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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

x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
   
   
OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the quarterly period ended June 30, 2010

OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
   
   
OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the transition period from _____to_____

Commission file number: 001-07964
 
NOBLE ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
73-0785597
(State 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 o
 
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 o
 
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 o
Non-accelerated filer o
Smaller reporting company o
 
(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 o    No x
 
As of July 15, 2010, there were 174,800,348 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.
   
22
         
Item 3.
   
40
         
Item 4.
   
41
         
   
PART II
   
Item 1.
   
41
         
Item 1A.
   
41
         
Item 2.
   
43
         
Item 3.
   
43
         
Item 4.
   
43
         
Item 5.
   
43
         
Item 6.
   
43


Part I. Financial Information
Item 1. Financial Statements

Noble Energy, Inc. and Subsidiaries
Consolidated Statements of Operations
(millions, except per share amounts)
(unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Oil, Gas and NGL Sales
  $ 710     $ 460     $ 1,398     $ 866  
Income from Equity Method Investees
    24       16       50       27  
Other Revenues
    17       15       36       39  
Total
    751       491       1,484       932  
Costs and Expenses
                               
Production Expense
    150       129       289       260  
Exploration Expense
    52       33       132       75  
Depreciation, Depletion and Amortization
    215       196       431       396  
General and Administrative
    63       60       129       119  
Asset Impairments
    -       -       -       437  
Other Operating (Income) Expense, Net
    41       (3 )     55       (11 )
Total
    521       415       1,036       1,276  
Operating Income (Loss)
    230       76       448       (344 )
Other (Income) Expense
                               
(Gain) Loss on Commodity Derivative Instruments
    (96 )     139       (242 )     66  
Interest, Net of Amount Capitalized
    19       23       39       41  
Other Non-Operating (Income) Expense, Net
    (13 )     4       (13 )     12  
Total
    (90 )     166       (216 )     119  
Income (Loss) Before Income Taxes
    320       (90 )     664       (463 )
Income Tax Provision (Benefit)
    116       (33 )     223       (218 )
Net Income (Loss)
  $ 204     $ (57 )   $ 441     $ (245 )
                                 
Earnings (Loss) Per Share, Basic
  $ 1.17     $ (0.33 )   $ 2.53     $ (1.42 )
Earnings (Loss) Per Share, Diluted
    1.10       (0.33 )     2.44       (1.42 )
                                 
Weighted Average Number of Shares Outstanding, Basic
    175       173       175       173  
Weighted Average Number of Shares Outstanding, Diluted
    178       173       178       173  

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


Noble Energy, Inc.
Consolidated Balance Sheets
(millions)

   
(unaudited) June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
Current Assets
           
Cash and Cash Equivalents
  $ 1,017     $ 1,014  
Accounts Receivable, Net
    538       465  
Assets Held for Sale
    375       -  
Other Current Assets
    257       199  
Total Assets, Current
    2,187       1,678  
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
    13,381       12,584  
Property, Plant and Equipment, Other
    252       240  
Total Property, Plant and Equipment, Gross
    13,633       12,824  
Accumulated Depreciation, Depletion and Amortization
    (4,067 )     (3,908 )
Total Property, Plant and Equipment, Net
    9,566       8,916  
Goodwill
    757       758  
Other Noncurrent Assets
    503       455  
Total Assets
  $ 13,013     $ 11,807  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current Liabilities
               
Accounts Payable - Trade
  $ 751     $ 548  
Other Current Liabilities
    464       442  
Total Liabilities, Current
    1,215       990  
Long-Term Debt
    2,584       2,037  
Deferred Income Taxes, Noncurrent
    2,162       2,076  
Other Noncurrent Liabilities
    511       547  
Total Liabilities
    6,472       5,650  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Preferred Stock - Par Value $1.00 per share; 4 Million Shares Authorized, None Issued
    -       -  
Common Stock - Par Value $3.33 1/3 per share; 250 Million Shares Authorized; 195 Million and 194 Million Shares Issued, Respectively
    649       645  
Additional Paid in Capital
    2,327       2,260  
Accumulated Other Comprehensive Loss
    (128 )     (75 )
Treasury Stock, at Cost; 19 Million Shares
    (627 )     (615 )
Retained Earnings
    4,320       3,942  
Total Shareholders’ Equity
    6,541       6,157  
Total Liabilities and Shareholders’ Equity
  $ 13,013     $ 11,807  

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


Noble Energy, Inc.
Consolidated Statements of Cash Flows
(millions)
(unaudited)

   
Six Months Ended June 30,
 
   
2010
   
2009
 
Cash Flows From Operating Activities
           
Net Income (Loss)
  $ 441     $ (245 )
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities
               
Depreciation, Depletion and Amortization
    431       396  
Dry Hole Cost
    54       9  
Asset Impairments
    -       437  
Deferred Income Taxes
    85       (359 )
Income from Equity Method Investees
    (50 )     (27 )
Dividends from Equity Method Investees
    48       5  
Unrealized (Gain) Loss on Commodity Derivative Instruments
    (210 )     358  
Gain on Asset Sale
    -       (24 )
Other Adjustments for Noncash Items Included in Income
    24       (1 )
Changes in Operating Assets and Liabilities
               
(Increase) Decrease in Accounts Receivable
    (73 )     7  
Decrease in Other Current Assets
    28       17  
Increase in Accounts Payable
    102       10  
Decrease in Other Current Liabilities
    (3 )     (47 )
Other Operating Assets and Liabilities, Net
    (33 )     (38 )
Net Cash Provided by Operating Activities
    844       498  
                 
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (782 )     (777 )
DJ Basin Asset Acquisition
    (466 )     -  
Net Cash Used in Investing Activities
    (1,248 )     (777 )
                 
Cash Flows From Financing Activities
               
Exercise of Stock Options
    28       13  
Excess Tax Benefits from Stock-Based Awards
    16       3  
Dividends Paid, Common Stock
    (63 )     (63 )
Purchase of Treasury Stock
    (12 )     (1 )
Proceeds from Credit Facilities
    1,165       340  
Repayment of Credit Facilities
    (727 )     (1,161 )
Proceeds from Issuance of Senior Long-Term Debt
    -       989  
Repayment of Installment Note
    -       (25 )
Net Cash Provided by Financing Activities
    407       95  
Increase (Decrease) in Cash and Cash Equivalents
    3       (184 )
Cash and Cash Equivalents at Beginning of Period
    1,014       1,140  
Cash and Cash Equivalents at End of Period
  $ 1,017     $ 956  

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


Noble Energy, Inc.
Consolidated Statements of Shareholders' Equity
(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
    -       -       -       -       441       441  
Stock-based Compensation
    -       27       -       -       -       27  
Exercise of Stock Options
    2       26       -       -       -       28  
Tax Benefits Related to Exercise of Stock Options
    -       16       -       -       -       16  
Restricted Stock Awards, Net
    2       (2 )     -       -       -       -  
Dividends (36 cents per share)
    -       -       -       -       (63 )     (63 )
Changes in Treasury Stock, Net
    -       -       -       (12 )     -       (12 )
Oil and Gas Cash Flow Hedges                                                
Realized Amounts Reclassified Into Earnings
    -       -       6       -       -       6  
Interest Rate Cash Flow Hedges                                                
Unrealized Change in Fair Value
    -       -       (61 )     -       -       (61 )
Net Change in Other
    -       -       2       -       -       2  
June 30, 2010
  $ 649     $ 2,327     $ (128 )   $ (627 )   $ 4,320     $ 6,541  
                                                 
December 31, 2008
  $ 641     $ 2,193     $ (110 )   $ (614 )   $ 4,199     $ 6,309  
Net Loss
    -       -       -       -       (245 )     (245 )
Stock-based Compensation
    -       24       -       -       -       24  
Exercise of Stock Options
    2       11       -       -       -       13  
Tax Benefits Related to Exercise of Stock Options
    -       3       -       -       -       3  
Restricted Stock Awards, Net
    2       (2 )     -       -       -       -  
Dividends (36 cents per share)
    -       -       -       -       (63 )     (63 )
Changes in Treasury Stock, Net
    -       -       -       (1 )     -       (1 )
Oil and Gas Cash Flow Hedges                                                
Realized Amounts Reclassified Into Earnings
    -       -       20       -       -       20  
Net Change in Other
    -       -       (1 )     -       -       (1 )
June 30, 2009
  $ 645     $ 2,229     $ (91 )   $ (615 )   $ 3,891     $ 6,059  

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 global 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 core 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 June 30, 2010 and December 31, 2009 and for the three and six months ended June 30, 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 and six months ended June 30, 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 June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
(millions)
                       
Other Revenues
                       
Electricity Sales (1)
  $ 16     $ 11     $ 35     $ 32  
Other
    1       4       1       7  
Total
  $ 17     $ 15     $ 36     $ 39  
Production Expense
                               
Lease Operating Expense
  $ 100     $ 93     $ 188     $ 193  
Production and Ad Valorem Taxes
    34       23       67       42  
Transportation Expense
    16       13       34       25  
Total
  $ 150     $ 129     $ 289     $ 260  
Other Operating (Income) Expense, Net
                               
Rig Contract Termination Expense (2)
  $ 26     $ -     $ 26     $ -  
Gain on Asset Sale (3)
    -       (24 )     -       (24 )
Electricity Generation Expense (1)
    7       11       17       (19 )
Other, Net
    8       10       12       32  
Total
  $ 41     $ (3 )   $ 55     $ (11 )
Other Non-Operating (Income) Expense, Net
                               
Deferred Compensation (4)
  $ (13 )   $ 5     $ (11 )   $ 10  
Interest Income
    (2 )     (1 )     (4 )     (1 )
Other (Income) Expense, Net
    2       -       2       3  
Total
  $ (13 )   $ 4     $ (13 )   $ 12  
 
(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 the first six months of 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)
See Note 3. Impact of Federal Deepwater Moratorium.
 
(3)
In February 2008, effective July 1, 2007, we sold our interest in Argentina. The gain on sale was deferred until second quarter 2009 when the Argentine government approved the sale.
 
(4)
Amount represents increases (decreases) 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:
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
(millions)
           
Accounts Receivable, Net
           
Commodity Sales
  $ 254     $ 205  
Joint Interest Billings
    282       140  
Refund of Deepwater Gulf of Mexico Royalties (1)
    -       97  
Other
    30       54  
Allowance for Doubtful Accounts
    (28 )     (31 )
Total
  $ 538     $ 465  
Other Current Assets
               
Inventories, Current
  $ 99     $ 89  
Commodity Derivative Assets, Current
    71       13  
Prepaid Expenses and Other Assets, Current
    26       65  
Deferred Income Taxes, Net, Current
    61       32  
Total
  $ 257     $ 199  
Other Noncurrent Assets
               
Equity Method Investments
  $ 305     $ 303  
Mutual Fund Investments
    103       108  
Commodity Derivative Assets, Noncurrent
    51       1  
Other Assets, Noncurrent
    44       43  
Total
  $ 503     $ 455  
Accounts Payable - Trade
               
Capital Costs
  $ 441     $ 277  
Royalties Payable
    86       65  
Lease Operating Expense
    40       27  
Rig Contract Termination Expense (2)
    26       -  
Other
    158       179  
Total
  $ 751     $ 548  
Other Current Liabilities
               
Production and Ad Valorem Taxes
  $ 102     $ 103  
Commodity Derivative Liabilities, Current
    4       100  
Interest Rate Derivative Liability, Current
    94       -  
Income Taxes Payable
    77       60  
Asset Retirement Obligations, Current
    63       51  
Interest Payable
    37       37  
Other
    87       91  
Total
  $ 464     $ 442  
Other Noncurrent Liabilities
               
Deferred Compensation Liabilities, Noncurrent
  $ 200     $ 213  
Asset Retirement Obligations, Noncurrent
    187       181  
Accrued Benefit Costs, Noncurrent
    80       76  
Commodity Derivative Liabilities, Noncurrent
    1       17  
Other
    43       60  
Total
  $ 511     $ 547  
 
(1)
During 2010, we received a refund, including interest thereon, 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.
 
(2)
See Note 3. Impact of Federal Deepwater Moratorium.
 

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

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 7. Fair Value Measurements and Disclosures.
 
Note 3.  Impact of Federal Deepwater Moratorium
During second quarter 2010, a six-month moratorium on drilling in the deepwater Gulf of Mexico (Federal Deepwater Moratorium or Moratorium) was enacted in response to an apparent blowout and fire on a deepwater drilling rig, Deepwater Horizon, which was engaged in drilling operations for another operator (the Deepwater Horizon Incident or the Incident). The Incident resulted in the loss of life and a significant oil spill. As a result, all deepwater drilling activities in progress at the time the Moratorium was announced were suspended.
 
As a result of the Moratorium, we entered into an agreement to terminate our contract for the Noble Clyde Boudreaux drilling rig and recognized rig contract termination expense of $26 million during second quarter 2010, in accordance with GAAP for contract termination costs. The amount is included in other operating (income) expense, net in our consolidated statements of operations. The US reporting unit recorded a related $26 million liability at June 30, 2010.
 
Note 4.  Acquisitions and Divestitures
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.
 
The total purchase price and allocation of the total purchase price are as follows:
 
   
June 30, 2010
 
(millions)
     
Total Purchase Price
     
Cash Paid
  $ 466  
Net Liabilities Assumed
    43  
Total
  $ 509  
         
Allocation of Total Purchase Price
       
Proved Oil and Gas Properties
  $ 363  
Unproved Oil and Gas Properties
    146  
Total
  $ 509  
 
The difference between the total purchase price and the fair values of the assets acquired 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.
 

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

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 June 30, 2010, or our consolidated results of operations for the three and six months ended June 30, 2010.
 
Sale of Onshore US Assets   We have entered into an agreement to divest certain non-core properties in the Mid-Continent and Illinois Basin areas for a sales price of approximately $550 million. We expect the sale, which will be effective as of April 1, 2010, to close in third quarter 2010. Information regarding assets and liabilities of the disposal group held for sale is as follows:
 
   
June 30,
 
   
2010
 
(millions)
     
Property, Plant and Equipment Held for Sale (Net Book Value)
  $ 375  
Goodwill Allocated to Properties Held for Sale
    65  
Asset Retirement Obligations Associated with Properties Held for Sale
    (12 )

Note 5.   Debt
Our debt consists of the following:
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
(millions, except percentages)
                       
Credit Facility (1)
  $ 820       0.66 %   $ 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 %
FPSO Lease Obligation (2)
    137       -       29       -  
Total
    2,591               2,045          
Unamortized Discount
    (7 )             (8 )        
Total Debt, Net of Discount
  $ 2,584             $ 2,037          
 
(1)
The increase in the credit facility balance from December 31, 2009 represents amounts drawn to fund the DJ Basin asset acquisition and other capital expenditures. See Note 4. Acquisitions and Divestitures.
 
(2)
Amount reported is based on percentage of floating production, storage and offloading vessel (FPSO) construction activities completed as of June 30, 2010, and therefore does not reflect future minimum lease obligations. The increase in the FPSO lease obligation is a non-cash financing activity.
 
Note 6.  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 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 7. 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.
 

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

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.
 
Unsettled Derivative Instruments   As of June 30, 2010, we had entered into the following crude oil derivative instruments:  
 
   
Variable to Fixed Price Swaps
 
Two Way Collars
 
Period
 
Index
   
Bbls Per Day
   
Weighted Average Fixed Price
 
Index
 
Bbls Per Day
   
Weighted Average Floor Price
       Weighted Average Ceiling Price  
                                       
3rd Qtr - 4th Qtr 2010
 
NYMEX WTI
      3,000     $ 83.36  
NYMEX WTI
    14,500     $ 61.48     $ 75.63  
3rd 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
    13,000       80.15       94.63  
                                                   
2012
 
NYMEX WTI
      5,000       91.84  
 -
    -       -       -  

   
Three Way Collars (1)
 
Period
 
Index
 
Bbls Per Day
   
Weighted Average Short Put Price
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
                             
2011
 
NYMEX WTI
    5,000     $ 56.00     $ 76.00     $ 101.46  

(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 July 1 and July 15, 2010, we entered into additional Dated Brent swaps covering 5,000 Bbls per day for calendar year 2012 with a weighted average fixed price of $83.09.
 

Noble Energy, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
As of June 30, 2010, we had entered into the following natural gas derivative instruments:
 
   
Variable to Fixed Price Swaps
 
Two Way Collars
 
Period
 
Index
   
MMBtu Per Day
   
Weighted Average Fixed Price
 
Index
 
MMBtu Per Day
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
                                       
3rd Qtr - 4th Qtr 2010
 
NYMEX HH
      40,000     $ 6.10  
NYMEX HH (1)
    210,000     $ 5.90     $ 6.73  
3rd 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  

   
Three Way Collars
 
Period
 
Index
 
MMBtu Per Day
   
Weighted Average Short Put Price
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
                             
2011
 
 NYMEX HH
    50,000     $ 4.00     $ 5.00     $ 6.70  
                                     
2012
 
 NYMEX HH
    50,000     $ 4.75     $ 5.50     $ 7.92  
 
(1)
Henry Hub
(2)
Colorado Interstate Gas - Northern System
 
As of June 30, 2010, we had entered into the following natural gas basis swaps:
 
   
Basis Swaps
 
Period
 
Index
 
Index Less Differential
 
MMBtu Per Day
 
Weighted Average Differential
 
3rd Qtr - 4th Qtr 2010
 
IFERC CIG
 
 NYMEX HH
    110,000     $ (1.49 )
2011
 
IFERC CIG
 
 NYMEX HH
    120,000       (0.73 )
2012
 
IFERC CIG
 
 NYMEX HH
    40,000       (0.52 )
 
Between July 1 and July 15, 2010, we entered into an additional basis swap covering 10,000 MMBtus per day for calendar year 2012 with a NYMEX HH to IFERC CIG differential of $(0.54).
 
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
 
   
June 30,
 
December 31,
 
June 30,
 
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
  $ 71  
Current Assets
  $ 13  
Current Liabilities
  $ 4  
Current Liabilities
  $ 100  
   
Noncurrent Assets
    51  
Noncurrent Assets
    1  
Noncurrent Liabilities
    1  
Noncurrent Liabilities
    17  
                                           
Interest Rate Derivative Instruments (Designated as Hedging Instruments)
 
Current Assets
    -  
Current Assets
    -  
Current Liabilities
    94  
Current Liabilities
    -  
Total
      $ 122       $ 14       $ 99       $ 117  


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

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 June 30,
 
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
(millions)
                       
Realized Mark-to-Market (Gain) Loss
  $ (33 )   $ (138 )   $ (32 )   $ (292 )
Unrealized Mark-to-Market (Gain) Loss
    (63 )     277       (210 )     358  
Total (Gain) Loss on Commodity Derivative Instruments
  $ (96 )   $ 139     $ (242 )   $ 66  

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
 
   
2010
   
2009
   
2010
   
2009
 
(millions)
                   
Three Months Ended June 30,
           
Commodity Derivative Instruments in Previously Designated Cash Flow Hedging Relationship (1)
                       
Crude Oil Derivative Instruments
  $ -     $ -     $ 4     $ 15  
                                 
Interest Rate Derivative Instruments in Cash Flow Hedging Relationships
    83       -       -       -  
Total
  $ 83       -     $ 4     $ 15  
Six Months Ended June 30,
               
Commodity Derivative Instruments in Previously Designated Cash Flow Hedging Relationships (1)
                               
Crude Oil Derivative Instruments
  $ -     $ -     $ 9     $ 32  
Natural Gas Derivative Instruments
    -       -       1       -  
                                 
Interest Rate Derivative Instruments in Cash Flow Hedging Relationships
    94       -       -       -  
Total
  $ 94       -     $ 10     $ 32  
 
(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. 
 
AOCL   As of June 30, 2010, the balance in AOCL included deferred losses of $6 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 $4 million. All remaining deferred losses will be reclassified to earnings during the period July 1 through December 31, 2010, as the forecasted transactions occur, and will be recorded as a reduction in oil and gas sales of approximately $10 million before tax.
 
AOCL also included deferred losses of $63 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 $61 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.
 

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

Note 7.  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 6. 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.
 
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)
                             
June 30, 2010
                             
Financial Assets
                             
Mutual Fund Investments
  $ 103     $ -     $ -     $ -     $ 103  
Commodity Derivative Instruments
    -       172       -