Annual Reports

 
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  • 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)
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8-K

 
Other

Noble Energy 10-Q 2010

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
form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

T
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2010

OR

£
 
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 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 T    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 T    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 T
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 T
 
As of April 16, 2010, there were 174,624,653 shares of the registrant’s common stock, par value $3.33 1/3 per share, outstanding.
 


 
 

 
 
   
TABLE OF CONTENTS
 
     
Page
   
PART I
 
Item 1.
 
Financial Statements
 
   
3
   
4
   
5
   
6
   
7
       
Item 2.
 
20
       
Item 3.
 
30
       
Item 4.
 
31
       
   
PART II
 
Item 1.
 
31
       
Item 1A.
 
31
       
Item 2.
 
32
       
Item 3.
 
32
       
Item 4.
 
32
       
Item 5.
 
32
       
Item 6.
 
32


Part I. Financial Information
Item 1. Financial Statements
 
Noble Energy, Inc. and Subsidiaries
 
Consolidated Statements of Operations
 
(in millions, except per share amounts)
 
(unaudited)
 
             
   
Three Months Ended
 
    March 31,  
   
2010
   
2009
 
Revenues
           
Oil, Gas and NGL Sales
  $ 688     $ 406  
Income from Equity Method Investees
    26       11  
Other Revenues
    19       24  
Total
    733       441  
Costs and Expenses
               
Production Expense
    139       130  
Exploration Expense
    80       42  
Depreciation, Depletion and Amortization
    216       200  
General and Administrative
    66       59  
Asset Impairments
    -       437  
Other Operating (Income) Expense, Net
    14       (6 )
Total
    515       862  
Operating Income (Loss)
    218       (421 )
Other (Income) Expense
               
Gain on Commodity Derivative Instruments
    (145 )     (73 )
Interest, Net of Amount Capitalized
    20       18  
Other Non-Operating Expense, Net
    -       8  
Total
    (125 )     (47 )
Income (Loss) Before Income Taxes
    343       (374 )
Income Tax Provision (Benefit)
    106       (186 )
Net Income (Loss)
  $ 237     $ (188 )
                 
Earnings (Loss) Per Share, Basic
  $ 1.36     $ (1.09 )
Earnings (Loss) Per Share, Diluted
    1.34       (1.09 )
                 
Weighted Average Number of Shares Outstanding, Basic
    174       173  
Weighted Average Number of Shares Outstanding, Diluted
    177       173  

The accompanying notes are an integral part of these financial statements.


Noble Energy, Inc.
 
Consolidated Balance Sheets
 
(in millions)
 
   
   
(unaudited)
       
   
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
Current Assets
           
Cash and Cash Equivalents
  $ 1,031     $ 1,014  
Accounts Receivable, Net
    380       465  
Other Current Assets
    186       199  
Total Assets, Current
    1,597       1,678  
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
    13,443       12,584  
Property, Plant and Equipment, Other
    243       240  
Total Property, Plant and Equipment, Gross
    13,686       12,824  
Accumulated Depreciation, Depletion and Amortization
    (4,090 )     (3,908 )
Total Property, Plant and Equipment, Net
    9,596       8,916  
Goodwill
    757       758  
Other Noncurrent Assets
    502       455  
Total Assets
  $ 12,452     $ 11,807  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current Liabilities
               
Accounts Payable - Trade
  $ 570     $ 548  
Other Current Liabilities
    435       442  
Total Liabilities, Current
    1,005       990  
Long-Term Debt
    2,366       2,037  
Deferred Income Taxes, Noncurrent
    2,104       2,076  
Other Noncurrent Liabilities
    582       547  
Total Liabilities
    6,057       5,650  
                 
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; 195 Million and 194 Million Shares Issued, Respectively
    649       645  
Additional Paid in Capital
    2,304       2,260  
Accumulated Other Comprehensive Loss
    (78 )     (75 )
Treasury Stock, at Cost; 19 Million Shares
    (627 )     (615 )
Retained Earnings
    4,147       3,942  
Total Shareholders’ Equity
    6,395       6,157  
Total Liabilities and Shareholders’ Equity
  $ 12,452     $ 11,807  

The accompanying notes are an integral part of these financial statements.


Noble Energy, Inc.
 
Consolidated Statements of Cash Flows
 
(in millions)
 
(unaudited)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
Cash Flows From Operating Activities
           
Net Income (Loss)
  $ 237     $ (188 )
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
               
Depreciation, Depletion and Amortization
    216       200  
Dry Hole Expense
    39       2  
Asset Impairments
    -       437  
Deferred Income Taxes
    27       (301 )
Income from Equity Method Investees
    (26 )     (11 )
Dividends from Equity Method Investees
    13       -  
Unrealized (Gain) Loss on Commodity Derivative Instruments
    (147 )     80  
Other Adjustments for Noncash Items Included in Income
    21       (18 )
Changes in Operating Assets and Liabilities
               
(Increase) Decrease in Accounts Receivable
    85       (34 )
(Increase) Decrease in Other Current Assets
    50       (1 )
Increase (Decrease) in Accounts Payable
    27       (35 )
Increase in Other Current Liabilities
    33       56  
Other Operating Assets and Liabilities, Net
    13       (2 )
Net Cash Provided by Operating Activities
    588       185  
                 
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (383 )     (399 )
DJ Basin Asset Acquisition
    (466 )     -  
Net Cash Used in Investing Activities
    (849 )     (399 )
                 
Cash Flows From Financing Activities
               
Exercise of Stock Options
    21       11  
Excess Tax Benefits from Stock-Based Awards
    13       3  
Dividends Paid, Common Stock
    (32 )     (31 )
Purchase of Treasury Stock
    (12 )     (1 )
Proceeds from Credit Facilities
    610       180  
Repayment of Credit Facilities
    (322 )     (1,060 )
Proceeds from Issuance of Senior Long-Term Debt
    -       989  
Net Cash Provided by Financing Activities
    278       91  
Increase (Decrease) in Cash and Cash Equivalents
    17       (123 )
Cash and Cash Equivalents at Beginning of Period
    1,014       1,140  
Cash and Cash Equivalents at End of Period
  $ 1,031     $ 1,017  

The accompanying notes are an integral part of these financial statements.


Noble Energy, Inc.
 
Consolidated Statements of Shareholders' Equity
 
(in millions)
 
(unaudited)
 
                                     
                                     
   
Common Stock
   
Additional Paid in Capital
   
Acumulated Other Comprehensive Loss
   
Treasury Stock at Cost
   
Retained Earnings
   
Total Shareholder's Equity
 
December 31, 2009
  $ 645     $ 2,260     $ (75 )   $ (615 )   $ 3,942     $ 6,157  
Net Income
    -       -       -       -       237       237  
Stock-based Compensation Expense
    -       14       -       -       -       14  
Exercise of Stock Options
    2       19       -       -       -       21  
Tax Benefits Related to Exercise of Stock Options
    -       13       -       -       -       13  
Restricted Stock Awards, Net
    2       (2 )     -       -       -       -  
Dividends (18 cents per share)
    -       -       -       -       (32 )     (32 )
Changes in Treasury Stock, Net
    -       -       -       (12 )     -       (12 )
Oil and Gas Cash Flow Hedges
                                               
Realized Amounts Reclassified Into Earnings
    -       -       4       -       -       4  
Interest Rate Cash Flow Hedges
                                               
Unrealized Change in Fair Value
    -       -       (7 )     -       -       (7 )
March 31, 2010
  $ 649     $ 2,304     $ (78 )   $ (627 )   $ 4,147     $ 6,395  
                                                 
December 31, 2008
  $ 641     $ 2,193     $ (110 )   $ (614 )   $ 4,199     $ 6,309  
Net Loss
    -       -       -       -       (188 )     (188 )
Stock-based Compensation Expense
    -       12       -       -       -       12  
Exercise of Stock Options
    2       9       -       -       -       11  
Tax Benefits Related to Exercise of Stock Options
    -       3       -       -       -       3  
Restricted Stock Awards, Net
    2       (2 )     -       -       -       -  
Dividends (18 cents per share)
    -       -       -       -       (31 )     (31 )
Changes in Treasury Stock, Net
    -       -       -       (1 )     -       (1 )
Oil and Gas Cash Flow Hedges
                                               
Realized Amounts Reclassified Into Earnings
    -       -       11       -       -       11  
Net Change in Other
    -       -       (1 )     -       -       (1 )
March 31, 2009
  $ 645     $ 2,215     $ (100 )   $ (615 )   $ 3,980     $ 6,125  

The accompanying notes are an integral part of these financial statements.


Noble Energy, Inc.
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 worldwide crude oil, natural gas and NGL exploration and production. We operate primarily in the Rocky Mountains, Mid-Continent, and deepwater Gulf of Mexico areas in the US, with key 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 March 31, 2010 and December 31, 2009 and for the three months ended March 31, 2010 and 2009 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, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. 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, 2009.
 
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.
 
Statements of Operations Information   Other statements of operations information is as follows:
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
(millions)
           
Other Revenues
           
Electricity Sales (1)
  $ 19     $ 20  
Other
    -       4  
Total
  $ 19     $ 24  
Production Expense
               
Lease Operating Expense
  $ 88     $ 100  
Production and Ad Valorem Taxes
    34       18  
Transportation Expense
    17       12  
Total
  $ 139     $ 130  
Other Operating Expense, Net
               
Electricity Generation Expense (1)
  $ 10     $ (30 )
Other, Net
    4       24  
Total
  $ 14     $ (6 )
Other Non-Operating (Income) Expense, Net
               
Deferred Compensation (2)
  $ 2     $ 5  
Interest Income
    (1 )     -  
Other (Income) Expense, Net
    (1 )     3  
Total
  $ -     $ 8  
 
(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. Electricity generation expense for first quarter 2009 includes a reduction in the allowance for doubtful accounts of $46 million received in accordance with the terms of a settlement with entities purchasing electricity in Ecuador.
 
(2)
Amount represents increases in the fair value of our common stock held in a rabbi trust.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

Balance Sheet Information   Other balance sheet information is as follows:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
(millions)
           
Accounts Receivable, Net
           
Commodity Sales
  $ 181     $ 205  
Joint Interest Billings
    177       140  
Refund of Deepwater Gulf of Mexico Royalties (1)
    12       97  
Other
    41       54  
Allowance for Doubtful Accounts (2)
    (31 )     (31 )
Total
  $ 380     $ 465  
Other Current Assets
               
Inventories, Current
  $ 90     $ 89  
Commodity Derivative Assets, Current
    50       13  
Prepaid Expenses and Other Assets, Current
    12       65  
Deferred Income Taxes, Net, Current
    34       32  
Total
  $ 186     $ 199  
Other Noncurrent Assets
               
Equity Method Investments
  $ 316     $ 303  
Mutual Fund Investments
    110       108  
Commodity Derivative Assets, Noncurrent
    29       1  
Other Assets, Noncurrent
    47       43  
Total
  $ 502     $ 455  
Accounts Payable - Trade
               
Capital Costs
  $ 270     $ 277  
Royalties Payable
    66       65  
Marketing and Trading Activities
    27       76  
Lease Operating Expense
    31       27  
Other
    176       103  
Total
  $ 570     $ 548  
Other Current Liabilities
               
Production and Ad Valorem Taxes
  $ 132     $ 103  
Commodity Derivative Liabilities, Current
    22       100  
Interest Rate Derivative Liability, Current
    11       -  
Income Taxes Payable
    119       60  
Asset Retirement Obligations, Current
    51       51  
Interest Payable
    24       37  
Other
    76       91  
Total
  $ 435     $ 442  
Other Noncurrent Liabilities
               
Deferred Compensation Liabilities, Noncurrent
  $ 219     $ 213  
Asset Retirement Obligations, Noncurrent
    199       181  
Accrued Benefit Costs, Noncurrent
    79       76  
Commodity Derivative Liabilities, Noncurrent
    7       17  
Other
    78       60  
Total
  $ 582     $ 547  
 
(1)
In March 2010, we received a refund of $84 million attributable to royalties that we previously paid on crude oil and natural gas produced in the deepwater Gulf of Mexico from January 1, 2003 through July 31, 2009. The amount remaining at March 31, 2010 represents accrued interest which we expect to receive within 12 months.
 
(2)
See footnote (1) to Statements of Operations Information table above.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

Subsequent Events   In April 2010, we determined that the Double Mountain exploration well (30% non-operated working interest) in the deepwater Gulf of Mexico had found noncommercial quantities of hydrocarbons and will be plugged and abandoned. As a result, we recorded $38 million (pre-tax) of additional dry hole expense for the three months ended March 31, 2010.
 
Recently Adopted Accounting Standards    In February 2010, the Financial Accounting Standards Board (FASB) amended its guidance on subsequent events to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. The guidance was effective upon issuance. We adopted this guidance effective first quarter 2010.
 
The FASB also issued new guidance requiring additional disclosures about fair value measurements, adding a new requirement to disclose transfers in and out of Levels 1 and 2 measurements and gross presentation of activity within a Level 3 roll forward. The guidance also clarified existing disclosure requirements regarding the level of disaggregation of fair value measurements and disclosures regarding inputs and valuation techniques. We adopted this guidance effective first quarter 2010. Adoption had no impact on our financial position or results of operations. See Note 6. Fair Value Measurements and Disclosures.
 
Note 3.  DJ Basin Asset Acquisition
On March 1, 2010, we acquired substantially all of the US Rocky Mountain assets of Petro-Canada Resources (USA) Inc. and Suncor Energy (Natural Gas) America Inc. The acquisition included properties located in the Greater Denver-Julesberg (DJ) Basin, one of our core onshore US operating areas. We funded the acquisition using our existing credit facility.
 
We acquired the assets for $466 million cash and assumed net liabilities totaling $43 million, for a total purchase price of $509 million.
 
The total purchase price was allocated preliminarily to the assets acquired and the liabilities assumed based on fair values at the acquisition date. The preliminary allocation was as follows:
 
 
·
$363 million to proved oil and gas properties; and
 
·
$146 million to unproved oil and gas properties.
 
The difference between the total purchase price and the fair values of the assets acquired as of March 1, 2010 was de minimis.
 
To estimate the fair values of the properties, we used an income approach as comparable market data was not available.  We utilized a discounted cash flow model which took into account the following inputs to arrive at estimates of future net cash flows:
 
 
·
estimated quantities of crude oil and natural gas prepared by our qualified petroleum engineers;
 
·
estimated future commodity prices based on NYMEX crude oil and natural gas futures prices as of the acquisition date and adjusted for estimated location and quality differentials;
 
·
estimated future production rates based on our experience with similar DJ basin properties which we operate; and
 
·
estimated timing and amounts of future operating and development costs based on our experience with similar DJ basin properties which we operate.
 
To estimate the fair value of proved properties, we discounted the future net cash flows using a market-based weighted average cost of capital rate determined appropriate at the acquisition date. To compensate for the inherent risk of estimating and valuing unproved properties, we reduced the discounted future net cash flows of probable and possible reserves by additional risk-weighting factors. The fair values of the proved and unproved oil and gas properties are considered Level 3 fair value measurements.
 
Certain data necessary to complete the final purchase price allocation is not yet available, and includes, but is not limited to, final appraisals of assets acquired and liabilities assumed. We expect to complete the final purchase price allocation during the 12-month period following the acquisition date, during which time the preliminary allocation may be revised.
 
Related transaction costs were expensed. We have not presented pro forma information for the acquired business as the impact of the acquisition was not material to our consolidated balance sheet as of March 31, 2010, or our consolidated results of operations for the three months ended March 31, 2010.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

Note 4.   Debt
Our debt consists of the following:
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
(millions, except percentages)
                       
Credit Facility (1)
  $ 670       0.55 %   $ 382       0.54 %
5¼% Senior Notes, due April 15, 2014
    200       5.25 %     200       5.25 %
8¼% Senior Notes, due March 1, 2019
    1,000       8.25 %     1,000       8.25 %
7¼% Notes, due October 15, 2023
    100       7.25 %     100       7.25 %
8% Senior Notes, due April 1, 2027
    250       8.00 %     250       8.00 %
7¼% Senior Debentures, due August 1, 2097
    84       7.25 %     84       7.25 %
Obligation Under FPSO Lease (2)
    69       -       29       -  
Total
    2,373               2,045          
Unamortized Discount
    (7 )             (8 )        
Total Debt, Net of Discount
  $ 2,366             $ 2,037          
 
(1)
The increase in the credit facility balance from December 31, 2009 represents amounts drawn to fund the DJ Basin asset acquisition. See Note 3. DJ Basin Asset Acquisition.
 
(2)
Amount reported is based on percentage of FPSO construction activities completed as of March 31, 2010, and therefore does not reflect future minimum lease obligations. The increase in the FPSO lease obligation is a non-cash financing activity.
 
Note 5.  Derivative Instruments and Hedging Activities
Objectives and Strategies for Using Derivative Instruments   In order to reduce commodity price uncertainty and enhance the predictability of cash flows relating to the marketing of our crude oil and natural gas, we enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. The derivative instruments we use include variable to fixed price commodity swaps, 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 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.
 
All derivative instruments are reflected as either assets or liabilities at fair value in our consolidated balance sheets. See Note 6. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of derivative instruments and gross amounts of 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.  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 derivative instruments in an asset position.
 
Accounting for Commodity Derivative Instruments   We recognize all gains and losses on commodity derivative 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 Cash Flow Hedging Relationships table below.
 
Accounting for Interest Rate Derivative Instruments    Changes in fair value of interest rate swaps or interest rate “locks” used as cash flow hedges are reported in AOCL, to the extent the hedge is effective, until the forecasted transaction occurs, at which time they are recorded as adjustments to interest expense over the term of the related notes. In January 2010, in anticipation of a long-term debt issuance, we entered into an interest rate forward starting swap to effectively fix the cash flows related to interest payments on the anticipated debt issuance. We are accounting for the instrument as a cash flow hedge against the variability of interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The swap is in the notional amount of $500 million and is based on a 30-year LIBOR swap rate.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

Unsettled Derivative Instruments   As of March 31, 2010, we had entered into the following crude oil derivative instruments:  
 
   
Variable to Fixed Price Swaps
 
Two Way Collars
 
Production Period
 
Index
 
Bbls Per Day
   
Weighted Average Fixed Price
 
Index
 
Bbls Per Day
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
                                     
2nd Qtr - 4th Qtr 2010
 
NYMEX WTI
    3,000     $ 83.36  
NYMEX WTI
    14,500     $ 61.48     $ 75.63  
2nd Qtr - 4th Qtr 2010
 
Dated Brent
    1,000       80.05  
Dated Brent
    7,000       64.00       73.96  
2010 Average
        4,000       82.53         21,500       62.30       75.09  
                                               
2011
 
 -
    -       -  
NYMEX WTI
    8,000       80.25       88.74  

   
Three Way Collars (1)
 
Production Period
 
Index
 
Bbls Per Day
   
Weighted Average Short Put Price
   
Weighted Average Floor Price
 
Weighted
Average Ceiling
Price
 
                             
2011
 
NYMEX WTI
    4,000     $ 55.00     $ 75.00     $ 101.78  

(1)
A three-way collar consists of a collar contract combined with a put option contract sold by us with a price below the floor price of the collar.
 
Between April 1, 2010 and April 23, 2010, we entered into additional NYMEX WTI swaps covering 5,000 Bbls per day for calendar year 2012 with a weighted average fixed price of $91.84. We also entered into an additional three way collar covering 1,000 Bbls per day for calendar year 2011 with short put, floor and ceiling prices of $60.00, $80.00 and $100.20, respectively.
 
As of March 31, 2010, we had entered into the following natural gas derivative instruments:
 
   
Variable to Fixed Price Swaps
 
Two Way Collars
 
Production Period
 
Index
   
MMBtu Per Day
   
Weighted Average Fixed Price
 
Index
 
MMBtu Per Day
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
                                       
2nd Qtr - 4th Qtr 2010
 
NYMEX HH
      40,000     $ 6.10  
NYMEX HH (1)
    210,000     $ 5.90     $ 6.73  
2nd Qtr - 4th Qtr 2010
    -       -       -  
IFERC CIG (2)
    15,000       6.25       8.10  
2010 Average
            40,000       6.10         225,000       5.93       6.82  
                                                   
2011
 
NYMEX HH
      25,000       6.41  
NYMEX HH
    140,000       5.95       6.82  
 
(1)
Henry Hub
(2)
Colorado Interstate Gas - Northern System
 
Between April 1, 2010 and April 23, 2010, we entered into NYMEX HH three way collars covering 50,000 MMBtu per day for calendar year 2011 with weighted average short put, floor and ceiling prices of $4.00, $5.00 and $6.70, respectively. We also entered into additional NYMEX HH three way collars covering 50,000 MMBtu per day for calendar year 2012 with weighted average short put, floor and ceiling prices of $4.75, $5.50 and $7.92, respectively.
 
As of March 31, 2010, we had entered into the following natural gas basis swaps:
 
   
Basis Swaps
 
Production Period
 
Index
 
Index Less Differential
 
MMBtu Per Day
   
Weighted Average Differential
 
2nd Qtr - 4th Qtr 2010
 
IFERC CIG
 
NYMEX HH
    110,000     $ (1.49 )
2011
 
IFERC CIG
 
NYMEX HH
    120,000       (0.73 )
 
Between April 1, 2010 and April 23, 2010, we did not enter into any additional natural gas basis swaps.
 

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:
 
Fair Value of Derivative Instruments
 
   
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
 
2010
 
2009
 
2010
 
2009
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
(millions)
                               
Commodity Derivative Instruments (Not Designated as Hedging Instruments)
Current Assets
  $ 50  
Current Assets
  $ 13  
Current Liabilities
  $ 22  
Current Liabilities
  $ 100  
 
Noncurrent Assets
    29  
Noncurrent Assets
    1  
Noncurrent Liabilities
    7  
Noncurrent Liabilities
    17  
                                         
Interest Rate Derivative Instruments (Designated as Hedging Instruments)
Current Assets
    -  
Current Assets
    -  
Current Liabilities
    11  
Current Liabilities
    -  
Total
    $ 79       $ 14       $ 40       $ 117  
 
The effect of derivative instruments on our consolidated statements of operations was as follows:
 
Commodity Derivative Instruments Not Designated as Hedging Instruments
 
Amount of (Gain) Loss on Derivative Instruments Recognized in Income
 
   
Three Months Ended
    March 31,
   
2010
   
2009
 
(millions)
           
Realized Mark-to-Market (Gain) Loss
  $ 2     $ (153 )
Unrealized Mark-to-Market (Gain) Loss
    (147 )     80  
Total (Gain) Loss on Commodity Derivative Instruments
  $ (145 )   $ (73 )

Derivative Instruments in Cash Flow Hedging Relationships
 
   
   
Amount of (Gain) Loss on Derivative Instruments Recognized in Other Comprehensive (Income) Loss
   
Amount of (Gain) Loss on Derivative Instruments Reclassified from Accumulated Other Comprehensive Loss
 
   
Three Months Ended March 31,
 
   
2010
   
2009
   
2010
   
2009
 
(millions)
                   
Commodity Derivative Instruments in Previously Designated Cash Flow Hedging Relationships (1)
                       
Crude Oil Derivative Instruments
  $ -     $ -     $ 5     $ 17  
Natural Gas Derivative Instruments
    -       -       1       -  
                                 
Interest Rate Derivative Instruments in Cash Flow Hedging Relationships
    11       -       -       -  
Total
  $ 11       -     $ 6     $ 17  
 
(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. 


Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

AOCL   As of March 31, 2010, the balance in AOCL included deferred losses of $9 million related to the fair value of commodity derivative instruments previously accounted for as cash flow hedges. The deferred losses are net of deferred income tax benefits of $5 million. All remaining deferred losses will be reclassified to earnings during the period April 1 through December 31, 2010, as the forecasted transactions occur, and will be recorded as a reduction in oil and gas sales of approximately $14 million before tax.
 
AOCL also included a deferred loss of $9 million, net of tax, related to interest rate derivative instruments. Of this amount, $2 million, net of tax, is currently being reclassified into earnings as adjustments to interest expense over the term of our 5¼% Senior Notes due April 2014. Approximately $7 million will remain in AOCL until fixed-rate debt is issued, at which time we will begin amortizing it to interest expense over the life of the related debt issuance.
 
Note 6.  Fair Value Measurements and Disclosures
 
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.
 
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 forward commodity price curves 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 5. Derivative Instruments and Hedging Activities.
 
Interest Rate Derivative Instrument   We estimate the fair value of our forward starting swap based on published interest rate yield curves as of the date of the estimate. The fair values of interest rate derivative instruments in an asset position include a measure of counterparty credit risk, and the fair values of interest rate derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published credit default swap rates.
 
Deferred Compensation Liability   A portion of our deferred compensation liability is measured at fair value, which is dependant upon the fair values of mutual fund investments and shares of our common stock held in a rabbi trust. See Mutual Fund Investments above.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

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) (1)
   
Significant Other Observable Inputs (Level 2) (2)
   
Significant Unobservable Inputs (Level 3) (3)
   
Adjustment (4)
   
Fair Value Measurement
 
(millions)
                             
March 31, 2010
                             
Financial Assets
                             
Mutual Fund Investments
  $ 110     $ -     $ -     $ -     $ 110  
Commodity Derivative Instruments
    -       184       -       (105 )     79  
Financial Liabilities
                                       
Commodity Derivative Instruments
    -       (134 )     -       105       (29 )
Interest Rate Derivative Instrument
    -       (11 )     -       -       (11 )
Portion of Deferred Compensation Liability Measured at Fair Value
    (172 )     -       -       -       (172 )
December 31, 2009
                     
Financial Assets
                                       
Mutual Fund Investments
  $ 108     $ -     $ -     $ -     $ 108  
Commodity Derivative Instruments
    -       42       -       (28 )     14  
Financial Liabilities
                                       
Commodity Derivative Instruments
    -       (145 )     -       28       (117 )
Portion of Deferred Compensation Liability Measured at Fair Value
    (168 )     -       -       -       (168 )
 
(1)
Level 1 measurements are fair value measurements which use quoted market prices (unadjusted) in active markets for identical assets or liabilities. We use Level 1 inputs when available as Level 1 inputs generally provide the most reliable evidence of fair value.
 
(2)
Level 2 measurements are fair value measurements which use inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.
 
(3)
Level 3 measurements are fair value measurements which use unobservable inputs.
 
(4)
Amount represents the impact of master netting agreements that allow us to net cash settle asset and liability positions with the same counterparty.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
Certain assets and liabilities are measured at fair value on a nonrecurring basis in our consolidated balance sheets.  The following methods and assumptions were used to estimate the fair values:
 
Asset Acquisition   See Note 3. DJ Basin Asset Acquisition.
 
Asset Impairments (First Quarter 2009)   We determined that the carrying amount of Granite Wash, an onshore US area where we have significantly reduced investments beginning in 2007, was not recoverable from future cash flows and, therefore, was impaired at March 31, 2009.  We also impaired our Gulf of Mexico Main Pass asset which had been reclassified from held-for-sale to held-and-used. The impaired assets, which had a total carrying amount of $753 million, were reduced to their estimated fair value of $316 million, resulting in total pre-tax (non-cash) impairments of $437 million.
 
The fair values of the properties were determined using a discounted cash flow method, as comparable market data was not available. The discounted cash flows were based on management’s expectations for the future. Inputs included estimates of future oil and gas production, commodity prices based on published forward commodity price curves as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate. The asset impairments were Level 3 fair value measurements.
 
Additional Fair Value Disclosures
 
Debt   The fair value of fixed-rate debt is estimated based on the published market prices for the same or similar issues.  The fair value of floating-rate debt is estimated using the carrying amounts because the interest rates paid on such debt are set for periods of three months or less. See Note 4. Debt.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

Fair value information regarding our debt is as follows:
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
(millions)
                       
Long-Term Debt, Net of Unamortized Discount (1)
  $ 2,297     $ 2,571     $ 2,008     $ 2,279  
 
(1)
Excludes obligation under FPSO lease.
 
Note 7.  Capitalized Exploratory Well Costs
Changes in capitalized exploratory well costs are as follows and exclude amounts that were capitalized and subsequently expensed in the same period:
    Three Months Ended  
   
March 31, 2010
 
(millions)
     
Capitalized Exploratory Well Costs, Beginning of Period
  $ 432  
Additions to Capitalized Exploratory Well Costs Pending Determination of Proved Reserves
    32  
Reclassified to Proved Oil and Gas Properties Based on Determination of Proved Reserves
    (6 )
Capitalized Exploratory Well Costs Charged to Expense
    (2 )
Capitalized Exploratory Well Costs, End of Period
  $ 456  

The following table provides an aging of capitalized exploratory well costs (suspended well costs) based on the date the drilling was completed and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling:
   
March 31,
   
December 31,
 
   
2010
   
2009
 
(millions)
           
Exploratory Well Costs Capitalized for a Period of One Year or Less
  $ 97     $ 158  
Exploratory Well Costs Capitalized for a Period Greater Than One Year After Completion of Drilling
    359       274  
Balance at End of Period
  $ 456     $ 432  
Number of Projects with Exploratory Well Costs That Have Been Capitalized for a Period Greater Than One Year After Completion of Drilling
    9       5  

The following table provides a further aging of those exploratory well costs that have been capitalized for a period greater than one year since the completion of drilling as of March 31, 2010:
         
Suspended Since
 
   
Total
   
2009
   
2008
   
2007 & Prior
 
(millions)
                       
Project
                       
Blocks O and I (West Africa)
  $ 194     $ 13     $ 71     $ 110  
Tamar and Dalit (Israel)
    58       33       24       1  
Gunflint (Deepwater Gulf of Mexico)
    49       -       49       -  
Redrock (Deepwater Gulf of Mexico)
    17       -       -       17  
Flyndre (North Sea)
    15       -       -       15  
Selkirk (North Sea)
    20       -       -       20  
Other
    6       6       -       -  
Total Exploratory Well Costs Capitalized for a Period Greater Than One Year After Completion of Drilling
  $ 359     $ 52     $ 144     $ 163  
 
West Africa   The West Africa project includes Blocks O and I offshore Equatorial Guinea and the YoYo concession and Tilapia production sharing contract offshore Cameroon. We have evaluated the potential for additional liquids and gas projects, and determined that the next development after Aseng will be at the Belinda field. We are also evaluating future oil projects at Diega and Carmen. In Cameroon, we will acquire a 3-D seismic survey over YoYo and portions of Tilapia during 2010, and exploration drilling is currently planned in Tilapia.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)

Israel   The Israel project includes the Tamar and Dalit prospects, both significant 2009 natural gas discoveries located offshore Israel. We are moving forward with Tamar development plans, and expect project sanction and recording of proved reserves in 2010, with first production projected for 2012. We have also signed letters of intent to sell natural gas from the Tamar field. In addition to the remaining exploratory well costs that have been capitalized for a period greater than one year, we have incurred $39 million in suspended costs related to additional drilling activity in Israel through March 31, 2010.
 
Gunflint (Deepwater Gulf of Mexico)   Gunflint (Mississippi Canyon Block 948) is our largest deepwater Gulf of Mexico discovery to date. We are currently acquiring additional seismic information and preparing to drill an appraisal well.
 
Redrock (Deepwater Gulf of Mexico)   Redrock (Mississippi Canyon Block 204) was a 2006 natural gas/condensate discovery and is currently considered a co-development candidate with Raton South (Mississippi Canyon Block 292). The anticipated development plan consists of tying Raton South back through the Gemini system to a host platform at Viosca Knoll Block 900 for processing and then connecting Redrock into this gathering system. Tie-back of Redrock is anticipated to occur following the development of Raton South.
 
Flyndre (North Sea)   The Flyndre project is located in the UK sector of the North Sea and we successfully completed an exploratory appraisal well in 2007.  We are currently working with the project operator and other partners to finalize the field development plan and relevant operating agreements.
 
Selkirk (North Sea)   The Selkirk project is also located in the UK sector of the North Sea. Capitalized costs to date primarily consist of the cost of drilling an exploratory well. We are currently working with our partners on a cost-effective development plan, including selection of a host facility.
 
Other   Other projects consist of three onshore US wells which continue to be evaluated by various means including additional seismic work, drilling additional wells and evaluating the potential of the exploration well.
 
Note 8.  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,
 
   
2010
   
2009
 
(in millions)
           
Asset Retirement Obligations, Beginning of Period
  $ 232     $ 211  
Liabilities Incurred in Current Period
    14       1  
Liabilities Settled in Current Period
    (4 )     (2 )
Revisions
    4       16  
Accretion Expense
    4       3  
Asset Retirement Obligations, End of Period
  $ 250     $ 229  
 
Liabilities incurred in 2010 were due to the DJ Basin asset acquisition.  Accretion expense is included in DD&A expense in the consolidated statements of operations.
 
Note 9.   Employee Benefit Plans
We have a noncontributory, tax-qualified defined benefit pension plan covering employees who were hired prior to May 1, 2006. 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 Internal Revenue Code of 1986, as amended. Net periodic benefit cost related to the retirement and restoration plans was as follows:
 
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
(millions)
           
Service Cost
  $ 4     $