Noble Energy 10-Q 2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q
NOBLE ENERGY, INC. (Exact name of registrant as specified in its charter)
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):
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)
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)
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)
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)
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)
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:
(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:
Effects of cash flow hedges on natural gas and crude oil sales were as follows:
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:
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:
(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:
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:
Note 5 - Stock-Based Compensation We recognized stock-based compensation expense as follows:
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:
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:
Summarized, 100% combined information:
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