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Noble Energy 10-Q 2007

Documents found in this filing:

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

 

UNITED STATES

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 June 30, 2007

 

 

 

 

 

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 July 25, 2007: 171,116,188

 




PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Noble Energy, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

301,750

 

$

153,408

 

Accounts receivable - trade, net

 

603,094

 

586,882

 

Deferred income taxes

 

50,912

 

99,835

 

Probable insurance claims

 

30,620

 

101,233

 

Other current assets

 

141,431

 

127,188

 

Total current assets

 

1,127,807

 

1,068,546

 

Property, plant and equipment

 

 

 

 

 

Oil and gas properties (successful efforts method of accounting)

 

9,539,419

 

8,867,639

 

Other property, plant and equipment

 

90,534

 

79,646

 

 

 

9,629,953

 

8,947,285

 

Accumulated depreciation, depletion and amortization

 

(2,110,142

)

(1,776,528

)

Total property, plant and equipment, net

 

7,519,811

 

7,170,757

 

Other noncurrent assets

 

574,321

 

568,032

 

Goodwill

 

767,121

 

781,290

 

Total Assets

 

$

9,989,060

 

$

9,588,625

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current Liabilities

 

 

 

 

 

Accounts payable - trade

 

$

548,147

 

$

518,609

 

Derivative instruments

 

328,418

 

254,625

 

Income taxes

 

36,616

 

107,136

 

Short-term borrowings

 

40,000

 

 

Asset retirement obligations

 

44,189

 

68,500

 

Other current liabilities

 

166,581

 

235,392

 

Total current liabilities

 

1,163,951

 

1,184,262

 

Deferred income taxes

 

1,771,059

 

1,758,452

 

Asset retirement obligations

 

111,471

 

127,689

 

Derivative instruments

 

223,854

 

328,875

 

Other noncurrent liabilities

 

342,048

 

274,720

 

Long-term debt

 

1,990,949

 

1,800,810

 

Total Liabilities

 

5,603,332

 

5,474,808

 

 

 

 

 

 

 

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; 190,244,402 and 188,808,087 shares issued, respectively

 

634,151

 

629,360

 

Capital in excess of par value

 

2,074,136

 

2,041,048

 

Accumulated other comprehensive loss

 

(192,196

)

(140,509

)

Treasury stock, at cost: 18,580,865 and 16,574,384 shares, respectively

 

(612,976

)

(511,443

)

Retained earnings

 

2,482,613

 

2,095,361

 

Total Shareholders’ Equity

 

4,385,728

 

4,113,817

 

Total Liabilities and Shareholders’ Equity

 

$

9,989,060

 

$

9,588,625

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

726,918

 

$

714,860

 

$

1,393,960

 

$

1,361,112

 

Income from equity method investees

 

48,970

 

35,441

 

94,533

 

75,091

 

Other revenues

 

18,325

 

22,279

 

48,265

 

48,374

 

Total Revenues

 

794,213

 

772,580

 

1,536,758

 

1,484,577

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Lease operating costs

 

82,563

 

79,186

 

161,438

 

161,379

 

Production and ad valorem taxes

 

28,748

 

27,513

 

53,915

 

52,966

 

Transportation costs

 

16,052

 

8,871

 

27,086

 

13,932

 

Exploration costs

 

53,761

 

29,400

 

99,002

 

61,423

 

Depreciation, depletion and amortization

 

181,227

 

168,648

 

345,187

 

293,113

 

General and administrative

 

47,761

 

37,661

 

92,850

 

73,059

 

Accretion of discount on asset retirement obligations

 

2,041

 

2,662

 

4,428

 

5,979

 

Interest, net of amount capitalized

 

30,986

 

33,918

 

57,858

 

67,086

 

(Gain) loss on derivative instruments

 

(1,066

)

401,197

 

(2,071

)

396,039

 

Loss on involuntary conversion

 

38,291

 

 

51,406

 

 

Other expense, net

 

20,748

 

28,389

 

48,706

 

55,112

 

Total Costs and Expenses

 

501,112

 

817,445

 

939,805

 

1,180,088

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

293,101

 

(44,865

)

596,953

 

304,489

 

Income Tax Provision (Benefit)

 

83,996

 

(14,160

)

176,036

 

109,107

 

Net Income (Loss)

 

$

209,105

 

$

(30,705

)

$

420,917

 

$

195,382

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share

 

 

 

 

 

 

 

 

 

Basic

 

$

1.22

 

$

(0.17

)

$

2.46

 

$

1.11

 

Diluted

 

$

1.21

 

$

(0.17

)

$

2.43

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

170,900

 

177,160

 

170,873

 

176,651

 

Diluted

 

173,083

 

177,160

 

173,064

 

180,460

 

 

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)

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

420,917

 

$

195,382

 

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

 

 

 

 

 

Depreciation, depletion and amortization - oil and gas production

 

345,187

 

293,113

 

Depreciation, depletion and amortization - electricity generation

 

6,913

 

8,067

 

Dry hole expense

 

30,863

 

15,019

 

Impairment of operating assets

 

 

6,359

 

Amortization of unproved leasehold costs

 

9,490

 

10,086

 

Stock-based compensation expense

 

12,078

 

6,323

 

Gain on sale of assets

 

(6,065

)

(11,015

)

Deferred income taxes

 

103,516

 

47,059

 

Accretion of discount on asset retirement obligations

 

4,428

 

5,979

 

Income from equity method investees

 

(94,533

)

(75,091

)

Dividends received from equity method investees

 

96,944

 

18,000

 

Deferred compensation expense

 

14,666

 

14,740

 

(Gain) loss on derivative instruments

 

(92,690

)

447,789

 

Loss on involuntary conversion

 

51,406

 

 

Other

 

61,045

 

8,440

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

Increase in accounts receivable

 

(22,498

)

(69,810

)

Increase in other current assets

 

(36,270

)

(30,800

)

Decrease in probable insurance claims

 

73,478

 

91,560

 

Increase in accounts payable

 

29,538

 

33,596

 

Decrease in other current liabilities

 

(235,542

)

(80,556

)

Net Cash Provided by Operating Activities

 

772,871

 

934,240

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Additions to property, plant and equipment

 

(695,132

)

(629,860

)

U.S. Exploration acquisition, net of cash acquired

 

 

(412,257

)

Proceeds from property sales

 

 

16,928

 

Investment in equity method investees

 

 

(1,358

)

Distributions from equity method investees

 

 

77,520

 

Net Cash Used in Investing Activities

 

(695,132

)

(949,027

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Exercise of stock options

 

15,597

 

29,289

 

Tax benefits from stock-based awards

 

10,204

 

7,600

 

Cash dividends paid

 

(33,665

)

(22,350

)

Purchases of treasury stock

 

(101,533

)

(23,682

)

Proceeds from credit facility

 

280,000

 

300,000

 

Repayment of credit facility

 

(115,000

)

(210,000

)

Repayment of term loans

 

 

(80,000

)

Proceeds from short term borrowings

 

15,000

 

85,000

 

Net Cash Provided by Financing Activities

 

70,603

 

85,857

 

Increase in Cash and Cash Equivalents

 

148,342

 

71,070

 

Cash and Cash Equivalents at Beginning of Period

 

153,408

 

110,321

 

Cash and Cash Equivalents at End of Period

 

$

301,750

 

$

181,391

 

 

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)

 

 

 

 

 

 

Deferred

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

Compensation -

 

Other

 

Treasury

 

 

 

Total

 

 

 

Common

 

Excess of

 

Restricted

 

Comprehensive

 

Stock

 

Retained

 

Shareholders’

 

 

 

Stock

 

Par Value

 

Stock

 

Loss

 

at Cost

 

Earnings

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2006

 

$

629,360

 

$

2,041,048

 

$

 

$

(140,509

)

$

(511,443

)

$

2,095,361

 

$

4,113,817

 

Net income

 

 

 

 

 

 

420,917

 

420,917

 

Stock-based compensation expense

 

 

12,078

 

 

 

 

 

12,078

 

Exercise of stock options

 

3,044

 

12,553

 

 

 

 

 

15,597

 

Tax benefits from stock-based awards

 

 

10,204

 

 

 

 

 

10,204

 

Issuance of restricted stock, net

 

1,747

 

(1,747

)

 

 

 

 

 

Dividends ($0.195 per share)

 

 

 

 

 

 

(33,665

)

(33,665

)

Purchases of treasury stock

 

 

 

 

 

(101,533

)

 

(101,533

)

Oil and gas cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized amounts reclassified into earnings

 

 

 

 

(2,510

)

 

 

(2,510

)

Unrealized change in fair value

 

 

 

 

(51,372

)

 

 

(51,372

)

Net change in other

 

 

 

 

2,195

 

 

 

2,195

 

June 30, 2007

 

$

634,151

 

$

2,074,136

 

$

 

$

(192,196

)

$

(612,976

)

$

2,482,613

 

$

4,385,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2005

 

$

616,311

 

$

1,945,239

 

$

(5,288

)

$

(783,499

)

$

(148,476

)

$

1,465,857

 

$

3,090,144

 

Net income

 

 

 

 

 

 

195,382

 

195,382

 

Adoption of SFAS 123(R), net of tax

 

 

(5,288

)

5,288

 

 

 

 

 

Stock-based compensation expense

 

 

6,323

 

 

 

 

 

6,323

 

Exercise of stock options

 

5,169

 

24,120

 

 

 

 

 

29,289

 

Tax benefits from stock-based awards

 

 

7,600

 

 

 

 

 

7,600

 

Issuance of restricted stock, net

 

217

 

(217

)

 

 

 

 

 

Dividends ($0.125 per share)

 

 

 

 

 

 

(22,350

)

(22,350

)

Rabbi trust shares sold

 

 

3,035

 

 

 

13,809

 

 

16,844

 

Purchases of treasury stock

 

 

 

 

 

(23,682

)

 

(23,682

)

Oil and gas cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized amounts reclassified into earnings

 

 

 

 

113,904

 

 

 

113,904

 

Unrealized amounts reclassified into earnings

 

 

 

 

275,542

 

 

 

275,542

 

Unrealized change in fair value

 

 

 

 

(5,121

)

 

 

(5,121

)

Net change in other

 

 

 

 

326

 

 

 

326

 

June 30, 2006

 

$

621,697

 

$

1,980,812

 

$

 

$

(398,848

)

$

(158,349

)

$

1,638,889

 

$

3,684,201

 

 

The accompanying notes are an integral part of these financial statements

5




Noble Energy, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

209,105

 

$

(30,705

)

$

420,917

 

$

195,382

 

 

 

 

 

 

 

 

 

 

 

Other items of comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Oil and gas cash flow hedges:

 

 

 

 

 

 

 

 

 

Realized amounts reclassified into earnings

 

10,714

 

67,920

 

(4,022

)

175,237

 

  Less tax provision

 

(4,029

)

(23,772

)

1,512

 

(61,333

)

Unrealized amounts reclassified into earnings

 

 

398,517

 

 

423,910

 

  Less tax provision

 

 

(139,482

)

 

(148,368

)

Unrealized change in fair value

 

17,943

 

(75,603

)

(82,327

)

(7,878

)

  Less tax provision

 

(6,747

)

26,462

 

30,955

 

2,757

 

Net change in other:

 

2,179

 

58

 

3,519

 

501

 

  Less tax provision

 

(820

)

(20

)

(1,324

)

(175

)

Other comprehensive income (loss)

 

19,240

 

254,080

 

(51,687

)

384,651

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

228,345

 

$

223,375

 

$

369,230

 

$

580,033

 

 

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

Noble Energy, Inc. (“Noble Energy”, “we”, “our” or “us”) is an independent energy company engaged 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 U.S. 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 (Israel), Ecuador, the North Sea (UK, the Netherlands and Norway), China, Argentina and Suriname.

Note 2 - Basis of Presentation

Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. 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. The accompanying unaudited consolidated financial statements at June 30, 2007 and December 31, 2006 and for the three and six months ended June 30, 2007 and 2006 contain all normally 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 and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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 included in our annual report on Form 10-K for the year ended December 31, 2006.

Estimates – The preparation of consolidated financial statements in conformity with GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Recent Acreage Acquisitions – During second quarter 2007, we acquired approximately 280,000 net acres onshore North America in the Piceance, Niobrara and New Albany Shale areas at a cost of approximately $85 million. The working interests acquired consist primarily of unproved properties. The Piceance acreage was purchased for $75 million, which is being paid in three annual installments. The first installment of $25 million was paid on May 3, 2007. Additional installments of $25 million each are due on May 12, 2008 and May 11, 2009.  The amount due in 2008 is included in short-term borrowings and the amount due in 2009 is included in long-term debt in the consolidated balance sheets. Interest on the unpaid amounts is due quarterly, with the first interest payment made on July 1, 2007. Interest accrues at a LIBOR rate plus a margin.  The interest rate was 5.66% at June 30, 2007.

7




Balance Sheet and Statement of Operations Information

Other balance sheet and statement of operations information is as follows:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Other Current Assets

 

 

 

 

 

Derivative instruments

 

$

13,303

 

$

35,242

 

Materials and supplies inventories

 

52,415

 

46,973

 

Prepaid expenses and other current assets

 

75,713

 

44,973

 

Total

 

$

141,431

 

$

127,188

 

Other Noncurrent Assets

 

 

 

 

 

Equity method investments

 

$

371,759

 

$

373,372

 

Mutual fund investments

 

125,826

 

116,314

 

Probable insurance claims

 

43,636

 

46,500

 

Derivative instruments

 

487

 

2,862

 

Other noncurrent assets

 

32,613

 

28,984

 

Total

 

$

574,321

 

$

568,032

 

Other Current Liabilities

 

 

 

 

 

Accrued and other current liabilities

 

$

150,045

 

$

219,885

 

Interest payable

 

16,536

 

15,507

 

Total

 

$

166,581

 

$

235,392

 

Other Noncurrent Liabilities

 

 

 

 

 

Deferred compensation liability

 

$

199,897

 

$

173,253

 

Accrued benefit costs

 

65,304

 

58,491

 

Other noncurrent liabilities

 

76,847

 

42,976

 

Total

 

$

342,048

 

$

274,720

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Other Revenues

 

 

 

 

 

 

 

 

 

Electricity sales

 

$

13,905

 

$

15,519

 

$

37,129

 

$

33,431

 

Gathering, marketing and processing

 

4,420

 

6,760

 

11,136

 

14,943

 

Total

 

$

18,325

 

$

22,279

 

$

48,265

 

$

48,374

 

 

 

 

 

 

 

 

 

 

 

Other Expense, net

 

 

 

 

 

 

 

 

 

Electricity generation (1)

 

$

12,169

 

$

14,597

 

$

28,262

 

$

25,224

 

Gathering, marketing and processing

 

3,977

 

5,968

 

8,993

 

11,470

 

Deferred compensation expense

 

3,017

 

5,563

 

14,666

 

14,740

 

Impairment of operating assets

 

 

6,359

 

 

6,359

 

Other

 

1,585

 

(4,098

)

(3,215

)

(2,681

)

Total

 

$

20,748

 

$

28,389

 

$

48,706

 

$

55,112

 

 


(1)  Includes increases in the allowance for doubtful accounts of $2 million and $3 million for second quarter 2007 and 2006, respectively, and $7 million and $4 million for the first six months of 2007 and 2006, respectively. We increased the allowance to cover potentially uncollectible balances related to our 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.

8




Note 3 - Derivative Instruments and Hedging Activities

Cash Flow Hedges – We use various derivative instruments in connection with forecasted crude oil and natural gas sales to mitigate the variability of cash flows associated with commodity price fluctuations. Such instruments include fixed to variable price swaps, costless collars and basis swaps.  While these instruments mitigate the cash flow risk of future reductions in commodity prices they may also curtail benefits from future increases in commodity prices.

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 certain of our derivative instruments as cash flow hedges. Derivative instruments designated as cash flow hedges are reflected at fair value in the consolidated balance sheets. Changes in fair value, to the extent the hedge is effective, are reported in accumulated other comprehensive income or loss (“AOCL”) until the forecasted transaction occurs. Gains and losses from such derivative instruments related to our crude oil and natural gas sales and which qualify for hedge accounting treatment are recorded in oil and gas sales on our consolidated statements of operations upon sale of the associated commodity. 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 immediately recognized in earnings.

Effects of cash flow hedges on gains and losses on derivative instruments were as follows:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Reclassified from AOCL

 

$

 

$

398,517

 

$

 

$

423,910

 

Mark-to-market gain on derivative instruments not accounted for as cash flow hedges

 

 

 

 

(39,212

)

Ineffectiveness (gains) losses

 

(1,066

)

2,680

 

(2,071

)

11,341

 

(Gain) loss on derivative instruments

 

$

(1,066

)

$

401,197

 

$

(2,071

)

$

396,039

 

 

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

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in natural gas sales

 

$

29,245

 

$

(10,734

)

$

72,084

 

$

(61,936

)

Decrease in crude oil sales

 

(39,959

)

(57,186

)

(68,062

)

(113,301

)

Total (decrease) increase in oil and gas sales

 

$

(10,714

)

$

(67,920

)

$

4,022

 

$

(175,237

)

 

The increase in natural gas sales in 2007 includes non-cash increases related to hedge contracts that were re-designated at the time of the Gulf of Mexico shelf asset sale in 2006 and settled during the first six months of 2007. These non-cash increases totaled $40 million for second quarter 2007 and $91 million for the first six months of 2007.

9




At June 30, 2007, we had entered into fixed to variable price swap derivative instruments related to natural gas and crude oil sales as follows:

 

 

Natural Gas

 

Crude Oil

 

 

 

 

 

Average price

 

 

 

Average Price

 

Production Period

 

MMBtupd

 

per MMBtu

 

Bopd

 

per Bbl

 

July - December 2007 (NYMEX)

 

170,000

 

$

5.83

 

17,100

 

$

38.89

 

 

 

 

 

 

 

 

 

 

 

2008 (NYMEX)

 

170,000

 

5.66

 

16,500

 

38.23

 

 

At June 30, 2007, we had entered into basis swap derivative instruments related to natural gas sales. These basis swaps have been combined with NYMEX fixed to variable swaps and designated as cash flow hedges. The basis swaps are as follows:

 

 

Natural Gas

 

 

 

 

 

Average

 

 

 

 

 

Differential

 

Production Period

 

MMBtupd

 

per MMBtu

 

July - December 2007 (CIG (1)vs. NYMEX)

 

100,000

 

$

2.02

 

July - December 2007 (ANR (2) vs. NYMEX)

 

30,000

 

1.17

 

July - December 2007 (PEPL (3) vs. NYMEX)

 

10,000

 

1.11

 

 

 

 

 

 

 

2008 (CIG vs. NYMEX)

 

100,000

 

1.66

 

2008 (ANR vs. NYMEX)

 

40,000

 

1.01

 

2008 (PEPL vs. NYMEX)

 

10,000

 

0.98

 

 


(1)  Colorado Interstate Gas - North System

(2) ANR Oklahoma Pipeline

(3) Panhandle Eastern Pipe Line

At June 30, 2007, we had entered into costless collar derivative instruments related to natural gas and crude oil sales as follows:

 

 

Natural Gas

 

Crude Oil

 

 

 

 

 

Average price

 

 

 

Average price

 

 

 

 

 

per MMBtu

 

 

 

per Bbl

 

Production Period

 

MMBtupd

 

Floor

 

Ceiling

 

Bopd

 

Floor

 

Ceiling

 

July - December 2007 (NYMEX)

 

 

$

 

$

 

2,700

 

$

60.00

 

$

74.30

 

July - December 2007 (CIG)

 

12,000

 

6.50

 

9.50

 

 

 

 

July - December 2007 (Dated Brent)

 

 

 

 

6,516

 

45.00

 

70.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 (NYMEX)

 

 

 

 

3,100

 

60.00

 

72.40

 

2008 (CIG)

 

14,000

 

6.75

 

8.70

 

 

 

 

2008 (Dated Brent)

 

 

 

 

4,074

 

45.00

 

66.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 (NYMEX)

 

 

 

 

3,700

 

60.00

 

70.00

 

2009 (CIG)

 

15,000

 

6.00

 

9.90

 

 

 

 

2009 (Dated Brent)

 

 

 

 

3,074

 

45.00

 

63.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010 (NYMEX)

 

 

 

 

3,500

 

55.00

 

73.80

 

2010 (CIG)

 

15,000

 

6.25

 

8.10

 

 

 

 

 

If commodity prices were to stay the same as they were at June 30, 2007, approximately $70 million of deferred losses, net of taxes, related to the fair values of the derivative instruments included in AOCL at June 30, 2007 would be reversed during the next twelve months as the forecasted transactions occur, and settlements would be recorded as a reduction in oil and gas sales. All forecasted transactions currently being hedged are expected to occur by December 2010.

10




Note 4 Defined Benefit Pension, Restoration and Medical and Life Plans

We have a noncontributory, tax-qualified defined benefit pension plan covering certain domestic employees. We also have an unfunded, nonqualified restoration plan that provides the pension plan formula benefits that cannot be provided by the qualified pension plan because of pay deferrals and the compensation and benefit limitations imposed on the pension plan by the Employee Retirement Income Security Act of 1974. We sponsor other plans for the benefit of our employees and retirees, which include medical and life insurance benefits. Net periodic benefit cost related to the pension, restoration and medical and life plans was as follows:

 

Retirement & Restoration

 

Medical & Life

 

 

 

Plan Benefits

 

Plan Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

Service cost

 

$

3,087

 

$

2,701

 

$

502

 

$

528

 

Interest cost

 

2,474

 

2,240

 

293

 

321

 

Expected return on plan assets

 

(2,693

)

(2,018

)

 

 

Transition obligation recognition

 

60

 

60

 

 

 

Amortization of prior service cost

 

(129

)

(45

)

(232

)

(184

)

Recognized net actuarial loss

 

978

 

520

 

293

 

217

 

Net periodic benefit cost

 

$

3,777

 

$

3,458

 

$

856

 

$

882

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

Service cost

 

$

6,174

 

$

6,006

 

$

1,004

 

$

1,272

 

Interest cost

 

4,948

 

4,512

 

586

 

690

 

Expected return on plan assets

 

(5,386

)

(3,981

)

 

 

Transition obligation recognition

 

120

 

120

 

 

 

Amortization of prior service cost

 

(258

)

48

 

(464

)

(243

)

Recognized net actuarial loss

 

1,956

 

1,240

 

586

 

548

 

Net periodic benefit cost

 

$

7,554

 

$

7,945

 

$

1,712

 

$

2,267

 

 

Note 5 - Stock-Based Compensation

We recognized stock-based compensation expense as follows:

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Stock-based compensation expense

 

$6,631

 

$3,169

 

$12,078

 

$6,323

 

Tax benefit from expense recognized

 

2,493

 

1,109

 

4,541

 

2,213

 

 

During the six months ended June 30, 2007, we granted 1,478,836 stock options with a weighted-average grant-date fair value of $18.72 per option and awarded 533,002 shares of restricted stock subject to service conditions with a weighted-average grant-date fair value of $53.57 per share.

11




Note 6 - Effect of Gulf Coast Hurricanes

We have substantially completed our cleanup activities relating to the damage caused by Hurricane Ivan in 2004.  During second quarter 2007, we completed the abandonment of the wells damaged by Ivan and in July 2007, we completed the lifting and removal of the three platform decks that were sheared from their supporting structures during the storm.

During the first half of 2007, several factors contributed to an increase in our estimated cleanup costs for Hurricane Ivan related damage.  These factors include cost escalation due to weather delays and an increase in effort for the design and construction of the deck lifting barge and mooring system, as well as additional costs for the actual deck lifting activities.  These increases caused the total expected project costs combined with net book value of the assets destroyed to reach approximately $300 million, which exceeded our maximum single event insurance coverage.  As a result, we recorded $40 million as a loss on involuntary conversion for the first six months of 2007.  As of June 30, 2007, we have been reimbursed $259 million by our insurance providers, our maximum single event insurance recovery at the time of the storm.

During second quarter 2007, we completed the abandonment of the wells damaged by Hurricane Katrina and in July 2007, we completed the lifting and removal of the platform deck that was sheared from its supporting structure during the storm.

The cost escalation problems that impacted the Hurricane Ivan cleanup activities also impacted the Hurricane Katrina cleanup activities, resulting in an increase in total cleanup costs.  These increases caused the sum of the expected total cleanup and return to production costs to reach $130 million.  As a result of these cost increases, we have recorded a loss on involuntary conversion of $10 million for the first six months of 2007.  Our estimates for restoring a production platform and wells are approximately $70 million.  The recovery of a significant portion of our insurance receivable is dependent upon the final redevelopment or settlement resolution with our insurance providers.  As of June 30, 2007, we have been reimbursed $19 million by our insurance providers and have recorded probable insurance claims of $68 million.

Insurance reimbursements received to date have been for cleanup and return to production repair costs and are included in cash flows from operating activities.

Note 7 - Asset Retirement Obligations

Asset retirement obligations consist primarily of estimated costs of dismantlement, removal, site reclamation and similar activities associated with our oil and gas properties. Changes in asset retirement obligations were as follows:

 

Six Months Ended

 

 

 

June 30, 2007

 

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

 

$

196,189

 

Liabilities incurred in current period

 

1,353

 

Liabilities settled in current period

 

(115,324

)

Revisions

 

69,014

 

Accretion expense

 

4,428

 

Asset retirement obligations at end of period

 

$

155,660

 

 

The ending aggregate amount includes $32 million related to damage to the Main Pass assets caused by Hurricanes Ivan and Katrina.  Liabilities settled and revisions during the period were primarily related to cleanup of hurricane damage at Main Pass.

12




Note 8 – Equity Method Investments

Equity method investments are included in other noncurrent assets in the consolidated balance sheets, and our share of earnings is reported as income from equity method investees in our consolidated statements of operations.  Our share of income taxes incurred directly by the equity method investees is reported in income from equity method investees and is not included in our income tax provision in our consolidated statements of operations. Equity method investments and summarized, 100% combined financial information are as follows:

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Equity method investments:

 

 

 

 

 

Atlantic Methanol Production Company, LLC (“AMPCO, LLC”)

 

$

204,145

 

$

211,325

 

Alba Plant LLC

 

150,663

 

146,051

 

Other

 

16,951

 

15,996

 

Total equity method investments

 

$

371,759

 

$

373,372

 

 

Summarized, 100% combined information:

 

June 30,

 

December 31,