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Noble Energy 10-Q 2009

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. Graphic
  7. Graphic
form10-q.htm
 






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 September 30, 2009

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
 
GRAPHIC
NOBLE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
           Delaware
 
73-0785597
(State or other jurisdiction of incorporation
or organization)
 
(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 [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]    No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]    No [X]
 
 
As of October 13, 2009, there were 173,477,323 shares of the registrant’s common stock,
par value $3.33 1/3 per share, outstanding.

 
 

 


 
 
 
   
Page
   
Item 1.
Financial Statements
 
 
3
 
4
 
5
 
6
 
7
     
Item 2.
26
     
Item 3.
43
     
Item 4.
44
     
   
Item 1.
44
     
Item 1A.
44
     
Item 2.
45
     
Item 3.
45
     
Item 4.
46
     
Item 5.
46
     
Item 6.
46


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 

NOBLE ENERGY, INC.
(in millions, except per share amounts)
(unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues
                       
Oil, Gas and NGL Sales
  $ 573     $ 1,040     $ 1,440     $ 3,115  
Income from Equity Method Investees
    25       40       52       158  
Other Revenues
    23       18       61       55  
Total Revenues
    621       1,098       1,553       3,328  
Costs and Expenses
                               
Lease Operating Expense
    88       98       281       268  
Production and Ad Valorem Taxes
    25       47       66       141  
Transportation Expense
    18       14       43       43  
Exploration Expense
    27       39       102       181  
Depreciation, Depletion and Amortization
    205       194       601       593  
General and Administrative
    53       63       173       184  
Asset Impairments
    -       38       437       38  
Other Operating (Income) Expense, Net
    34       60       22       107  
Total Operating Expenses
    450       553       1,725       1,555  
Operating Income (Loss)
    171       545       (172 )     1,773  
Other (Income) Expense
                               
(Gain) Loss on Commodity Derivative Instruments
    28       (875 )     95       190  
Interest, Net of Amount Capitalized
    23       18       64       52  
Other Non-Operating (Income) Expense, Net
    5       (52 )     18       (42 )
Total Non-Operating (Income) Expense
    56       (909 )     177       200  
Income (Loss) Before Income Taxes
    115       1,454       (349 )     1,573  
Income Tax Provision (Benefit)
    8       480       (210 )     528  
Net Income (Loss)
  $ 107     $ 974     $ (139 )   $ 1,045  
                                 
Earnings (Loss) Per Share, Basic
  $ 0.62     $ 5.64     $ (0.80 )   $ 6.06  
Earnings (Loss) Per Share, Diluted
    0.61       5.37       (0.80 )     5.86  
                                 
Weighted Average Number of Shares Outstanding, Basic
    173       173       173       172  
Weighted Average Number of Shares Outstanding, Diluted
    175       176       173       176  
                                 
The accompanying notes are an integral part of these financial statements.
                         
                                 
 


NOBLE ENERGY, INC.
(in millions)

     
(unaudited) September 30,
   
December 31,
 
     
2009
     
2008
 
ASSETS
               
Current Assets
               
Cash and Cash Equivalents
 
              926
    $
1,140
 
Accounts Receivable, Net
   
                348
     
           423
 
Commodity Derivative Assets, Current
   
                  96
     
           437
 
Other Current Assets
   
                130
     
           158
 
Total Assets, Current
   
             1,500
     
        2,158
 
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
   
           12,364
     
      11,963
 
Property, Plant and Equipment, Other
   
                228
     
           175
 
Total Property, Plant and Equipment, Gross
   
           12,592
     
      12,138
 
Accumulated Depreciation, Depletion and Amortization
   
           (3,696
   
       (3,134
Total Property, Plant and Equipment, Net
   
             8,896
     
        9,004
 
Goodwill
   
                758
     
           759
 
Other Noncurrent Assets
   
                481
     
           463
 
Total Assets
  $
         11,635
    $
12,384
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts Payable - Trade
  $
              397
    $
579
 
Income Taxes Payable
   
                137
     
           130
 
Deferred Income Taxes, Net, Current
   
                    1
     
           142
 
Other Current Liabilities
   
                311
     
           323
 
Total Liabilities, Current
   
                846
     
        1,174
 
Long-Term Debt
   
             2,161
     
        2,241
 
Deferred Income Taxes, Noncurrent
   
             1,905
     
        2,174
 
Other Noncurrent Liabilities
   
                565
     
           486
 
Total Liabilities
   
             5,477
     
        6,075
 
                 
Commitments and Contingencies
               
 
               
Shareholders’ Equity
               
Preferred Stock - Par Value $1.00; 4 million Shares Authorized, None Issued
   
                    -
     
                -
 
Common Stock - Par Value $3.33 1/3; 250 Million Shares Authorized; 193 Million and 192 Million Shares Issued, Respectively
   
                645
     
           641
 
Additional Paid in Capital
   
             2,244
     
        2,193
 
Accumulated Other Comprehensive Loss
   
                (82
   
          (110
Treasury Stock, at Cost; 19 Million Shares
   
              (615
   
          (614
Retained Earnings
   
             3,966
     
        4,199
 
Total Shareholders’ Equity
   
             6,158
     
        6,309
 
Total Liabilities and Shareholders’ Equity
  $
         11,635
    $
12,384
 
                 
The accompanying notes are an integral part of these financial statements.
         



NOBLE ENERGY, INC.
(in millions)
(unaudited)

   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
Cash Flows From Operating Activities
           
Net Income (Loss)
  $ (139 )   $ 1,045  
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
         
Depreciation, Depletion and Amortization
    601       593  
Asset Impairments
    437       38  
Deferred Income Taxes
    (443 )     173  
Income from Equity Method Investees
    (52 )     (158 )
Dividends from Equity Method Investees
    37       192  
Unrealized (Gain) Loss on Commodity Derivative Instruments
    508       (9 )
Settlement of Previously Recognized Hedge Losses
    -       (144 )
Allowance for Doubtful Accounts
    (22 )     47  
Gain on Asset Sale
    (24 )     -  
Other Adjustments for Noncash Items Included in Income
    72       99  
Changes in Operating Assets and Liabilities:
               
(Increase) Decrease in Accounts Receivable
    92       (94 )
(Increase) Decrease in Other Current Assets
    25       (19 )
(Decrease) in Accounts Payable
    (65 )     (135 )
Increase in Other Current Liabilities
    10       235  
Other Assets and Liabilities, Net
    (51 )     4  
Net Cash Provided by Operating Activities
    986       1,867  
 
               
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (1,012 )     (1,852 )
Proceeds from Sale of Property, Plant and Equipment
    -       131  
Net Cash Used in Investing Activities
    (1,012 )     (1,721 )
 
               
Cash Flows From Financing Activities
               
Exercise of Stock Options
    15       26  
Excess Tax Benefits from Stock-Based Awards
    3       23  
Dividends Paid, Common Stock
    (94 )     (84 )
Purchase of Treasury Stock
    (1 )     (2 )
Proceeds from Credit Facilities
    340       650  
Repayment of Credit Facilities
    (1,411 )     (425 )
Net Proceeds from Issuance of 8 ¼% Senior Notes
    989       -  
Repayment of Installment Note
    (25 )     (25 )
Repurchase of Senior Debentures
    (4 )     -  
Proceeds from Short Term Borrowings
    -       23  
Net Cash Provided by (Used in) Financing Activities
    (188 )     186  
Increase (Decrease) in Cash and Cash Equivalents
    (214 )     332  
Cash and Cash Equivalents at Beginning of Period
    1,140       660  
Cash and Cash Equivalents at End of Period
  $ 926     $ 992  
                 
The accompanying notes are an integral part of these financial statements.
               
 


NOBLE ENERGY, INC.
(in millions)
(unaudited)
   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
             
Common Stock
           
Balance, Beginning of Period
  $ 641     $ 636  
Exercise of Stock Options
    2       4  
Restricted Stock Awards, Net
    2       1  
Balance, End of Period
    645       641  
Capital in Excess of Par Value
               
Balance, Beginning of Period
    2,193       2,106  
Stock-Based Compensation Expense
    37       30  
Exercise of Stock Options
    13       22  
Tax Benefits Related to Exercise of Stock Options
    3       23  
Restricted Stock Awards, Net
    (2 )     (1 )
Rabbi Trust Shares Sold
    -       2  
Balance, End of Period
    2,244       2,182  
Accumulated Other Comprehensive Loss
               
Balance, Beginning of Period
    (110 )     (284 )
Oil and Gas Cash Flow Hedges:
               
 Realized Amounts Reclassified Into Earnings
    28       155  
Balance, End of Period
    (82 )     (129 )
Treasury Stock at Cost
               
Balance, Beginning of Period
    (614 )     (613 )
Purchases of Treasury Stock
    (1 )     (2 )
Rabbi Trust Shares Sold
    -       1  
Balance, End of Period
    (615 )     (614 )
Retained Earnings
               
Balance, Beginning of Period
    4,199       2,964  
Net Income (Loss)
    (139 )     1,045  
Cash Dividends ($0.54 Per Share and $0.48 Per Share, Respectively)
    (94 )     (84 )
Balance, End of Period
    3,966       3,925  
                 
Total Shareholders' Equity
  $ 6,158     $ 6,005  
                 
The accompanying notes are an integral part of these financial statements.
               
 



 
Note 1 – Organization and Nature of Operations
Noble Energy, Inc. (Noble Energy, we or us) is an independent energy company engaged in worldwide crude oil, natural gas and natural gas liquids (NGL) acquisition, exploration and production. We operate primarily in the Rocky Mountains, Mid-continent, and deepwater Gulf of Mexico areas in the US, with significant international operations offshore Israel and West Africa.
 
Note 2 – Basis of Presentation
Presentation – Our consolidated accounts include our accounts and the accounts of our wholly-owned subsidiaries. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US 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 US generally accepted accounting principles (GAAP) for complete financial statements. The accompanying consolidated financial statements at September 30, 2009 and December 31, 2008 and for the three months and nine months ended September 30, 2009 and 2008 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 and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. 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 accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2008.
 
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. Current credit market conditions combined with volatile commodity prices have resulted in increased uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined accurately, actual results could differ significantly from our estimates.
 
Statements of Operations Information – Other statements of operations information is as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
 
Other Revenues
                       
Electricity Sales (1)
  $ 20     $ 14     $ 51     $ 42  
Gathering, Marketing and Processing (GMP) Revenues
    3       4       10       13  
Total
  $ 23     $ 18     $ 61     $ 55  
Other Operating (Income) Expense, Net
                               
Gain on Asset Sale (2)
  $ -     $ (8 )   $ (24 )   $ (8 )
Electricity Generation Expense (1)
    19       13       -       41  
GMP Expense
    5       5       15       14  
Settlement of Legal Proceedings (3)
    -       -       9       -  
(Gain) Loss on Involuntary Conversion (4)
    -       9       (4 )     9  
Other, Net (5)
    10       41       26       51  
Total
  $ 34     $ 60     $ 22     $ 107  
Other Non-Operating (Income) Expense, Net
                               
Deferred Compensation (Income) Expense (6)
  $ 7     $ (47 )   $ 18     $ (25 )
Interest Income
    (1 )     (6 )     (2 )     (18 )
Other (Income) Expense, Net
    (1 )     1       2       1  
Total
  $ 5     $ (52 )   $ 18     $ (42 )
 
(1)
Includes amounts related to our 100%-owned Ecuador integrated power project. The project includes the Amistad natural gas field, offshore Ecuador, which supplies natural gas to fuel the Machala power plant located in Machala, Ecuador. Electricity generation expense includes all operating and non-operating expenses associated with the plant, including depreciation, depletion and amortization expense (DD&A) and changes in the allowance for doubtful accounts. We recognized a net increase of $4 million in the allowance during third quarter 2009 and a net decrease of $36 million in the allowance during the first nine months of 2009. We recognized net increases of $3 million and $9 million in the allowance during the third quarter and first nine months of 2008, respectively. See Allowance for Doubtful Accounts below.
 

7

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


 
(2)
In February 2008, effective July 1, 2007, we sold our interest in Argentina for a sales price of $117.5 million. The gain on sale was deferred until second quarter 2009 when the Argentine government approved the sale.
 
(3)
Amount for the first nine months of 2009 includes a $19 million charge on legal settlement, offset by a $15 million gain on legal settlement related to reimbursement of bonuses paid for federal leases offshore California.
 
(4)
Amount for the first nine months of 2009 represents final receipt of insurance claims related to Hurricanes Katrina and Rita damage. Amount for the first nine months of 2008 represents interim settlement of the replacement cost portion of the Hurricane Katrina insurance claim.
 
(5)
Includes write-downs of SemCrude L.P. receivable of $12 million in third quarter 2009 and $38 million in third quarter 2008. See Allowance for Doubtful Accounts below and Note 14 – Commitments and Contingencies.
 
(6)
Amount represents increases or (decreases) in the fair value of Noble Energy common stock held in a rabbi trust.
 
Balance Sheet Information – Other balance sheet information is as follows:
 
   
September 30,
 
December 31,
 
     
2009
 
2008
 
     
(in millions)
 
Other Current Assets
             
Inventories, Current
  $
101
  $
      105
 
Prepaid Expenses and Other Assets, Current
   
         29
   
          27
 
Asset Held for Sale (1)
   
           -
   
          26
 
Total
  $
130
 
      158
 
Other Noncurrent Assets
             
Equity Method Investments
  $
329
  $
      311
 
Mutual Fund Investments
   
       103
   
          84
 
Commodity Derivative Assets, Noncurrent
   
           -
   
          33
 
Other Assets, Noncurrent
   
         49
   
          35
 
Total
  $
481
  $
      463
 
 
(1)
The Main Pass asset was reclassified as held-and-used and impaired during first quarter 2009. Estimated proved reserves attributed to this property were less than 1% of our total estimated proved reserves. See Note 5 Fair Value Measurements and Disclosures.
 

8

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


   
September 30,
 
December 31,
 
     
2009
 
2008
 
     
(in millions)
 
Other Current Liabilities
             
Production and Ad Valorem Taxes
  $
       116
  $
        114
 
Commodity Derivative Liabilities, Current
   
         58
   
          23
 
Asset Retirement Obligations, Current
   
         44
   
          27
 
Interest Payable
   
         24
   
            9
 
Short-Term Borrowings
   
           -
   
          25
 
Deferred Gain on Asset Sale, Current (1)
   
           -
   
          24
 
Other
   
         69
   
        101
 
Total
  $
311
  $
      323
 
Other Noncurrent Liabilities
             
Deferred Compensation Liabilities, Noncurrent
  $
202
  $
      159
 
Asset Retirement Obligations, Noncurrent
   
       184
   
        184
 
Accrued Benefit Costs, Noncurrent
   
         71
   
          81
 
Commodity Derivative Liabilities, Noncurrent
   
         56
   
            2
 
Other Liabilities, Noncurrent
   
         52
   
          60
 
Total
  $
565
  $
      486
 
 
 (1)
See footnote (2) to Statements of Operations Information above.
 
Allowance for Doubtful Accounts – Through December 31, 2008, we had recorded an allowance for doubtful accounts of $57 million related to our Ecuador power operations. The allowance was necessary to cover potentially uncollectible balances, as certain entities purchasing electricity in Ecuador have been slow to pay amounts due us. As a result of pursuing various strategies to protect our interests, including international arbitration and litigation, we reached a settlement in fourth quarter 2008. In March and April 2009, we received total payments of $60 million in accordance with the terms of the settlement, against which a reserve of $46 million had previously been recorded.  Accordingly, we reduced the allowance for doubtful accounts by $46 million and included the amount as a reduction in electricity generation expense during first quarter 2009. We recorded additions to the allowance for doubtful accounts of $4 million and $12 million during the third quarter and first nine months of 2009, respectively, related to current period commodity and electricity sales. We also recorded an addition of $12 million related to the SemCrude L.P. receivable during third quarter 2009. See Note 4 Derivative Instruments and Hedging Activities – Counterparty Credit Risk and Note 14 – Commitments and Contingencies.
 
Recently Adopted Accounting Standards –
 
Postretirement Benefit Plan Asset Disclosures In December 2008, the Financial Accounting Standards Board (FASB) issued new standards which require employers to make additional disclosures about plan assets for defined benefit pension and other postretirement benefit plans beginning with annual periods ending after December 15, 2009. Disclosures must provide an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair-value measurements using significant unobservable inputs on changes in plan assets for the period, and significant concentrations of risk within plan assets. We adopted the new standards as of January 1, 2009. Adoption had no impact on our financial position or results of operations. Enhanced disclosures are required for annual periods only.
 
Business Combinations and Noncontrolling Interests in Consolidated Financial StatementsIn 2007, the FASB issued new standards regarding the accounting for business combinations and noncontrolling interests in consolidated financial statements. These standards require most identifiable assets, liabilities and noncontrolling interests to be recorded at full fair value and require noncontrolling interests to be reported as a component of equity. We adopted the new standards as of January 1, 2009. There were no non-controlling interests at adoption date. Adoption had no impact on our financial position or results of operations.
 
Fair Value Measurements – The FASB’s fair value measurement standards establish a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and create a fair value hierarchy that prioritizes the information used to develop those assumptions. The standards require additional disclosures, including disclosures of fair value measurements by level within the fair value hierarchy. As of January 1, 2008, we adopted the new standards as they related to our financial assets and liabilities. As of January 1, 2009, we adopted the new standards as they related to our nonfinancial assets and liabilities, including nonfinancial assets and liabilities measured at fair value in a business combination; impaired property, plant and equipment; goodwill impairment assessments; and initial recognition of asset retirement obligations. Adoption did not have a significant impact on our consolidated financial statements. See Note 5 – Fair Value Measurements and Disclosures and Note 16 – Recently Issued Pronouncements.
 

9

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


 
In April 2009, the FASB issued additional guidance clarifying the application of US GAAP for fair value measurements in the current economic environment, modifying the recognition of other-than-temporary impairments of debt securities, and requiring companies to disclose the fair value of financial instruments in interim periods. The revised guidance is effective for interim and annual periods ending after June 15, 2009. The guidance:
 
·
descibes how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
·
modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.
·
requires disclosures of the fair value of financial instruments in interim financial statements, the method or methods and significant assumptions used to estimate the fair value of financial instruments, and a discussion of changes, if any, in the method or methods and significant assumptions during the period.
 
We adopted this new guidance for the quarter ended June 30, 2009. Adoption had no impact on our financial position or results of operations. See Note 5 – Fair Value Measurements and Disclosures for additional interim disclosure requirements.
 
Derivative Instruments and Hedging ActivitiesIn March 2008, the FASB issued new standards which amended and expanded previous disclosure requirements related to derivative instruments and hedging activities. The new standards require qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of derivative instruments and related gains and losses, and disclosures about credit risk-related contingent features in derivative agreements. We adopted the new standards as of January 1, 2009. They provide only for enhanced disclosures, and adoption had no impact on our financial position or results of operations. See Note 4 – Derivative Instruments and Hedging Activities.
 
Subsequent Events In May 2009, the FASB issued new standards which establish the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, the new standards set forth:
 
·
the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (through the date that the financial statements are issued or are available to be issued);
·
the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
·
the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
 
We adopted the new standards as of June 30, 2009. We have evaluated subsequent events after the balance sheet date of September 30, 2009 through the time of filing with the Securities and Exchange Commission (SEC) on October 29, 2009 which is the date the financial statements were issued. See Note 15 – Subsequent Events.
 
Accounting Standards Codification In June 2009, the FASB established the FASB Accounting Standards Codification (Codification), which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  Generally, the Codification is not expected to change US GAAP.  All other accounting literature excluded from the Codification will be considered nonauthoritative.  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We adopted the new standards for our quarter ending September 30, 2009.  All references to authoritative accounting literature are now referenced in accordance with the Codification.
 

10

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


 
Equity Method Investments In November 2008, the FASB issued new guidance in accounting for equity method investments. The new guidance was issued to address questions that arose regarding the application of the equity method subsequent to the issuance of new business combination standards. The new guidance concluded that equity method investments should continue to be recognized using a cost accumulation model, thus continuing to include transaction costs in the carrying amount of the equity method investment. In addition, it clarified that an impairment assessment should be applied to the equity method investment as a whole, rather than to the individual assets underlying the investment. We adopted the new guidance as of January 1, 2009. Adoption had no impact on our financial position or results of operations.
 
Note 3 – Debt
On February 27, 2009, we closed an offering of $1 billion senior unsecured notes receiving net proceeds of $989 million, after deducting the discount and underwriting fees. The notes are due March 1, 2019, and pay interest semi-annually at 8¼%. Debt issuance costs of approximately $2 million were incurred and are being amortized to expense over the life of the debt issue. Substantially all of the net proceeds from the offering were used to repay outstanding indebtedness under our revolving credit facility maturing 2012. The notes are senior unsecured debt and will rank pari passu with any of our other senior unsecured indebtedness with respect to the payment of both principal and interest.
 
On May 11, 2009, we made the final $25 million installment payment to the seller of properties we purchased in 2007. Interest on the unpaid amount was due quarterly and accrued at a LIBOR rate plus .30%. The interest rate was 1.51% at the date of payment.
 
On July 22, 2009, we repurchased $5 million of our 7¼% Senior Debentures due August 1, 2097, recognizing a debt extinguishment gain of $1 million, which is included in other non-operating (income) expense, net.
 
On October 6, 2009, we entered into a lease agreement which will result in the recording of an additional long-term obligation in our balance sheet, as the related asset is constructed.  See Note 15 – Subsequent Events.
 
Our debt consists of the following:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
   
(in millions, except percentages)
 
Credit Facility
  $ 535       0.56 %   $ 1,606       0.80 %
5 ¼% Senior Notes, due April 15, 2014
    200       5.25 %     200       5.25 %
8 ¼% Senior Notes, due March 1, 2019
    1,000       8.25 %     -       -  
7 ¼% Notes, due October 15, 2023
    100       7.25 %     100       7.25 %
8% Senior Notes, due April 1, 2027
    250       8.00 %     250       8.00 %
7 ¼% Senior Debentures, due August 1, 2097
    84       7.25 %     89       7.25 %
Long-term Debt
    2,169               2,245          
Installment Payment, due May 11, 2009
    -       -       25       4.18 %
Total Debt
    2,169               2,270          
Unamortized Discount
    (8 )             (4 )        
Total Debt, Net of Discount
  $ 2,161             $ 2,266          
 
Note 4 – Derivative Instruments and Hedging Activities
Objectives and Strategies for Using Derivative Instruments – We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk. We use various commodity derivative instruments in connection with forecasted crude oil and natural gas sales to minimize the impact of commodity price fluctuations. Such instruments include variable to fixed price swaps, collars and basis swaps.
 
We may also use derivative instruments to manage interest rate risk by entering into forward contracts or swap agreements to minimize the impact of interest rate fluctuations associated with fixed or floating rate borrowings. We may designate these as cash flow hedges.
 

11

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


In accordance with US GAAP for derivative instruments and hedging activities, all of our derivative instruments are reflected as either assets or liabilities at fair value in our consolidated balance sheets. See Note 5 – Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our commodity derivative instruments and gross amounts of commodity derivative assets and liabilities.
 
Counterparty Credit Risk  Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of financial institutions, a majority of which are lenders under our credit facility arrangement.  Certain of these financial institutions have received capital injections and other forms of support from government sources, and may require additional financial assistance in the future to remain viable.  Discontinuance of government support to these institutions could have an adverse impact on the collectibility of our derivative receivables. We generally execute commodity derivative instruments under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net cash settled at the time of election.
 
We monitor the creditworthiness of our counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices as well as incur a loss.  We include a measure of counterparty credit risk in our estimates of the fair values of commodity derivative instruments in an asset position. See also Note 5 – Fair Value Measurements and Disclosures.
 
Accounting for Commodity Derivative Instruments – During 2009 and 2008 we accounted for our commodity derivative instruments using mark-to-market accounting, and we recognize all gains and losses on such instruments in earnings during the period in which they occur.  Prior to January 1, 2008, we elected to designate certain of our commodity derivative instruments as cash flow hedges. Net derivative gains and losses that were deferred in accumulated other comprehensive loss (AOCL) as of January 1, 2008, as a result of previous cash flow hedge accounting, are reclassified to earnings in future periods as the original hedged transactions occur.  See Derivative Instruments in Previously Designated Cash Flow Hedging Relationships table below.
 
Unsettled Derivative Instruments – As of September 30, 2009, we had entered into the following crude oil derivative instruments:  
 
   
Variable to Fixed Price Swaps
   
Collars
 
               
Weighted
             
Weighted
   
Weighted
 
Production
       
Bbls
   
Average
       
Bbls
   
Average
   
Average
 
Period
 
Index
   
Per Day
   
Fixed Price
   
Index
 
Per Day
   
Floor Price
   
Ceiling Price
 
4th Qtr 2009
 
NYMEX WTI
      9,000     $ 88.43    
NYMEX WTI
    6,700     $ 79.70     $ 90.60  
4th Qtr 2009
 
Dated Brent
      2,000       87.98    
Dated Brent
    4,848       71.82       88.66  
4th Qtr 2009 Average
      11,000       88.35           11,548       76.39       89.79  
2010
    -       -       -    
NYMEX WTI
    14,500       61.48       75.63  
2010
 
Dated Brent
      1,000       80.05    
Dated Brent
    7,000       64.00       73.96  
2010 Average
            1,000       80.05           21,500       62.30       75.09  
2011
    -       -       -    
NYMEX WTI
    1,000       70.00       82.40  
 


12

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

As of September 30, 2009, we had entered into the following natural gas derivative instruments:
 
   
Variable to Fixed Price Swaps
   
Collars
 
               
Weighted
             
Weighted
   
Weighted
 
Production
       
MMBtu
   
Average
       
MMBtu
   
Average
   
Average
 
Period
 
Index
   
Per Day
   
Fixed Price
   
Index
 
Per Day
   
Floor Price
   
Ceiling Price
 
4th Qtr 2009
    -       -       -    
NYMEX HH (1)
    170,000     $ 9.15     $ 10.81  
4th Qtr 2009
    -       -       -    
IFERC CIG (2)
    15,000       6.00       9.90  
4th Qtr 2009 Average
      -       -           185,000       8.90       10.73  
2010
 
NYMEX HH
      20,000       6.10    
 NYMEX HH
    210,000       5.90       6.73  
2010
    -       -       -    
 IFERC CIG
    15,000       6.25       8.10  
2010 Average
            20,000       6.10           225,000       5.93       6.82  
2011
    -       -       -    
 NYMEX HH
    140,000       5.95       6.82  
 
(1)
Henry Hub
(2)
Colorado Interstate Gas – Northern System
 
As of September 30, 2009, we had entered into the following natural gas basis swaps:
 
   
Basis Swaps
 
                   
Weighted
 
Production
       
Index Less
 
MMBtu
   
Average
 
Period
 
Index
   
Differential
 
Per Day
   
Differential
 
4th Qtr 2009
 
IFERC CIG
   
 NYMEX HH
    140,000     $ (2.49 )
2010
 
IFERC CIG
   
 NYMEX HH
    100,000       (1.60 )
2011
 
IFERC CIG
   
 NYMEX HH
    80,000       (0.84 )
 
 

13

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

Fair Value Amounts and Gains and Losses on Derivative Instruments – The fair values of derivative instruments in our consolidated balance sheets were as follows:
 
   
Derivative Instruments Not Designated as Hedging Instruments
 
    Asset Derivative Instruments     Liability Derivative Instruments  
   
September 30,
 
December 31,
 
September 30,
 
December 31,
 
   
2009
 
2008
 
2009
 
2008
 
(in millions)
 
Balance
Sheet Location
 
Fair
Value
 
Balance
Sheet Location
 
Fair
Value
 
Balance
Sheet Location
 
Fair
Value
Balance
Sheet Location
 
Fair
Value
 
Commodity Derivative Instruments
                                 
   
Current Assets
  $ 96  
Current Assets
  $ 437  
Current Liabilities
  $ 58  
Current Liabilities
  $ 23  
   
Noncurrent Assets
    -  
Noncurrent Assets
    33  
Noncurrent Liabilities
    56  
Noncurrent Liabilities
    2  
Total
      $ 96       $ 470       $ 114       $ 25  

The effect of derivative instruments on our consolidated statements of operations was as follows:
 
Derivative Instruments Not Designated as Hedging Instruments
 
   
Amount of (Gain) Loss on Derivative
Instruments Recognized in Income
 
     
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
 
     
2009
     
2008
     
2009
     
2008
 
     
(in millions)
 
Commodity Derivative Instruments
                               
Realized Mark-to-Market (Gain) Loss (1)
  $
(121
 
         68
   
   (413
 
        199
 
Unrealized Mark-to-Market (Gain) Loss (1)
   
         149
     
        (943
   
       508
     
            (9
Total (Gain) Loss on Commodity Derivative Instruments
  $
28
    $
      (875
 
       95
   
        190
 
 
(1)
Amounts are recognized as (Gain) Loss on Commodity Derivative Instruments in our consolidated statements of operations.


14

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


Derivative Instruments in Previously Designated Cash Flow Hedging Relationships
 
   
Amount of (Gain) Loss on Derivative Instruments Recognized in Other Comprehensive Income
   
Amount of (Gain) Loss on Derivative Instruments Reclassified from Accumulated Other Comprehensive Loss
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
   
(in millions)
 
Three Months Ended September 30,
                       
Commodity Derivative Instruments (1)
                       
Crude Oil (2)
  $ -     $ -     $ 14     $ 89  
Natural Gas (2)
    -       -       -       4  
Treasury Rate Locks
    -       (12 )     -       -  
Total
  $ -     $ (12 )   $ 14     $ 93  
Nine Months Ended September 30,
                               
Commodity Derivative Instruments (1)
                               
Crude Oil (2)
  $ -     $ -     $ 45     $ 279  
Natural Gas (2)
    -       -       -       (31 )
Treasury Rate Locks
    -       (1 )     -       -  
Total
  $ -     $ (1 )   $ 45     $ 248  
 
(1)
Includes effect of commodity derivative instruments previously accounted for as cash flow hedges. Net derivative gains and losses that were deferred in AOCL as of January 1, 2008, as a result of previous cash flow hedge accounting, are reclassified to earnings in future periods as the original hedged transactions occur.
 
(2)
The amount of (Gain) Loss reclassified from AOCL on Derivative Instruments is recognized in Oil, Gas and NGL Sales within our consolidated statements of operations.
 
AOCL – As of September 30, 2009, the balance in AOCL included net deferred losses of $20 million related to the fair value of commodity derivative instruments previously accounted for as cash flow hedges. The net deferred losses are net of deferred income tax benefits of $12 million. Approximately $17 million of deferred losses (net of tax) related to the fair values of the commodity derivative instruments previously designated as cash flow hedges and remaining in AOCL at September 30, 2009 will be reclassified to earnings during the next 12 months as the forecasted transactions occur, and will be recorded as a reduction in oil and gas sales of approximately $27 million before tax. All forecasted transactions currently being hedged and for which amounts remain in AOCL at September 30, 2009, are expected to occur by December 2010.
 
Note 5 – Fair Value Measurements and Disclosures
US GAAP for fair value measurements establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority to quoted market prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. We use Level 1 inputs when available as Level 1 inputs generally provide the most reliable evidence of fair value. 
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Certain assets and liabilities are measured at fair value on a recurring basis in our consolidated balance sheets.  The following methods and assumptions were used to estimate the fair values: 
 
Cash, Cash Equivalents, Accounts Receivable and Accounts Payable The carrying amounts approximate fair value due to the short-term nature or maturity of the instruments.
 
Mutual Fund Investments – Our mutual fund investments, which primarily include assets held in a rabbi trust, consist of various publicly-traded mutual funds that include investments ranging from equities to money market instruments. The fair values are based on quoted market prices for identical assets. 
 

15

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


Commodity Derivative Instruments – Our commodity derivative instruments consist of variable to fixed price commodity swaps, collars and basis swaps. We estimate the fair values of these instruments based on published commodity futures price strips for the underlying commodities as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates, Eurodollar futures rates and interest swap rates. The fair values of commodity derivative instruments in an asset position include a measure of counterparty credit risk, and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published credit default swap rates. In addition, for collars, we estimate the option value of the contract floors and ceilings using an option pricing model which takes into account market volatility, market prices and contract terms. See Note 4 – Derivative Instruments and Hedging Activities.
 
Patina Deferred Compensation Liability - The value is dependant upon the fair values of mutual fund investments and shares of Noble Energy common stock held in a rabbi trust. See Mutual Fund Investments above.
 
Measurement information for assets and liabilities that are measured at fair value on a recurring basis was as follows:
 
     
Fair Value Measurements Using
             
   
  Quoted Prices in 
Active Markets (Level 1)
 
Significant Other Observable Inputs (Level 2)
    Significant Unobservable Inputs (Level 3)  
Adjustment (1)
    Fair Value Measurement