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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Noble Energy 10-Q 2011

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 March 31, 2011

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 April 15, 2011, there were 176,466,238 shares of the registrant’s common stock, par value $3.33 1/3 per share, outstanding.
 


 
 

 

Table of Contents

Part I.
3
     
 
Item 1.
3
       
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
Item 2.
19
       
 
Item 3.
34
       
 
Item 4.
35
       
Part II.
35
     
 
Item 1.
35
       
 
Item 1A.
35
       
 
Item 2.
36
       
 
Item 3.
36
       
 
Item 4.
36
       
 
Item 5.
36
       
 
Item 6.
36
       
37
   
38


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 March 31,
 
   
2011
   
2010
 
Revenues
           
Oil, Gas and NGL Sales
  $ 830     $ 688  
Income from Equity Method Investees
    48       26  
Other Revenues
    21       19  
Total
    899       733  
Costs and Expenses
               
Production Expense
    142       139  
Exploration Expense
    70       80  
Depreciation, Depletion and Amortization
    221       216  
General and Administrative
    83       66  
Other Operating (Income) Expense, Net
    36       14  
Total
    552       515  
Operating Income
    347       218  
Other (Income) Expense
               
(Gain) Loss on Commodity Derivative Instruments
    286       (145 )
Interest, Net of Amount Capitalized
    16       20  
Other Non-Operating (Income) Expense, Net
    8       -  
Total
    310       (125 )
Income Before Income Taxes
    37       343  
Income Tax Provision
    23       106  
Net Income
  $ 14     $ 237  
                 
Earnings Per Share, Basic
  $ 0.08     $ 1.36  
Earnings Per Share, Diluted
    0.08       1.34  
                 
Weighted Average Number of Shares Outstanding, Basic
    176       174  
Weighted Average Number of Shares Outstanding, Diluted
    178       177  

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


Noble Energy, Inc.
Consolidated Balance Sheets
(millions)
(unaudited)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
 
Current Assets
           
Cash and Cash Equivalents
  $ 1,419     $ 1,081  
Accounts Receivable, Net
    565       556  
Other Current Assets
    207       201  
Total Assets, Current
    2,191       1,838  
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
    14,893       14,393  
Property, Plant and Equipment, Other
    276       263  
Total Property, Plant and Equipment, Gross
    15,169       14,656  
Accumulated Depreciation, Depletion and Amortization
    (4,608 )     (4,392 )
Total Property, Plant and Equipment, Net
    10,561       10,264  
Goodwill
    696       696  
Other Noncurrent Assets
    519       484  
Total Assets
  $ 13,967     $ 13,282  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current Liabilities
               
Accounts Payable - Trade
  $ 897     $ 927  
Other Current Liabilities
    403       495  
Total Liabilities, Current
    1,300       1,422  
Long-Term Debt
    2,801       2,272  
Deferred Income Taxes, Noncurrent
    2,175       2,110  
Other Noncurrent Liabilities
    815       630  
Total Liabilities
    7,091       6,434  
                 
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; 196 Million and 195 Million Shares Issued, Respectively
    654       651  
Additional Paid in Capital
    2,427       2,385  
Accumulated Other Comprehensive Loss
    (87 )     (104 )
Treasury Stock, at Cost; 19 Million Shares
    (640 )     (624 )
Retained Earnings
    4,522       4,540  
Total Shareholders’ Equity
    6,876       6,848  
Total Liabilities and Shareholders’ Equity
  $ 13,967     $ 13,282  

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


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

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities
           
Net Income
  $ 14     $ 237  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
               
Depreciation, Depletion and Amortization
    221       216  
Dry Hole Cost
    22       39  
Deferred Income Taxes
    11       27  
Dividends (Income) from Equity Method Investees, Net
    (23 )     (13 )
Unrealized (Gain) Loss on Commodity Derivative Instruments
    303       (147 )
Other Adjustments for Noncash Items Included in Income
    36       21  
Changes in Operating Assets and Liabilities
               
(Increase) Decrease in Accounts Receivable
    (9 )     85  
(Increase) Decrease in Other Current Assets
    (17 )     50  
Increase in Accounts Payable
    28       27  
Increase (Decrease) in Current Income Taxes Payable
    (71 )     58  
(Decrease) in Other Current Liabilities
    (54 )     (25 )
Other Operating Assets and Liabilities, Net
    23       13  
Net Cash Provided by Operating Activities
    484       588  
 
               
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (578 )     (383 )
Central DJ Basin Asset Acquisition
    -       (466 )
Proceeds from Sale of Property, Plant and Equipment
    3       -  
Net Cash Used in Investing Activities
    (575 )     (849 )
 
               
Cash Flows From Financing Activities
               
Exercise of Stock Options
    23       21  
Excess Tax Benefits from Stock-Based Awards
    8       13  
Dividends Paid, Common Stock
    (32 )     (32 )
Purchase of Treasury Stock
    (16 )     (12 )
Proceeds from Credit Facilities
    120       610  
Repayment of Credit Facilities
    (470 )     (322 )
Proceeds from Issuance of Senior Long-Term Debt, Net
    836       -  
Settlement of Interest Rate Derivative Instrument
    (40 )     -  
Net Cash Provided By Financing Activities
    429       278  
Increase in Cash and Cash Equivalents
    338       17  
Cash and Cash Equivalents at Beginning of Period
    1,081       1,014  
Cash and Cash Equivalents at End of Period
  $ 1,419     $ 1,031  

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 Shareholders' Equity
 
December 31, 2010
  $ 651     $ 2,385     $ (104 )   $ (624 )   $ 4,540     $ 6,848  
Net Income
    -       -       -       -       14       14  
Stock-based Compensation
    -       14       -       -       -       14  
Exercise of Stock Options
    2       21       -       -       -       23  
Tax Benefits Related to Exercise of Stock Options
    -       8       -       -       -       8  
Restricted Stock Awards, Net
    1       (1 )     -       -       -       -  
Dividends (18 cents per share)
    -       -       -       -       (32 )     (32 )
Changes in Treasury Stock, Net
    -       -       -       (16 )     -       (16 )
Interest Rate Cash Flow Hedges
                                               
Unrealized Change in Fair Value
    -       -       15       -       -       15  
Net Change in Other
    -       -       2       -       -       2  
March 31, 2011
  $ 654     $ 2,427     $ (87 )   $ (640 )   $ 4,522     $ 6,876  
                                                 
December 31, 2009
  $ 645     $ 2,260     $ (75 )   $ (615 )   $ 3,942     $ 6,157  
Net Income
    -       -       -       -       237       237  
Stock-based Compensation
    -       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  

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 a leading independent energy company engaged in worldwide crude oil and natural gas exploration and production. Our key operating areas are onshore in the US, primarily in the DJ Basin, in the Deepwater Gulf of Mexico, offshore Eastern Mediterranean, and offshore West Africa.

Note 2.  Basis of Presentation

Presentation   The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US (US GAAP) 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 GAAP for complete financial statements. The accompanying consolidated financial statements at March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010 contain all normally recurring adjustments considered necessary for a fair presentation of our financial position, results of operations, cash flows and shareholders’ equity for such periods. Operating results for the three months ending March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. 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, 2010.

Consolidation  Our consolidated accounts include our accounts and the accounts of our wholly-owned subsidiaries.  In addition, we use the equity method of accounting for investments in entities that we do not control but over which we exert significant influence. All significant intercompany balances and transactions have been eliminated upon consolidation.

Estimates   The preparation of consolidated financial statements in conformity with US 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,
 
   
2011
   
2010
 
(millions)
           
Other Revenues
           
Electricity Sales (1)
  $ 21     $ 19  
Total
  $ 21     $ 19  
Production Expense
               
Lease Operating Expense
  $ 92     $ 88  
Production and Ad Valorem Taxes
    32       34  
Transportation Expense
    18       17  
Total
  $ 142     $ 139  
Other Operating (Income) Expense, Net
               
Deepwater Gulf of Mexico Moratorium Expense (2)
  $ 18     $ -  
Electricity Generation Expense (1)
    17       10  
Other, Net
    1       4  
Total
  $ 36     $ 14  
Other Non-Operating (Income) Expense, Net
               
Deferred Compensation (3)
  $ 10     $ 2  
Interest Income
    (3 )     (1 )
Other (Income) Expense, Net
    1       (1 )
Total
  $ 8     $ -  

(1)
Electricity sales include sales from the Machala power plant located in Machala, Ecuador. Electricity generation expense includes all operating and non-operating expenses associated with the plant, including DD&A and changes in the allowance for doubtful accounts.
(2)
Amount primarily relates to rig stand-by expense incurred prior to receiving permit to resume drilling activities in the Deepwater Gulf of Mexico.
(3)
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,
 
   
2011
   
2010
 
(millions)
           
Accounts Receivable, Net
           
Commodity Sales
  $ 314     $ 291  
Joint Interest Billings
    231       259  
Other
    45       33  
Allowance for Doubtful Accounts
    (25 )     (27 )
Total
  $ 565     $ 556  
Other Current Assets
               
Inventories, Current
  $ 119     $ 112  
Commodity Derivative Assets, Current
    2       62  
Deferred Income Taxes, Net, Current
    55       8  
Prepaid Expenses and Other Assets, Current
    31       19  
Total
  $ 207     $ 201  
Other Noncurrent Assets
               
Equity Method Investments
  $ 309     $ 285  
Mutual Fund Investments
    117       112  
Other Assets, Noncurrent
    93       87  
Total
  $ 519     $ 484  
Accounts Payable - Trade
               
Capital Costs
  $ 580     $ 642  
Royalties Payable
    107       94  
Lease Operating Expense
    29       29  
Other
    181       162  
Total
  $ 897     $ 927  
Other Current Liabilities
               
Production and Ad Valorem Taxes
  $ 110     $ 110  
Commodity Derivative Liabilities, Current
    119       24  
Interest Rate Derivative Liability, Current
    -       63  
Income Taxes Payable
    19       90  
Asset Retirement Obligations, Current
    45       45  
Interest Payable
    30       36  
Other
    80       127  
Total
  $ 403     $ 495  
Other Noncurrent Liabilities
               
Deferred Compensation Liabilities, Noncurrent
  $ 247     $ 229  
Asset Retirement Obligations, Noncurrent
    209       208  
Accrued Benefit Costs, Noncurrent
    78       76  
Commodity Derivative Liabilities, Noncurrent
    200       51  
Other
    81       66  
Total
  $ 815     $ 630  


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

Note 3.   Debt

Our debt consists of the following:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
(millions, except percentages)
                       
Credit Facility, due December 9, 2012
  $ -       -     $ 350       0.57 %
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 %
6% Senior Notes, due March 1, 2041
    850       6.00 %     -       -  
7¼% Senior Debentures, due August 1, 2097
    84       7.25 %     84       7.25 %
FPSO Lease Obligation (1)
    329       -       295       -  
Total
    2,813               2,279          
Unamortized Discount
    (12 )             (7 )        
Total Debt, Net of Discount
  $ 2,801             $ 2,272          

(1)
Amount reported is based on percentage of floating production, storage and offloading vessel (FPSO) construction activities completed as of the reporting dates, and therefore does not reflect future minimum lease obligations. The increase in the FPSO lease obligation is a non-cash financing activity.

Debt Issuance   On February 18, 2011, we closed an offering of $850 million senior unsecured notes receiving net proceeds of $836 million, after deducting discount and underwriting fees. The notes are due March 1, 2041, and pay interest semi-annually at 6%. Total debt issuance costs of approximately $9 million were incurred and are being amortized to expense over the term of the note. Approximately $470 million of the net proceeds were used to repay outstanding indebtedness under our revolving credit facility and the balance of the proceeds will be used for general corporate purposes. 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.

Annual Maturities   Annual maturities of outstanding debt, excluding FPSO lease payments, are as follows:

 
As of March 31, 2011
 
(millions)
     
2011
  $ -  
2012
    -  
2013
    -  
2014
    200  
2015
    -  
Thereafter
    2,284  
Total
  $ 2,484  

Note 4.  Derivative Instruments and Hedging Activities

Objective 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, two-way and three-way collars and basis swaps.

The fixed price swap, two-way collar, and basis swap contracts entitle us (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. We would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or ceiling price. The amount payable by us, if the floating price is above the fixed or ceiling price, is the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price in respect of each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price in respect of each calculation period.


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

A three-way collar consists of a two-way collar contract combined with a put option contract sold by us with a strike price below the floor price of the two-way collar.  We receive price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, we receive the cash market price plus the delta between the two put option strike prices. This type of instrument allows us to capture more value in a rising commodity price environment, but limits our benefits in a downward commodity price environment.

We also enter into forward contracts or swap agreements to hedge exposure to interest rate risk.

While these instruments mitigate the cash flow risk of future reductions in commodity prices or increases in interest rates, they may also curtail benefits from future increases in commodity prices or decreases in interest rates.

See Note 5. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.

Counterparty Credit Risk   Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of highly rated major banks or market participants, and we control our level of financial exposure. Our commodity derivative contracts are executed 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 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 or higher interest rates, and could incur a loss.

Interest Rate Derivative Instrument In January 2010, we entered into an interest rate forward starting swap to effectively fix the cash flows related to interest payments on our anticipated debt issuance. On February 15, 2011 we settled the interest rate swap, which had a net liability position of $40 million. Approximately $26 million, net of tax, will remain in accumulated other comprehensive loss (AOCL) and be reclassified into interest expense over the term of the note. The ineffective portion of the interest rate swap was de minimis. See Note 3. Debt.

Unsettled Derivative Instruments   As of March 31, 2011, we had entered into the following crude oil derivative instruments:  

             
Swaps
   
Collars
 
Period
Type of Contract
Index
 
Bbls Per Day
   
Weighted Average Fixed Price
   
Weighted Average Short Put Price
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
2011
Swaps
    NYMEX WTI (1)
    5,000     $ 85.52     $ -     $ -     $ -  
2011
Two-Way Collars
 NYMEX WTI
    13,000       -       -       80.15       94.63  
2011
Three-Way Collars
 NYMEX WTI
    12,000       -       58.33       78.33       100.71  
2012
Swaps
 NYMEX WTI
    5,000       91.84       -       -       -  
2012
Swaps
Dated Brent
    8,000       89.06       -       -       -  
2012
Three-Way Collars
 NYMEX WTI
    23,000       -       61.09       83.04       101.66  
2012
Three-Way Collars
 Dated Brent
    3,000       -       70.00       95.83       105.00  
2013
Swaps
 Dated Brent
    3,000       98.03       -       -       -  
2013
Three-Way Collars
 NYMEX WTI
    5,000       -       65.00       85.00       113.63  
2013
Three-Way Collars
 Dated Brent
    12,000       -       75.83       97.50       125.93  

(1)           West Texas Intermediate


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

As of March 31, 2011, we had entered into the following natural gas derivative instruments:

             
Swaps
   
Collars
 
Period
Type of Contract
Index
 
MMBtu Per Day
   
Weighted Average Fixed Price
   
Weighted Average Short Put Price
   
Weighted Average Floor Price
   
Weighted Average Ceiling Price
 
2011
Swaps
   NYMEX HH(1)
    25,000     $ 6.41     $ -     $ -     $ -  
2011
Two-Way Collars
NYMEX HH
    140,000       -       -       5.95       6.82  
2011
Three-Way Collars
NYMEX HH
    50,000       -       4.00       5.00       6.70  
2012
Swaps
NYMEX HH
    30,000       5.10       -       -       -  
2012
Three-Way Collars
NYMEX HH
    110,000       -       4.44       5.25       6.66  
2013
Swaps
NYMEX HH
    30,000       5.25       -       -       -  
2013
Three-Way Collars
NYMEX HH
    50,000       -       4.00       5.25       5.59  

(1)
Henry Hub

As of March 31, 2011, we had entered into the following natural gas basis swaps:

Period
Index
Index Less Differential
 
MMBtu Per Day
   
Weighted Average Differential
 
2011
   IFERC CIG(1)
 NYMEX HH
    140,000     $ (0.70 )
2012
IFERC CIG
 NYMEX HH
    150,000       (0.52 )

(1)
Colorado Interstate Gas – Northern System

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,
 
   
2011
 
2010
 
2011
 
2010
 
   
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
  $ 2  
Current Assets
  $ 62  
Current Liabilities
  $ 119  
Current Liabilities
  $ 24  
   
Noncurrent Assets
   
-
 
Noncurrent Assets
   
-
 
Noncurrent Liabilities
   
200
 
Noncurrent Liabilities
   
51
 
                                           
Interest Rate Derivative Instruments
(Designated as Hedging Instruments)
 
Current Assets
    -  
Current Assets
    -  
Current Liabilities
    -  
Current Liabilities
    63  
Total
      $ 2       $ 62       $ 319       $ 138  


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 March 31,
 
   
2011
   
2010
 
(millions)
           
Realized Mark-to-Market (Gain) Loss
  $ (17 )   $ 2  
Unrealized Mark-to-Market (Gain) Loss
    303       (147 )
Total (Gain) Loss on Commodity Derivative Instruments
  $ 286     $ (145 )

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,
 
   
2011
   
2010
   
2011
   
2010
 
(millions)
                   
Commodity Derivative Instruments in Previously Designated Cash Flow Hedging Relationships (1)
                       
Crude Oil Derivative Instruments
  $ -     $ -     $ -     $ 5  
Natural Gas Derivative Instruments
    -       -       -       1  
                                 
Interest Rate Derivative Instruments in Cash Flow Hedging Relationships
    (23 )     11       -       -  
Total
  $ (23 )   $ 11     $ -     $ 6  

(1)
Includes effect of commodity derivative instruments previously accounted for as cash flow hedges. All net derivative gains and losses that were deferred in AOCL as of January 1, 2008, as a result of previous cash flow hedge accounting, had been reclassified to earnings by December 31, 2010.

AOCL at March 31, 2011 included deferred losses of $28 million, net of tax, related to interest rate derivative instruments. This amount will be reclassified into earnings as an adjustment to interest expense over the terms of our Senior Notes due April 2014 and March 2041.  Approximately $2 million of deferred losses (net of tax) will be reclassified to earnings during the next 12 months and will be recorded as an increase in interest expense.

Note 5.  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, two-way and three-way collars and basis swaps. We estimate the fair values of these instruments based on published forward commodity price curves 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 nonperformance 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 values of the put options sold (for three-way collars) and the contract floors and ceilings (for two-way and three-way collars) using an option pricing model which takes into account market volatility, market prices and contract terms. See Note 4. Derivative Instruments and Hedging Activities.


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

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 nonperformance 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. See Note 4. Derivative Instruments and Hedging Activities.

Deferred Compensation Liability   The value is dependent 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)
                             
March 31, 2011
                                       
Financial Assets
                                       
Mutual Fund Investments
  $ 117     $ -     $ -     $ -     $ 117  
Commodity Derivative Instruments
    -       80       -       (78 )     2  
Financial Liabilities
                                       
Commodity Derivative Instruments
    -       (397 )     -       78       (319 )
Portion of Deferred Compensation
                                       
Liability Measured at Fair Value
    (191 )     -       -       -       (191 )
December 31, 2010
                     
Financial Assets
                                       
Mutual Fund Investments
  $ 112     $ -     $ -     $ -     $ 112  
Commodity Derivative Instruments
    -       106       -       (44 )     62  
Financial Liabilities
                                       
Commodity Derivative Instruments
    -       (119 )     -       44       (75 )
Interest Rate Derivative Instrument
    -       (63 )     -               (63 )
Portion of Deferred Compensation
                                       
Liability Measured at Fair Value
    (178 )     -       -       -       (178 )

(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.


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

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 carrying amount of floating-rate debt approximates fair value because the interest rate paid on such debt is set for periods of three months or less. See Note 3. Debt.

Fair value information regarding our debt is as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
(millions)
                       
Long-Term Debt, Net of Unamortized Discount (1)
  $ 2,472     $ 2,828     $ 1,977     $ 2,302  

(1)
Excludes FPSO lease obligation.

Note 6.  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, 2011
 
(millions)
     
Capitalized Exploratory Well Costs, Beginning of Period
  $ 426  
Additions to Capitalized Exploratory Well Costs Pending Determination of Proved Reserves
    80  
Reclassified to Proved Oil and Gas Properties Based on Determination of Proved Reserves (1)
    (18 )
Capitalized Exploratory Well Costs Charged to Expense
    (15 )
Capitalized Exploratory Well Costs, End of Period
  $ 473  

(1)
Includes $13 million related to the Flyndre project in the North Sea.

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,
 
   
2011
   
2010
 
(millions)
           
Exploratory Well Costs Capitalized for a Period of One Year or Less
  $ 171     $ 148  
Exploratory Well Costs Capitalized for a Period Greater Than One Year After Completion of Drilling
    302       278  
Balance at End of Period
  $ 473     $ 426  
Number of Projects with Exploratory Well Costs That Have Been Capitalized for a Period Greater Than One Year After Completion of Drilling
    8       9  


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

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, 2011:

    Suspended Since  
   
Total
   
2010
   
2009
   
2008 & Prior
 
(millions)
                       
Project
                       
Blocks O and I (West Africa)
  $ 102     $ 3     $ 14     $ 85  
YoYo (West Africa)
    34       -       -       34  
Dalit (Israel)
    20       -       20       -  
Deep Blue (Deepwater Gulf of Mexico)
    52       33       19       -  
Gunflint (Deepwater Gulf of Mexico)
    52       -       3       49  
Redrock (Deepwater Gulf of Mexico)
    17       -       -       17  
Selkirk (North Sea)
    20       -       -       20  
Other
    5       -       2       3  
Total Exploratory Well Costs Capitalized for a Period Greater Than One Year After Completion of Drilling
  $ 302     $ 36     $ 58     $ 208  

Blocks O and I (West Africa)   Blocks O and I are crude oil, natural gas and natural gas condensate discoveries located offshore Equatorial Guinea.   We are evaluating future crude oil and natural gas projects and are currently appraising the Diega/Carmen area, offshore Equatorial Guinea.

YoYo (West Africa)   The YoYo mining concession is a 2007 natural gas and condensate discovery located offshore Cameroon.  We recently completed a 3-D seismic acquisition, and results are being processed for further drilling potential.

Dalit (Israel)   Dalit is a 2009 natural gas discovery located offshore Israel. We are currently working with our partners on a cost-effective development plan.

Deep Blue (Deepwater Gulf of Mexico)  Deep Blue (Green Canyon Block 723) was a significant test well, which began drilling during 2009.  When the Deepwater Gulf of Mexico moratorium was announced in May 2010, we were required to suspend sidetrack drilling activities.  Once a drilling permit is approved, we plan to resume exploration activities.

Gunflint (Deepwater Gulf of Mexico)   Gunflint (Mississippi Canyon Block 948) is a 2008 crude oil discovery. Our plans to drill one or two appraisal wells in 2010 were delayed by the Deepwater Gulf of Mexico moratorium. Once a drilling permit is approved, we plan to drill one or two appraisal wells. We are also reviewing host platform options.

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). We are in the process of tying back Raton South to a host platform at Viosca Knoll Block 900.  We plan to tie back Redrock after Raton South commences production, which is currently expected to occur by the end of 2011.

Selkirk (North Sea)   The Selkirk project is 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.

Note 7.  Asset Retirement Obligations

Asset retirement obligations consist primarily of estimated costs of dismantlement, removal, site reclamation and similar activities associated with our oil and gas properties. Changes in asset retirement obligations were as follows:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
(millions)
           
Asset Retirement Obligations, Beginning Balance
  $ 253     $ 232  
Liabilities Incurred
    1       14  
Liabilities Settled
    (9 )     (4 )
Revision of Estimate
    4       4  
Accretion Expense
    5       4  
Asset Retirement Obligations, Ending Balance
  $ 254     $ 250  


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

Liabilities settled in 2011 related primarily to Deepwater Gulf of Mexico and Gulf of Mexico shelf properties.

Liabilities incurred in 2010 were due to the Central DJ Basin asset acquisition.

Accretion expense is included in DD&A expense in the consolidated statements of operations.

Note 8.   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,
 
   
2011
   
2010
 
(millions)
           
Service Cost
  $ 4     $ 4  
Interest Cost
    3       3  
Expected Return on Plan Assets
    (4 )