 

 

 

(14,788

)

(14,788

)

Rabbi trust shares sold

 

 

90

 

 

 

683

 

 

773

 

Unrealized changes in fair value of cash flow hedges

 

 

 

 

(955,837

)

 

 

(955,837

)

Realized cash flow hedges reclassified out of accumulated other comprehensive loss

 

 

 

 

85,845

 

 

 

85,845

 

Other

 

 

 

 

350

 

 

 

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2005

 

$

614,830

 

$

1,941,010

 

$

(6,796

)

$

(884,429

)

$

(148,476

)

$

1,252,805

 

$

2,768,944

 

 

The accompanying notes are an integral part of these financial statements

5




 

Noble Energy, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

318,064

 

$

176,956

 

$

513,446

 

$

423,801

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on cash flow hedges:

 

 

 

 

 

 

 

 

 

Changes in fair value of cash flow hedges

 

274,361

 

(717,035

)

266,483

 

(1,470,519

)

Less tax provision

 

(87,952

)

250,962

 

(69,244

)

514,682

 

Recognized in net income

 

 

 

423,910

 

 

Less tax provision

 

 

 

(159,645

)

 

Realized cash flow hedges reclassified out of
accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

Oil and gas cash flow hedges

 

43,798

 

90,065

 

219,035

 

131,502

 

Less tax provision

 

(16,494

)

(31,523

)

(82,489

)

(46,026

)

Interest rate lock cash flow hedge

 

174

 

189

 

552

 

568

 

Less tax provision

 

(66

)

(66

)

(208

)

(199

)

Other comprehensive income (loss)

 

180

 

372

 

303

 

538

 

Less tax provision

 

(68

)

(130

)

(114

)

(188

)

Other comprehensive income (loss)

 

213,933

 

(407,166

)

598,583

 

(869,642

)

Comprehensive income (loss)

 

$

531,997

 

$

(230,210

)

$

1,112,029

 

$

(445,841

)

 

The accompanying notes are an integral part of these financial statements

6




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Organization and Nature of Operations

We are an independent energy company engaged, directly or through our subsidiaries, in the exploration, development, production and marketing of crude oil and natural gas. We have exploration, exploitation and production operations domestically and internationally. We operate throughout major basins in the United States including Colorado’s Wattenberg field, the Mid-continent region of western Oklahoma and the Texas Panhandle, the San Juan basin in New Mexico, the Gulf Coast and the Gulf of Mexico. In addition, we conduct business internationally in West Africa (Equatorial Guinea and Cameroon), the Mediterranean Sea, Ecuador, the North Sea, China, Argentina, and Suriname.

Sale of Gulf of Mexico Shelf Properties – On July 14, 2006, we completed the sale of our Gulf of Mexico shelf assets. The sale included essentially all of our assets in the Gulf of Mexico shelf except for our interest in the Main Pass area, which we have retained. Pretax cash proceeds from the sale totaled $487 million including proceeds received from parties who exercised preferential rights to purchase certain properties. See Note 3 - Asset Purchases and Sales and Note 5 - Derivative Instruments and Hedging Activities.

Purchase of U.S. Exploration Holdings, Inc. – On March 29, 2006, we purchased the common stock of U.S. Exploration Holdings, Inc. (“U.S. Exploration”), a privately held corporation located in Billings, Montana, for $411.6 million. U.S. Exploration’s reserves and production are located in the Wattenberg field of Colorado’s Denver-Julesburg (“D-J”) basin. See Note 3 - Asset Purchases and Sales.

Patina Merger – On May 16, 2005, we completed a merger (the “Patina Merger”) with Patina Oil & Gas Corporation (“Patina”). Patina was an independent energy company engaged in the acquisition, development and exploitation of crude oil and natural gas properties within the continental United States. Patina’s properties and oil and gas reserves are principally located in relatively long-lived fields with established production histories. The properties are primarily concentrated in the Wattenberg field of Colorado’s D-J basin, the Mid-continent region of western Oklahoma and the Texas Panhandle, and the San Juan basin in New Mexico.  See Note 3 - Asset Purchases and Sales.

Note 2 - Basis of Presentation

Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements at September 30, 2006 and December 31, 2005 and for the three months and nine months ended September 30, 2006 and 2005 contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of our financial position, results of operations and cash flows for such periods. Operating results for the three months and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. Certain reclassifications of amounts previously reported have been made to conform to current year presentations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005. Unless otherwise specified or the context otherwise requires, all references in these notes to “Noble Energy,” “we,” “us,” or “our” are to Noble Energy, Inc. and its subsidiaries.

We have accounted for the purchase of U.S. Exploration and the Patina Merger in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”  As a result, our consolidated balance sheet at September 30, 2006 includes the assets and liabilities of U.S. Exploration as well as the assets and liabilities of Patina. Our consolidated balance sheet at December 31, 2005 includes only the assets and liabilities of Patina. Our

7




consolidated statements of operations and statements of cash flows include financial results of U. S. Exploration after March 29, 2006 and financial results of Patina from May 16, 2005. See Note 3 - Asset Purchases and Sales.

Accounting for Stock-Based Compensation – Through December 31, 2005, we accounted for our stock-based compensation plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations. As of January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) revised SFAS No. 123, “Accounting for Stock-Based Compensation” and nullified APB 25 and its related implementation guidance. SFAS 123(R) requires companies to recognize in the statement of operations the grant-date fair value of stock options and other stock-based compensation issued to employees and is effective for interim or annual periods beginning January 1, 2006.  The fair value is expensed over the requisite service period of the award.  In accordance with the modified prospective transition method, prior period amounts have not been restated. See Note 4 – Stock-Based Compensation.

Balance Sheet and Income Statement Information

Other current assets consist of the following:

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

 

 

 

 

 

 

Derivative instruments

 

$

23,636

 

$

29,258

 

Materials and supplies inventories

 

45,584

 

33,802

 

Prepaid expenses and other

 

47,364

 

56,568

 

Total

 

$

116,584

 

$

119,628

 

 

Other noncurrent assets consist of the following:

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

 

 

 

 

 

 

Equity method investments

 

$

399,630

 

$

420,362

 

Probable insurance claims

 

52,481

 

112,800

 

Derivative instruments

 

2,914

 

17,259

 

Other assets

 

125,128

 

90,317

 

Total

 

$

580,153

 

$

640,738

 

 

Other current liabilities consist of the following:

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

 

 

 

 

 

 

Accrued and other current liabilities

 

$

176,300

 

$

137,428

 

Interest payable

 

24,006

 

11,340

 

Short-term borrowings

 

35,000

 

 

Total

 

$

235,306

 

$

148,768

 

 

8




 

Other revenues consist of the following:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Electricity sales

 

$

16,241

 

$

18,843

 

$

49,672

 

$

54,978

 

Gathering, marketing and processing

 

7,724

 

8,831

 

22,667

 

28,735

 

Total

 

$

23,965

 

$

27,674

 

$

72,339

 

$

83,713

 

 

Other expense (income), net consists of the following:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Electricity generation (1)

 

$

17,876

 

$

16,746

 

$

43,099

 

$

37,637

 

Gathering, marketing and processing

 

4,204

 

5,856

 

15,674

 

20,905

 

Deferred compensation

 

933

 

21,429

 

15,673

 

31,307

 

Impairments

 

 

5,198

 

6,359

 

5,198

 

Other

 

(133

)

3,383

 

8,203

 

3,248

 

Total

 

$

22,880

 

$

52,612

 

$

89,008

 

$

98,295

 

 


(1) Includes increases in the allowance for doubtful accounts of $6.9 million and $6.1 million for third quarter 2006 and 2005, respectively, and $10.6 million and $7.4 million for the first nine months of 2006 and 2005, respectively. These increases have been made to cover potentially uncollectible balances related to the Ecuador power operations. Certain entities purchasing electricity in Ecuador have been slow to pay amounts due us. We are pursuing various strategies to protect our interests including international arbitration and litigation.

Note 3 - Asset Purchases and Sales

Sale of Gulf of Mexico Shelf Assets – On July 14, 2006, we completed the sale of our Gulf of Mexico shelf assets. The sale included essentially all of our assets in the Gulf of Mexico shelf except for our interest in the Main Pass area, which we have retained. Pretax cash proceeds from the sale totaled $487 million including proceeds received from parties who exercised preferential rights to purchase certain properties. We recorded a pretax gain of $203.5 million from the sale during third quarter 2006. The net book value of assets sold totaled $221.4 million.  Asset retirement obligations of $43.6 million, related to the Gulf of Mexico shelf assets, were also included in the sale. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we have allocated $100 million of our domestic reporting unit goodwill to the sale.

As a result of the sale, we recognized a pretax charge of $398.5 million related to cash flow hedges which were reclassified from accumulated other comprehensive loss (“AOCL”) to earnings during second quarter 2006. This reclassification reflected the mark-to-market value of the cash flow hedges that related to Gulf of Mexico shelf production. See Note 5 - Derivative Instruments and Hedging Activities.

Purchase of U.S. Exploration – On March 29, 2006, we completed the purchase of U.S. Exploration for a cash purchase price of $411.6 million. The total purchase price was allocated preliminarily to the assets acquired and the liabilities assumed based on fair values at the acquisition date. The allocation, which has been revised based on updated information, is as follows:

·      $412.7 million to proved oil and gas properties;

·      $130.8 million to unproved oil and gas properties;

·      $33.9 million to goodwill; and

·      $171.9 million to deferred income taxes.

9




Certain data necessary to complete the final purchase price allocation is not yet available, and includes, but is not limited to, final appraisals of assets acquired and liabilities assumed and final tax returns that provide the underlying tax bases of assets and liabilities. We expect to complete the purchase price allocation during the twelve-month period following the acquisition date, during which time the preliminary allocation will be revised and goodwill will be adjusted, if necessary.

Patina Merger – On May 16, 2005, we completed the Patina Merger.  We acquired the common stock of Patina for a total purchase price of approximately $4.9 billion, which was comprised primarily of cash and Noble Energy common stock, plus liabilities assumed. In exchange for Patina’s common stock and stock options held by Patina’s employees, we issued 55.7 million shares of stock valued at $1.7 billion, issued options valued at $104.9 million, paid $1.1 billion in cash to Patina shareholders and assumed debt of $610.5 million and deferred taxes of $1.1 billion. The total purchase price was allocated to the assets acquired and the liabilities assumed based on fair values at the merger date as follows:

·      $2.642 billion to proved oil and gas properties;

·      $1.068 billion to unproved oil and gas properties;

·      $878.3 million to goodwill; and

·      $1.108 billion to deferred income taxes.

The amount of goodwill recorded in the Patina Merger has been reduced by a total of $21.2 million ($9.3 million during the first nine months of 2006) for tax benefits associated with the exercise of fully-vested stock options assumed in conjunction with the merger in accordance with Emerging Issues Task Force Abstract Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44.”

Pro Forma Financial Information – The following pro forma condensed combined financial information for the nine months ended September 30, 2005 was derived from the historical financial statements of Noble Energy and Patina and gives effect to the merger as if it had occurred on January 1, 2005. The pro forma condensed combined financial information has been included for comparative purposes with actual results for the nine months ended September 30, 2006 (as included in our consolidated statements of operations) and is not necessarily indicative of the results that might have occurred had the merger taken place at the dates indicated and is not intended to be a projection of future results.

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2005

 

 

 

(in thousands, except

 

 

 

per share amounts)

 

 

 

 

 

Revenues

 

$

1,733,697

 

Income from continuing operations

 

471,173

 

Net income

 

471,173

 

 

 

 

 

Earnings per share:

 

 

 

Basic

 

$

2.74

 

Diluted

 

$

2.71

 

 

10




 

Note 4 - Stock-Based Compensation

As discussed in Note 2 - Basis of Presentation, effective January 1, 2006, we adopted the fair value recognition provisions for stock-based awards granted to employees using the modified prospective application method provided by SFAS 123(R).  Accordingly, prior period amounts have not been restated.  SFAS 123(R) requires companies to recognize in the statement of operations the grant-date fair value of stock options and other stock-based compensation issued to employees and is effective for interim or annual periods beginning January 1, 2006.

We recognize the expense of all stock-based awards on a straight-line basis over the employee’s requisite service period (generally the vesting period of the award). We recognized total stock-based compensation expense as follows:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

Stock-based compensation expense included in:

 

 

 

 

 

 

 

 

 

General and administrative expense

 

$

2,720

 

$

1,406

 

$

8,493

 

$

2,742

 

Exploration expense and other

 

277

 

 

827

 

 

Total stock-based compensation expense

 

2,997

 

1,406

 

9,320

 

2,742

 

 

 

 

 

 

 

 

 

 

 

Tax benefit from expense recognized

 

$

1,129

 

$

492

 

$

3,510

 

$

960

 

 

As a result of adopting SFAS 123(R) on January 1, 2006, our income before income taxes, net income and earnings per share were lower than if we had continued to account for stock-based compensation under APB 25.  The impact on our financial results related to the adoption of SFAS 123(R) is as follows:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2006

 

 

 

(in thousands, except per share amounts)

 

Decrease in income:

 

 

 

 

 

Income before taxes

 

$

2,041

 

$

6,005

 

Net income

 

1,272

 

3,744

 

Basic earnings per share

 

$

< 0.01

 

$

0.02

 

Diluted earnings per share

 

$

< 0.01

 

$

0.02

 

 

Prior to the adoption of SFAS 123(R), we presented tax benefits resulting from the exercise of stock-based compensation awards as cash flows from operating activities within our consolidated statements of cash flows.  Tax benefits presented as cash flows from financing activities totaled $10.9 million and $18.5 million for the three and nine months ended September 30, 2006, respectively. These amounts would have been presented as cash flows from operating activities if we had continued to account for stock-based compensation under APB 25.

11




 

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123(R) to stock-based employee compensation in all periods presented.  The actual and pro forma net income and earnings per share for 2006 below are the same since we have adopted SFAS 123(R) as of January 1, 2006.  The 2006 amounts are presented for comparison to the prior year.

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

Actual

 

Pro Forma

 

Actual

 

Pro Forma

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net income, as reported

 

$

318,064

 

$

176,956

 

$

513,446

 

$

423,801

 

Add: Stock-based compensation cost recognized, net of related tax effects

 

1,868

 

914

 

5,810

 

1,713

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(1,868

)

(2,380

)

(5,810

)

(6,346

)

Pro forma net income

 

$

318,064

 

$

175,490

 

$

513,446

 

$

419,168

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic - as reported

 

$

1.80

 

$

1.01

 

$

2.91

 

$

2.89

 

Basic - pro forma

 

$

1.80

 

$

1.00

 

$

2.91

 

$

2.86

 

Diluted - as reported

 

$

1.75

 

$

0.99

 

$

2.85

 

$

2.84

 

Diluted - pro forma

 

$

1.75

 

$

0.98

 

$

2.85

 

$

2.81

 

 

Our stock option and restricted stock plans (the “Plans”) and incentive plan are described below.

1992 Stock Option and Restricted Stock Plan

Under the Noble Energy, Inc. 1992 Stock Option and Restricted Stock Plan, as amended (the “1992 Plan”), the Compensation, Benefits and Stock Option Committee of the Board of Directors (the “Committee”) may grant stock options and award restricted stock to officers or other employees of Noble Energy.  The maximum number of shares of common stock that may be issued under the 1992 Plan is 18,500,000 shares.  At September 30, 2006, 8,359,634 shares of common stock were reserved for issuance, including 4,466,432 shares available for future grants and awards, under the 1992 Plan.

1992 Plan Stock Options Stock options are issued with an exercise price equal to the market price of Noble Energy common stock on the date of grant, and are subject to such other terms and conditions as may be determined by the Committee. Unless granted by the Committee for a shorter term, the options expire ten years from the grant date. Option grants generally vest ratably over a three-year period.

1992 Plan Restricted Stock Restricted stock awards made under the 1992 Plan are subject to such restrictions, terms and conditions, including forfeitures, if any, as may be determined by the Committee.  Restricted Stock awards generally vest over periods of one to three years.

2004 Long-Term Incentive Plan

Under the Noble Energy, Inc. 2004 Long-Term Incentive Plan (the “2004 LTIP”), the Committee may make incentive awards to key employees of Noble Energy and its subsidiaries. Incentive compensation is based upon the attainment of specific market and performance goals established by the Committee. Awards may be in the form of stock options or restricted stock or in the form of performance units or other incentive measurements providing for the payment of bonuses in cash, or in any

12




 

combination thereof, as determined by the Committee in its discretion. Stock options granted and restricted stock (both service based and market based) awarded under the 2004 LTIP are granted and awarded pursuant to the terms of the 1992 Plan.  These awards are accounted for in accordance with the provisions of SFAS 123(R) which provides for the grant-date fair value of the awards to be recognized in the income statement over the service period. Our cash based performance units and/or cash based bonuses are accounted for under SFAS No. 5, “Accounting for Contingencies” and are excluded from the provisions of SFAS 123(R).

2005 Stock Plan for Non-Employee Directors

The 2005 Stock Plan for Non-Employee Directors of Noble Energy, Inc. (the “2005 Plan”) provides for grants of stock options and awards of restricted stock to non-employee directors of Noble Energy.  The 2005 Plan superseded and replaced the 1988 Nonqualified Stock Option Plan for Non-Employee Directors. The total number of shares of common stock that may be issued under the 2005 Plan is 800,000. At September 30, 2006, 790,400 shares of common stock were reserved for issuance, including 715,180 shares available for future grants and awards under the 2005 Plan.

2005 Plan Stock Options The 2005 Plan provides for the granting to a non-employee director of 11,200 stock options on the date of election to the Board of Directors, annual grants of 2,800 options per non-employee director on February 1 of each year, and discretionary grants by the Board of Directors (up to a maximum of 11,200 options per non-employee director granted in any one year). Options are issued with an exercise price equal to the market price of Noble Energy common stock on the date of grant and may be exercised one year after the date of grant. The options expire ten years from the date of grant.

2005 Plan Restricted Stock The 2005 Plan also provides for the granting to a non-employee director of 4,800 shares of restricted stock on the date of election to the Board of Directors, annual awards of 1,200 shares of restricted stock per non-employee director on February 1 of each year, and discretionary grants by the Board of Directors (up to a maximum of 4,800 shares of restricted stock per non-employee director awarded in any one year). Restricted stock is restricted for a period of at least one year from the date of grant.

1988 Nonqualified Stock Option Plan

The 1988 Nonqualified Stock Option Plan for Non-Employee Directors of Noble Energy, Inc., as amended, (the “1988 Plan”) provided for the issuance of stock options to non-employee directors of Noble Energy. Options issued under the 1988 Plan may be exercised one year after grant and expire ten years from the grant date. The 1988 Plan provided for the granting of a fixed number of stock options to each non-employee director annually (10,000 stock options for the first calendar year of service and 5,000 stock options for each year thereafter) on February 1 of each year. The 1988 Plan was terminated in 2005.

Stock Option Awards

The fair value of each option award was estimated on the date of grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table.  The expected term represents the period of time that options granted are expected to be outstanding.  The hypothetical midpoint scenario we use considers the actual exercise and post-vesting cancellation history of stock-based compensation historical trends to develop expectations for future periods.  Expected volatility represents the extent to which our stock price is expected to fluctuate between now and the anticipated term of the award.  We used the historical volatility of Noble Energy common stock for the 5.5-year period ended prior to the date of grant.  The risk-free rate is based on a weighting of five and seven year U.S. Treasury securities as of the year ended prior to the date of grant to arrive at an approximated 5.5-year risk free rate of return.  The dividend yield represents the value of our stock’s annualized dividend as compared to our stock’s average price for the three-year period ended prior to the date of grant.  It is calculated by dividing one full year of our expected dividends by our average stock price over the three-year period ended prior to the date of grant.

13




 

Assumptions - Stock Option Awards

 

2006 Grants

 

 

 

(weighted averages)

 

 

 

 

 

Expected term (in years)

 

5.5

 

Expected volatility

 

31.79

%

Risk-free rate

 

4.72

%

Dividend yield

 

0.79

%

 

A summary of option activity for the nine months ended September 30, 2006 follows:

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Options

 

Price

 

Term

 

Value

 

 

 

 

 

 

 

(years)

 

(in thousands)

 

Outstanding at December 31, 2005

 

9,319,642

 

$

19.21

 

 

 

 

 

Granted

 

822,719

 

45.24

 

 

 

 

 

Exercised

 

(2,814,696

)

17.97

 

 

 

 

 

Forfeited

 

(85,379

)

38.48

 

 

 

 

 

Canceled / expired

 

 

 

 

 

 

 

Outstanding at September 30, 2006

 

7,242,286

 

$

22.42

 

4.4

 

$

167,801

 

Exercisable at September 30, 2006

 

5,888,948

 

$

18.81

 

3.4

 

$

157,704

 

 

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2006 and 2005 was $16.08 and $12.12, respectively.  The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $79.8 million and $63.7 million, respectively.

As of September 30, 2006, there was $12.5 million of total unrecognized compensation cost related to unvested stock options granted under the Plans.  The cost is expected to be recognized over a weighted-average period of 1.6 years. We issue new shares of common stock to settle option exercises.

Approximately 2,000,000 of the options exercised during the nine months ended September 30, 2006 were options held by Patina employees which were converted into options for Noble Energy common stock at the date of the Patina Merger.

Restricted Stock Awards

Grants of service based restricted stock awards are valued at our common stock price at the date of grant.  The fair values of market based restricted stock awards are estimated on the date of grant using a Monte Carlo valuation model that uses the assumptions in the following table.  The Monte Carlo model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment.  Expected volatility represents the extent to which our stock price is expected to fluctuate between now and the award’s anticipated term.  We use the historical volatility of Noble Energy common stock for the three-year period ended prior to the date of grant.  The risk-free rate is based on a three-year period from U.S. Treasury securities as of the year ended prior to the date of grant.

 

Assumptions - Restricted Stock

 

2006 Grants

 

 

 

 

 

Number of simulations

 

100,000

 

Expected volatility

 

28.4

%

Risk-free rate

 

4.35

%

 

14




 

A summary of restricted stock activity for the nine months ended September 30, 2006 follows:

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Subject to

 

Average

 

Subject to

 

Average

 

 

 

Service

 

Grant Date

 

Market

 

Grant Date

 

 

 

Conditions

 

Fair Value

 

Conditions

 

Fair Value

 

 

 

(shares)

 

 

 

(shares)

 

 

 

Restricted stock at December 31, 2005

 

123,246

 

$

33.79

 

133,515

 

$

23.60

 

Granted

 

11,039

 

45.10

 

77,563

 

39.51

 

Vested

 

(40,672

)

33.44

 

 

 

Forfeited

 

(16,718

)

33.44

 

(6,828

)

34.59

 

Restricted stock at September 30, 2006

 

76,895

 

$

35.67

 

204,250

 

$

29.27

 

 

The total intrinsic value of restricted stock that vested during the nine months ended September 30, 2006 was $1.9 million. The shares of restricted stock which vested during the nine months ended September 30, 2006 were issued in connection with the Patina Merger on May 16, 2005 and were subject to a one-year vesting period.  No restricted stock vested during the nine months ended September 30, 2005.

As of September 30, 2006, there was $3.9 million of total unrecognized compensation cost related to unvested restricted stock granted under the Plans.  The cost is expected to be recognized over a weighted-average period of 1.5 years.  Common stock dividends accrue on restricted stock grants and are paid upon vesting.  We issue new shares of common stock when awarding restricted stock.

Note 5 - Derivative Instruments and Hedging Activities

Cash Flow Hedges – We use various derivative instruments in connection with anticipated crude oil and natural gas sales to minimize the impact of product price fluctuations. Such instruments include variable to fixed price swaps, costless collars and basis swaps. Although these derivative instruments expose us to credit risk, we monitor the creditworthiness of our counterparties and we believe that losses from nonperformance are unlikely to be significant. However, we are not able to predict sudden changes in the creditworthiness of our counterparties.

We account for derivative instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and have elected to designate the majority of our derivative instruments as cash flow hedges. Derivative instruments designated as cash flow hedges are reflected at fair value in our consolidated balance sheets. Changes in fair value, to the extent the hedge is effective, are reported in AOCL until the forecasted transaction occurs. Gains and losses from such derivative instruments related to our crude oil and natural gas production and which qualify for hedge accounting treatment are recorded in oil and gas sales in our consolidated statements of operations upon sale of the associated products. We assess hedge effectiveness quarterly based on total changes in the derivative’s fair value. Any ineffective portion of the derivative instrument’s change in fair value is recognized immediately and is included in (gain) loss on derivative instruments in the consolidated statements of operations.

Ineffectiveness was recognized as follows:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Ineffectiveness (gains) losses

 

$

(2,957

)

$

(259

)

$

8,384

 

$

2,121

 

 

15




 

If it becomes probable that the hedge transaction will not occur, the hedging instrument loses hedge accounting treatment. All prospective mark-to-market gains and losses are recorded in earnings and the related accumulated gains or losses recorded in AOCL are also reclassified to earnings.  As a result of the impacts of Hurricanes Katrina and Rita on the timing of forecasted production during first quarter 2006, derivative instruments hedging approximately 6,000 barrels per day of crude oil and 40,000 MMBtu per day of natural gas did not qualify for hedge accounting during a portion of first quarter 2006.  Accordingly, the changes in fair value of these derivative contracts were recognized in our results of operations, causing a mark-to-market gain of $39.2 million in first quarter 2006.  These derivative instruments were redesignated as cash flow hedges in February 2006.  In addition, the delay in the timing of our production resulted in a loss of $25.4 million related to amounts previously recorded in AOCL. Both the gain and the loss are included in (gain) loss on derivative instruments in the consolidated statements of operations.

We have hedging instruments that were designated as cash flow hedges of production from our Gulf of Mexico shelf assets. We sold these shelf assets during the third quarter 2006. During second quarter 2006, when it became probable that forecasted production would not occur due to the pending sale, we determined that deferral of losses in AOCL related to this forecasted production was no longer appropriate under SFAS 133.  As a result, we reclassified a pretax charge of $398.5 million related to the cash flow hedges from AOCL to earnings.   We have redesignated the majority of these instruments as cash flow hedges for other North America production. Future earnings will reflect only those changes in derivative fair value that occur after the date of redesignation and are deferred in AOCL until the forecasted production occurs. In addition, a mark-to-market gain of $3.4 million relating to a hedging instrument that was not redesignated is included in (gain) loss on derivative instruments for third quarter 2006.

 Effects of cash flow hedges on oil and gas sales were as follows:

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2006

 

2005

 

2006

 

2005