Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 31, 2017)
  • 10-Q (Aug 3, 2017)
  • 10-Q (May 2, 2017)
  • 10-Q (Nov 2, 2016)
  • 10-Q (Aug 3, 2016)
  • 10-Q (May 4, 2016)

 
8-K

 
Other

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 March 31, 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 April 25, 2007: 170,862,159

 




PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Noble Energy, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

(Unaudited)

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

249,219

 

$

153,408

 

Accounts receivable - trade, net

 

633,250

 

586,882

 

Probable insurance claims

 

72,160

 

101,233

 

Deferred income taxes

 

51,247

 

99,835

 

Other current assets

 

89,333

 

127,188

 

Total current assets

 

1,095,209

 

1,068,546

 

Property, plant and equipment

 

 

 

 

 

Oil and gas properties (successful efforts method of accounting)

 

9,114,554

 

8,867,639

 

Other property, plant and equipment

 

81,535

 

79,646

 

 

 

9,196,089

 

8,947,285

 

Accumulated depreciation, depletion and amortization

 

(1,936,758

)

(1,776,528

)

Total property, plant and equipment, net

 

7,259,331

 

7,170,757

 

Other noncurrent assets

 

579,437

 

568,032

 

Goodwill

 

767,214

 

781,290

 

Total Assets

 

$

9,701,191

 

$

9,588,625

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current Liabilities

 

 

 

 

 

Accounts payable - trade

 

$

530,290

 

$

518,609

 

Derivative instruments

 

330,586

 

254,625

 

Income taxes

 

134,698

 

107,136

 

Short-term borrowings

 

100,000

 

 

Asset retirement obligations

 

31,204

 

68,500

 

Other current liabilities

 

188,641

 

235,392

 

Total current liabilities

 

1,315,419

 

1,184,262

 

Deferred income taxes

 

1,704,274

 

1,758,452

 

Asset retirement obligations

 

120,884

 

127,689

 

Derivative instruments

 

293,150

 

328,875

 

Other noncurrent liabilities

 

300,069

 

274,720

 

Long-term debt

 

1,800,879

 

1,800,810

 

Total Liabilities

 

5,534,675

 

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; 190,103,659 and 188,808,087 shares issued, respectively

 

633,681

 

629,360

 

Capital in excess of par value

 

2,063,018

 

2,041,048

 

Accumulated other comprehensive loss

 

(211,436

)

(140,509

)

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

 

(612,976

)

(511,443

)

Retained earnings

 

2,294,229

 

2,095,361

 

Total Shareholders’ Equity

 

4,166,516

 

4,113,817

 

Total Liabilities and Shareholders’ Equity

 

$

9,701,191

 

$

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

 

 

 

March 31,

 

 

 

2007

 

2006

 

Revenues

 

 

 

 

 

Oil and gas sales

 

$

667,042

 

$

646,252

 

Income from equity method investments

 

45,563

 

39,650

 

Other revenues

 

29,940

 

26,095

 

Total Revenues

 

742,545

 

711,997

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

Lease operating costs

 

78,875

 

82,193

 

Production and ad valorem taxes

 

25,167

 

25,453

 

Transportation costs

 

11,034

 

5,061

 

Exploration costs

 

45,241

 

32,022

 

Depreciation, depletion and amortization

 

163,960

 

124,465

 

General and administrative

 

45,089

 

35,398

 

Accretion of discount on asset retirement obligations

 

2,387

 

3,318

 

Interest, net of amount capitalized

 

26,872

 

33,168

 

Other expense, net

 

40,068

 

21,566

 

Total Costs and Expenses

 

438,693

 

362,644

 

 

 

 

 

 

 

Income Before Taxes

 

303,852

 

349,353

 

Income Tax Provision

 

92,040

 

123,266

 

Net Income

 

$

211,812

 

$

226,087

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

Basic

 

$

1.24

 

$

1.28

 

Diluted

 

$

1.22

 

$

1.26

 

 

 

 

 

 

 

Weighted average number of shares outstanding

 

 

 

 

 

Basic

 

170,844

 

176,136

 

Diluted

 

173,043

 

180,099

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

211,812

 

$

226,087

 

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

 

 

 

 

 

Depreciation, depletion and amortization - oil and gas production

 

163,960

 

124,465

 

Depreciation, depletion and amortization - electricity generation

 

3,472

 

4,151

 

Dry hole expense

 

20,235

 

7,383

 

Amortization of unproved leasehold costs

 

6,085

 

5,491

 

Stock-based compensation expense

 

5,447

 

3,154

 

Gain on sale of assets

 

(5,152

)

 

Deferred income taxes

 

47,720

 

55,460

 

Accretion of discount on asset retirement obligations

 

2,387

 

3,318

 

Income from equity method investees

 

(45,563

)

(39,650

)

Dividends received from equity method investees

 

52,693

 

9,000

 

Deferred compensation expense

 

11,649

 

9,176

 

(Gain) loss on derivative instruments

 

(52,035

)

30,686

 

Loss on involuntary conversion

 

13,115

 

 

Other

 

3,647

 

5,110

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(50,869

)

25,575

 

Decrease (increase) in other current assets

 

17,016

 

(1,277

)

Decrease in probable insurance claims

 

16,661

 

66,014

 

Increase (decrease) in accounts payable

 

11,680

 

(42,843

)

(Decrease) increase in other current liabilities

 

(11,640

)

36,209

 

Net Cash Provided by Operating Activities

 

422,320

 

527,509

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Additions to property, plant and equipment

 

(332,876

)

(288,018

)

U.S. Exploration acquisition, net of cash acquired

 

 

(412,257

)

Distributions from equity method investees

 

 

47,023

 

Net Cash Used in Investing Activities

 

(332,876

)

(653,252

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Exercise of stock options

 

12,603

 

20,236

 

Tax benefits from stock-based awards

 

8,241

 

5,062

 

Cash dividends paid

 

(12,944

)

(8,926

)

Purchases of treasury stock

 

(101,533

)

 

Proceeds from credit facilities

 

115,000

 

300,000

 

Repayment of credit facilities

 

(115,000

)

(110,000

)

Repayment of term loans

 

 

(80,000

)

Proceeds from short term borrowings

 

100,000

 

25,000

 

Net Cash Provided by Financing Activities

 

6,367

 

151,372

 

Increase in Cash and Cash Equivalents

 

95,811

 

25,629

 

Cash and Cash Equivalents at Beginning of Period

 

153,408

 

110,321

 

Cash and Cash Equivalents at End of Period

 

$

249,219

 

$

135,950

 

 

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

 

 

 

 

 

 

211,812

 

211,812

 

Stock-based compensation expense

 

 

5,447

 

 

 

 

 

5,447

 

Exercise of stock options

 

2,581

 

10,022

 

 

 

 

 

12,603

 

Tax benefits related to exercise of stock options

 

 

8,241

 

 

 

 

 

8,241

 

Issuance of restricted stock, net

 

1,740

 

(1,740

)

 

 

 

 

 

Dividends ($0.075 per share)

 

 

 

 

 

 

(12,944

)

(12,944

)

Purchases of treasury stock

 

 

 

 

 

(101,533

)

 

(101,533

)

Oil and gas cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized amounts reclassified into earnings

 

 

 

 

(9,195

)

 

 

(9,195

)

Unrealized change in fair value

 

 

 

 

(62,568

)

 

 

(62,568

)

Net change in other

 

 

 

 

836

 

 

 

836

 

March 31, 2007

 

$

633,681

 

$

2,063,018

 

$

 

$

(211,436

)

$

(612,976

)

$

2,294,229

 

$

4,166,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2005

 

$

616,311

 

$

1,945,239

 

$

(5,288

)

$

(783,499

)

$

(148,476

)

$

1,465,857

 

$

3,090,144

 

Net income

 

 

 

 

 

 

226,087

 

226,087

 

Adoption of SFAS 123(R), net of tax

 

 

(5,288

)

5,288

 

 

 

 

 

Stock-based compensation expense

 

 

3,154

 

 

 

 

 

3,154

 

Exercise of stock options

 

3,660

 

16,576

 

 

 

 

 

20,236

 

Tax benefits related to exercise of stock options

 

 

5,062

 

 

 

 

 

5,062

 

Issuance of restricted stock, net

 

267

 

(267

)

 

 

 

 

 

Dividends ($0.05 per share)

 

 

 

 

 

 

(8,926

)

(8,926

)

Rabbi trust shares sold

 

 

3,035

 

 

 

13,809

 

 

16,844

 

Oil and gas cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized amounts reclassified into earnings

 

 

 

 

69,755

 

 

 

69,755

 

Unrealized amounts reclassified into earnings

 

 

 

 

16,507

 

 

 

16,507

 

Unrealized change in fair value

 

 

 

 

44,020

 

 

 

44,020

 

Net change in other

 

 

 

 

290

 

 

 

290

 

March 31, 2006

 

$

620,238

 

$

1,967,511

 

$

 

$

(652,927

)

$

(134,667

)

$

1,683,018

 

$

3,483,173

 

 

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

 

 

 

March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Net income

 

$

211,812

 

$

226,087

 

 

 

 

 

 

 

Other items of comprehensive income (loss)

 

 

 

 

 

Oil and gas cash flow hedges:

 

 

 

 

 

Realized amounts reclassified into earnings

 

(14,736

)

107,316

 

Less tax provision

 

5,541

 

(37,561

)

Unrealized amounts reclassified into earnings

 

 

25,394

 

Less tax provision

 

 

(8,887

)

Unrealized change in fair value

 

(100,270

)

67,725

 

Less tax provision

 

37,702

 

(23,705

)

Net change in other:

 

1,340

 

445

 

Less tax provision

 

(504

)

(155

)

Other comprehensive (loss) income

 

(70,927

)

130,572

 

 

 

 

 

 

 

Comprehensive income

 

$

140,885

 

$

356,659

 

 

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” 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 March 31, 2007 and December 31, 2006 and for the three months ended March 31, 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-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ended 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 thereto included in our annual report on Form 10-K for the year ended December 31, 2006.

Accounting for Uncertainty in Income Taxes – We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) as of January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We also adopted FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No.48” (“FSP FIN 48-1”) as of January 1, 2007. FSP FIN 48-1 provides that a company’s tax position will be considered settled if the taxing authority has completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future. The adoption of FIN 48 and FSP FIN 48-1 had no effect on our financial position or results of operations. See Note 10 - Income Taxes.

7




Balance Sheet and Statement of Operations Information —

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

 

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Other Current Assets

 

 

 

 

 

Derivative instruments

 

$

14,528

 

$

35,242

 

Materials and supplies inventories

 

44,930

 

46,973

 

Prepaid expenses and other current assets

 

29,875

 

44,973

 

Total

 

$

89,333

 

$

127,188

 

Other Noncurrent Assets

 

 

 

 

 

Equity method investments

 

$

366,642

 

$

373,372

 

Mutual fund investments

 

118,623

 

116,314

 

Probable insurance claims

 

58,913

 

46,500

 

Derivative instruments

 

726

 

2,862

 

Other noncurrent assets

 

34,533

 

28,984

 

Total

 

$

579,437

 

$

568,032

 

Other Current Liabilities

 

 

 

 

 

Accrued and other current liabilities

 

$

163,410

 

$

219,885

 

Interest payable

 

25,231

 

15,507

 

Total

 

$

188,641

 

$

235,392

 

Other Noncurrent Liabilities

 

 

 

 

 

Deferred compensation liability

 

$

190,716

 

$

173,253

 

Accrued benefit costs

 

62,827

 

58,491

 

Other noncurrent liabilities

 

46,526

 

42,976

 

Total

 

$

300,069

 

$

274,720

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Other Revenues

 

 

 

 

 

Electricity sales

 

$

23,224

 

$

17,912

 

Gathering, marketing and processing

 

6,716

 

8,183

 

Total

 

$

29,940

 

$

26,095

 

 

 

 

 

 

 

Other Expense, net

 

 

 

 

 

Loss on involuntary conversion

 

$

13,115

 

$

 

Electricity generation (1)

 

16,093

 

10,626

 

Gathering, marketing and processing

 

5,016

 

5,502

 

Deferred compensation expense

 

11,649

 

9,176

 

Gain on derivative instruments

 

(1,005

)

(5,159

)

Other

 

(4,800

)

1,421

 

Total

 

$

40,068

 

$

21,566

 

 


(1)          Includes an increase in the allowance for doubtful accounts of $5 million for first quarter 2007. This increase has 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.

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 production 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 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 certain of our derivative instruments as cash flow hedges. Derivative instruments designated as cash flow hedges are reflected at fair value on our 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 production 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 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 other expense, net.

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

 

 

March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Decrease in crude oil sales

 

$

(28,103

)

$

(56,115

)

Increase (decrease) in natural gas sales

 

42,839

 

(51,201

)

Total increase (decrease) in oil and gas sales

 

$

14,736

 

$

(107,316

)

 

We recognized a hedge ineffectiveness gain of $1 million in first quarter 2007 and a loss of $9 million in first quarter 2006.

If it becomes probable that the hedging instrument is no longer highly effective, the hedging instrument loses hedge accounting treatment. All current mark-to-market gains and losses are recorded in earnings and all accumulated gains or losses recorded in AOCL related to the hedging instrument may also be 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 million in first quarter 2006.  These derivative instruments were re-designated as cash flow hedges in February 2006.  In addition, the delay in the timing of our Gulf of Mexico production resulted in a loss of $25 million related to amounts previously recorded in AOCL. Both the gain and the loss are included in gain on derivative instruments. No other gains or losses were reclassified from AOCL into earnings as a result of the discontinuance of hedge accounting treatment for individual contracts during first quarter 2007 or 2006.

9




At March 31, 2007, we had entered into costless collar derivative instruments related to crude oil and natural gas production as follows: 

 

 

Natural Gas

 

Crude Oil

 

 

 

 

 

Average price

 

 

 

Average price

 

 

 

 

 

per MMBtu

 

 

 

per Bbl

 

Production Period

 

MMBtupd

 

Floor

 

Ceiling

 

Bopd

 

Floor

 

Ceiling

 

April - December 2007 (NYMEX)

 

 

$

 

$

 

2,700

 

$

60.00

 

$

74.30

 

April - December 2007 (CIG) (1)

 

12,000

 

6.50

 

9.50

 

 

 

 

April - December 2007 (Brent)

 

 

 

 

7,265

 

45.00

 

70.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 (NYMEX)

 

 

 

 

3,100

 

60.00

 

72.40

 

2008 (CIG)

 

14,000

 

6.75

 

8.70

 

 

 

 

2008 (Brent)

 

 

 

 

4,074

 

45.00

 

66.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 (NYMEX)

 

 

 

 

3,700

 

60.00

 

70.00

 

2009 (CIG)

 

15,000

 

6.00

 

9.90

 

 

 

 

2009 (Brent)

 

 

 

 

3,074

 

45.00

 

63.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010 (NYMEX)

 

 

 

 

3,500

 

55.00

 

73.80

 

2010 (CIG)

 

15,000

 

6.25

 

8.10

 

 

 

 

 


(1)  Colorado Interstate Gas

At March 31, 2007, we had entered into fixed price swap derivative instruments related to crude oil and natural gas production as follows:

 

 

Natural Gas

 

Crude Oil

 

 

 

 

 

Average Price

 

 

 

Average price

 

Production Period

 

MMBtupd

 

per MMBtu

 

Bopd

 

per Bbl

 

April - December 2007 (NYMEX)

 

170,000

 

$

5.78

 

17,100

 

$

39.04

 

 

 

 

 

 

 

 

 

 

 

2008 (NYMEX)

 

170,000

 

5.66

 

16,500

 

38.23

 

 

At March 31, 2007, we had entered into basis swap derivative instruments related to natural gas production. 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

 

April - December 2007 (CIG vs. NYMEX)

 

100,000

 

$

2.02

 

April - December 2007 (ANR (1) vs. NYMEX)

 

30,000

 

1.17

 

April - December 2007 (PEPL (2) 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) ANR Pipeline

(2) Panhandle Eastern Pipe Line

If commodity prices were to stay the same as they were at March 31, 2007, approximately $75 million of deferred losses, net of taxes, related to the fair values of the derivative instruments included in AOCL at March 31, 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




Other Derivative Instruments – We also use various derivative instruments in connection with our purchases and sales of production to lock in profits or limit exposure to natural gas price risk. Most of the purchases are made on an index basis. However, purchasers in the markets in which we sell often require fixed or NYMEX-related pricing. We may use a derivative instrument to convert the fixed or NYMEX sale to an index basis thereby determining the margin and minimizing the risk of price volatility.

We record gains and losses on these derivative instruments using mark-to-market accounting. Under this accounting method, the changes in the market value of outstanding financial instruments are recognized as gains or losses in the period of change. Net gains (losses) related to these derivative instruments were de minimis for first quarter 2007 and 2006.

Note 4 - Employee Benefit 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 ERISA. We sponsor other plans for the benefit of our employees and retirees, which include health care and life insurance benefits. Net periodic benefit cost related to pension and other postretirement benefit plans was as follows:

 

 

Retirement & Restoration

 

Medical & Life

 

 

 

Plan Benefits

 

Plan Benefits

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

Service cost

 

$

3,087

 

$

3,305

 

$

502

 

$

744

 

Interest cost

 

2,474

 

2,272

 

293

 

369

 

Expected return on plan assets

 

(2,693

)

(1,963

)

 

 

Transition obligation recognition

 

60

 

60

 

 

 

Amortization of prior service cost

 

(129

)

93

 

(232

)

(59

)

Recognized net actuarial loss

 

978

 

720

 

293

 

331

 

Net periodic benefit cost

 

$

3,777

 

$

4,487

 

$

856

 

$

1,385

 

 

Note 5 - Stock-Based Compensation

We recognized stock-based compensation expense as follows:

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Stock-based compensation expense

 

$

5,447

 

$

3,154

 

Tax benefit from expense recognized

 

2,048

 

1,104

 

 

During the three months ended March 31, 2007, we granted 1,454,336 stock options with a weighted-average grant-date fair value of $18.71 and awarded 524,602 shares of restricted stock subject to service conditions with a weighted-average grant-date fair value of $53.43.

Note 6 - Effect of Gulf Coast Hurricanes

We have nearly completed our cleanup activities relating to the damage caused by Hurricane Ivan in 2004.  In April 2007, we completed the abandonment of the wells damaged by Ivan.  The most significant remaining activity is the lifting and removal of the three platform decks that were sheared from their supporting structures during the storm.  We are currently working with service providers to finalize a plan to safely and efficiently remove the decks from the ocean floor.  We have made

11




substantial progress in this effort and expect to remove the decks and finalize all Ivan related cleanup activities during second quarter 2007.

As a result of weather problems in the first quarter 2007, we were required to extend the contract for the necessary salvage vessels which resulted in a $10 million increase in total cleanup costs.  This increase caused the sum of the expected total project costs and the net book value of the assets destroyed to reach $270 million, $10 million in excess of our maximum single event insurance coverage of $260 million.  We have recorded the $10 million as an increase to our asset retirement obligations with a corresponding loss on involuntary conversion, which is included in other expense, net in the consolidated statements of operations.  As of March 31, 2007, we have been reimbursed $195 million by our insurance providers and have recorded probable insurance claims of $57 million and asset retirement obligations of $5 million related to Hurricane Ivan.

We are also continuing our cleanup activities relating to the damage caused by Hurricane Katrina in 2005.  The most significant remaining activity is the completion of abandonment of wells damaged by Katrina as well as the lifting and removal of a platform deck that toppled during the storm.  The removal of this deck will be performed in conjunction with the deck liftings for Ivan.

The weather problems that delayed the Hurricane Ivan cleanup activities also impacted the Hurricane Katrina cleanup activities, which resulted in a $5 million increase in total cleanup costs.  This increase caused the sum of the expected total project costs and the net book value of the assets destroyed to reach $188 million, $3 million in excess of our estimated recoverable insurance coverage.  Accordingly, we have recorded a $5 million increase to our asset retirement obligations with a $3 million loss on involuntary conversion, which is included in other expense, net.  As of March 31, 2007, we have been reimbursed $16 million by our insurance providers and have recorded probable insurance claims of $66 million and asset retirement obligations of $23 million related to Hurricane Katrina.

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:

 

 

Three Months Ended

 

 

 

March 31, 2007

 

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

 

$

196,189

 

Liabilities incurred in current period

 

540

 

Liabilities settled in current period

 

(65,421

)

Revisions

 

18,393

 

Accretion expense

 

2,387

 

Asset retirement obligations at end of period

 

$

152,088

 

 

The ending aggregate carrying amount includes $28 million related to damage to the Main Pass assets caused by Hurricanes Ivan and Katrina in the Gulf of Mexico.  Liabilities settled 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 our consolidated balance sheets, and our share of earnings is reported as income from equity method investments 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 investments and is not included in our income tax provision in our consolidated statements of operations. Investments and summarized, 100% combined financial information are as follows:

 

 

2007

 

2006

 

 

 

(in thousands)

 

Equity method investments as of March 31,

 

 

 

 

 

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

 

$

214,421

 

$

211,325

 

Alba Plant LLC

 

135,326

 

146,051

 

Other

 

16,895

 

15,996

 

Total equity method investments

 

$

366,642

 

$

373,372

 

 

 

 

 

 

 

Summarized, 100% combined information:

 

 

 

 

 

Balance sheet information as of March 31 and December 31, respectively,

 

 

 

 

 

Current assets

 

$

234,643

 

$

252,201

 

Noncurrent assets

 

850,248

 

857,465

 

Current liabilities

 

163,286

 

171,028

 

Noncurrent liabilities

 

2,317

 

2,385

 

 

 

 

 

 

 

Statements of operations information for the three months ended March 31,

 

 

 

 

 

Operating revenues

 

$

208,256

 

$

180,597

 

Less cost of goods sold

 

54,402

 

40,892

 

Gross margin

 

153,854

 

139,705

 

Less other expense

 

10,709

 

15,746

 

Less income tax expense

 

13,802

 

8,681

 

Net income

 

$

129,343

 

$

115,278

 

 

Note 9 - Basic Earnings Per Share and Diluted Earnings Per Share

Basic earnings per share (“EPS”) of common stock were computed using the weighted average number of shares of common stock outstanding during each period. The diluted earnings per share of common stock include the effect of outstanding stock options and restricted stock. The following table summarizes the calculation of basic and diluted EPS:

 

 

Three Months Ended March 31,

 

 

 

2007

 

2006

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Net

 

Average

 

Net

 

Average

 

 

 

Income

 

Shares

 

Income

 

Shares

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

211,812

 

170,844

 

$

226,087

 

176,136

 

Basic EPS

 

$

1.24

 

 

 

$

1.28

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

211,812

 

170,844

 

$

226,087

 

176,136

 

Plus: Incremental shares from assumed conversions

 

 

 

 

 

 

 

 

 

Dilutive stock options

 

 

 

2,058

 

 

 

3,827

 

Dilutive restricted stock

 

 

 

141

 

 

 

136

 

Adjusted net income and shares

 

$

211,812

 

173,043

 

$

226,087

 

180,099

 

Diluted EPS

 

$

1.22

 

 

 

$

1.26

 

 

 

 

Certain stock options and shares of our common stock held in a rabbi trust were antidilutive and were excluded from the calculation of diluted EPS. These items represented 2.5 million and 2.6 million weighted average shares for first quarter 2007 and 2006, respectively.

13




Note 10 - Income Taxes

The income tax provision consists of the following:

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Current

 

$

44,320

 

$

67,806

 

Deferred

 

47,720

 

55,460

 

Total income tax provision

 

$

92,040

 

$

123,266

 

 

Our effective tax rate decreased from 35% in first quarter 2006 to 30% in first quarter 2007.  The decrease was due primarily to higher earnings from equity method investments in first quarter 2007, which is a favorable permanent difference in calculating income tax expense. In addition, an increase in the valuation allowance on a deferred tax asset for future foreign tax credits resulted in an increase in the effective tax rate in first quarter 2006.

In assessing whether or not deferred tax assets are realizable, we consider whether it is more likely than not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2006, we had recorded deferred tax assets, subject to valuation allowances, of $74 million related to foreign tax credits and losses on foreign operations.  The valuation allowances with respect to the deferred tax assets totaled $74 million at December 31, 2006.  These deferred tax assets and valuation allowances are expected to increase to $86 million by the end of 2007.

On March 16, 2007, China’s legislature, the National People’s Congress, enacted the China Corporate Income Tax Law.  This new legislation will decrease our tax rate in China from 33% to 25% starting in 2008.  The deferred tax liability for China as of December 31, 2006 was revised during first quarter 2007 to reflect the new rate, which decreased deferred tax expense by $2 million during the three months ended March 31, 2007.

Adoption of FIN 48 and FSP FIN 48-1 — As discussed in Note 2 - Basis of Presentation, we adopted FIN 48 and FSP FIN 48-1 as of January 1, 2007. The adoption had no effect on our financial position or results of operations. As of January 1, 2007 and March 31, 2007, the total amount of unrecognized tax benefits was $400,000, all of which would affect our effective tax rate if recognized. In our major tax jurisdictions, the earliest years remaining open to examination are as follows: U.S. - 2003, Equatorial Guinea - 2002, China - 2003, Israel - 2000, UK - 2005 and the Netherlands - 2000.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. We had accrued no interest or penalties at March 31, 2007, because the jurisdiction in which we have unrecognized tax benefits has not historically imposed interest and penalties.

Note 11 - Geographical Data

We have operations throughout the world and manage our operations by country. The following information is grouped into five components that are all primarily in the business of natural gas and crude oil exploration and production:  North America; West Africa (Equatorial Guinea and Cameroon); North Sea (UK, the Netherlands and Norway); Israel; and Other International, Corporate and Marketing. Other International includes Argentina, China, Ecuador and Suriname. The following data was prepared on the same basis as our consolidated financial statements. The information excludes the effects of income taxes.

14




 

 

 

 

 

 

 

 

 

 

 

 

 

Other Int’l

 

 

 

 

 

North

 

West

 

 

 

 

 

Corporate &

 

 

 

Consolidated

 

America

 

Africa

 

North Sea

 

Israel

 

Marketing

 

 

 

(in thousands)

 

Three Months Ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from third parties

 

$

696,982

 

$

397,660

 

$

63,737

 

$

55,161

 

$

25,375

 

$

155,049

 

Intersegment revenue

 

 

95,575

 

 

 

 

(95,575

)

Income from equity method investments

 

45,563

 

 

45,563

 

 

 

 

Total Revenues

 

742,545

 

493,235

 

109,300

 

55,161

 

25,375

 

59,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DD&A

 

163,960

 

137,821

 

3,242

 

11,655

 

3,711

 

7,531

 

Income before taxes

 

303,852

 

217,507

 

83,446

 

32,161

 

19,682

 

(48,944

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from third parties

 

$

672,347

 

$

278,813

 

$

124,039

 

$

36,287

 

$

19,759

 

$

213,449

 

Intersegment revenue

 

 

152,043

 

 

 

 

(152,043

)

Income from equity method investments

 

39,650

 

 

39,650

 

 

 

 

Total Revenues

 

711,997

 

430,856

 

163,689

 

36,287

 

19,759

 

61,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DD&A

 

124,465

 

104,692

 

6,115

 

1,874

 

3,199

 

8,585

 

Income before taxes

 

349,353

 

201,358

 

147,892

 

25,663

 

14,728

 

(40,288

)