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Noble Energy 10-Q 2012
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, 2012

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

For the transition period from _____to_____

Commission file number: 001-07964
 
Graphic
 
NOBLE ENERGY, INC.
(Exact name of registrant as specified in its charter)
           Delaware
 
73-0785597
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
100 Glenborough Drive, Suite 100
   
Houston, Texas
 
77067
(Address of principal executive offices)
 
(Zip Code)
(281) 872-3100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No 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 6, 2012, there were 177,787,421 shares of the registrant’s common stock,
par value $3.33 1/3 per share, outstanding.
 


 
 

 
 
 
Part I. Financial Information 3
   
Item 1. Financial Statements  3
   
Consolidated Statements of Operations
   
Consolidated Statements of Comprehensive Income
   
Consolidated Balance Sheets   
   
Consolidated Statements of Cash Flows    
   
Consolidated Statements of Shareholders' Equity
   
Notes to Consolidated Financial Statements 
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk    35 
   
Item 4.  Controls and Procedures 36 
   
Part II. Other Information   36 
   
Item 1.  Legal Proceedings  36 
   
Item 1A.  Risk Factors  36 
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 
   
Item 3. Defaults Upon Senior Securities     37 
   
Item 4. Mine Safety Disclosures   37 
   
Item 5.  Other Information 37 
   
Item 6.  Exhibits  37 
   
Signatures 37 
   
Index to Exhibits   38 
 

 
Noble Energy, Inc.
(millions, except per share amounts)
(unaudited)

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Revenues
           
Oil, Gas and NGL Sales
  $ 1,112     $ 830  
Income from Equity Method Investees
    53       48  
Other Revenues
    -       21  
Total
    1,165       899  
Costs and Expenses
               
Production Expense
    179       142  
Exploration Expense
    63       70  
Depreciation, Depletion and Amortization
    312       221  
General and Administrative
    98       83  
Other Operating (Income) Expense, Net
    12       36  
Total
    664       552  
Operating Income
    501       347  
Other (Income) Expense
               
Loss on Commodity Derivative Instruments
    96       286  
Interest, Net of Amount Capitalized
    32       16  
Other Non-Operating (Income) Expense, Net
    (1 )     8  
Total
    127       310  
Income Before Income Taxes
    374       37  
Income Tax Provision
    111       23  
Net Income
  $ 263     $ 14  
                 
Earnings Per Share, Basic
  $ 1.48     $ 0.08  
Earnings Per Share, Diluted
    1.47       0.08  
                 
Weighted Average Number of Shares Outstanding, Basic
    177       176  
Weighted Average Number of Shares Outstanding, Diluted
    180       178  

The accompanying notes are an integral part of these financial statements.
 
 
Noble Energy, Inc.
(in millions)
(unaudited)
 
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Net Income
  $ 263     $ 14  
Other Items of Comprehensive Income (Loss)
               
Interest Rate Cash Flow Hedges
               
Unrealized Change in Fair Value
    -       23  
Less Tax Provision
    -       (8 )
Net Change in Other
    2       2  
Other Comprehensive Income
    2       17  
Comprehensive Income
  $ 265     $ 31  

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

Noble Energy, Inc.
(millions)
(unaudited)

   
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
 
Current Assets
           
Cash and Cash Equivalents
  $ 1,143     $ 1,455  
Accounts Receivable, Net
    919       783  
Other Current Assets
    330       180  
Total Current Assets
    2,392       2,418  
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
    18,527       17,703  
Property, Plant and Equipment, Other
    317       294  
Total Property, Plant and Equipment, Gross
    18,844       17,997  
Accumulated Depreciation, Depletion and Amortization
    (5,460 )     (5,215 )
Total Property, Plant and Equipment, Net
    13,384       12,782  
Goodwill
    696       696  
Other Noncurrent Assets
    592       548  
Total Assets
  $ 17,064     $ 16,444  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current Liabilities
               
Accounts Payable - Trade
  $ 1,457     $ 1,343  
Other Current Liabilities
    951       925  
Total Current Liabilities
    2,408       2,268  
Long-Term Debt
    4,088       4,100  
Deferred Income Taxes, Noncurrent
    2,216       2,059  
Other Noncurrent Liabilities
    819       752  
Total Liabilities
    9,531       9,179  
                 
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; 198 Million and 197 Million Shares Issued, Respectively
    659       656  
Additional Paid in Capital
    2,549       2,497  
Accumulated Other Comprehensive Loss
    (98 )     (100 )
Treasury Stock, at Cost; 19 Million Shares
    (651 )     (638 )
Retained Earnings
    5,074       4,850  
Total Shareholders’ Equity
    7,533       7,265  
Total Liabilities and Shareholders’ Equity
  $ 17,064     $ 16,444  

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

Noble Energy, Inc.
(millions)
(unaudited)

 
 
Three Months Ended
March 31,
 
 
 
2012
   
2011
 
Cash Flows From Operating Activities
 
 
   
 
 
Net Income
  $ 263     $ 14  
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
               
Depreciation, Depletion and Amortization
    312       221  
Dry Hole Cost
    1       22  
Deferred Income Taxes
    32       11  
Dividends (Income) from Equity Method Investees, Net
    (29 )     (23 )
Unrealized Loss on Commodity Derivative Instruments
    73       303  
Other Adjustments for Noncash Items Included in Income
    30       36  
Changes in Operating Assets and Liabilities
               
(Increase) in Accounts Receivable
    (135 )     (9 )
(Increase) in Other Current Assets
    (5 )     (17 )
Increase in Accounts Payable
    190       28  
Increase (Decrease) in Current Income Taxes Payable
    5       (71 )
(Decrease) in Other Current Liabilities
    (26 )     (54 )
Other Operating Assets and Liabilities, Net
    30       23  
Net Cash Provided by Operating Activities
    741       484  
                 
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (1,018 )     (578 )
Additions to Equity Method Investments
    (14 )     -  
Proceeds from Divestitures
    -       3  
Net Cash Used in Investing Activities
    (1,032 )     (575 )
                 
Cash Flows From Financing Activities
               
Exercise of Stock Options
    27       23  
Excess Tax Benefits from Stock-Based Awards
    12       8  
Dividends Paid, Common Stock
    (39 )     (32 )
Purchase of Treasury Stock
    (13 )     (16 )
Proceeds from Credit Facilities
    -       120  
Repayment of Credit Facilities
    -       (470 )
Proceeds from Issuance of Senior Long-Term Debt, Net
    -       836  
Settlement of Interest Rate Derivative Instrument
    -       (40 )
Repayment of Capital Lease Obligation
    (8 )     -  
Net Cash Provided By (Used In) Financing Activities
    (21 )     429  
Increase (Decrease) in Cash and Cash Equivalents
    (312 )     338  
Cash and Cash Equivalents at Beginning of Period
    1,455       1,081  
Cash and Cash Equivalents at End of Period
  $ 1,143     $ 1,419  
 
The accompanying notes are an integral part of these financial statements.
 
 
Noble Energy, Inc.
(millions)
 (unaudited)

   
Common
Stock
   
Additional
Paid in
Capital
   
Acumulated Other
Comprehensive
Loss
   
Treasury
Stock at
Cost
   
Retained
Earnings
   
Total
Shareholders'
Equity
 
December 31, 2011
  $ 656     $ 2,497     $ (100 )   $ (638 )   $ 4,850     $ 7,265  
Net Income
    -       -       -       -       263       263  
Stock-based Compensation
    -       16       -       -       -       16  
Exercise of Stock Options
    2       25       -       -       -       27  
Tax Benefits Related to Exercise of Stock Options
    -       12       -       -       -       12  
Restricted Stock Awards, Net
    1       (1 )     -       -       -       -  
Dividends (22 cents per share)
    -       -       -       -       (39 )     (39 )
Changes in Treasury Stock, Net
    -       -       -       (13 )     -       (13 )
Net Change in Other
    -       -       2       -       -       2  
March 31, 2012
  $ 659     $ 2,549     $ (98 )   $ (651 )   $ 5,074     $ 7,533  
                                                 
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  

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

 
Note 1.  Organization and Nature of Operations
Noble Energy, Inc. (Noble Energy, we or us) is a leading independent energy company engaged in worldwide crude oil and natural gas exploration and production. Our core operating areas are onshore U.S., primarily in the DJ Basin and Marcellus Shale, 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, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 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 ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.
 
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,
 
 
 
2012
   
2011
 
(millions)
           
Other Revenues (1)
  $ -     $ 21  
Production Expense
               
Lease Operating Expense
  $ 118     $ 92  
Production and Ad Valorem Taxes
    38       32  
Transportation and Gathering Expense
    23       18  
Total
  $ 179     $ 142  
Other Operating (Income) Expense, Net
               
Deepwater Gulf of Mexico Moratorium Expense (2)
  $ -     $ 18  
Electricity Generation Expense (1)
    -       17  
Other, Net
    12       1  
Total
  $ 12     $ 36  
Other Non-Operating (Income) Expense, Net
               
Deferred Compensation Expense (3)
  $ 3     $ 10  
Interest Income
    -       (3 )
Other (Income) Expense, Net
    (4 )     1  
Total
  $ (1 )   $ 8  
 
(1)
Other revenues for first quarter 2011 consist of electricity 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 depreciation and changes in the allowance for doubtful accounts. In May 2011, we transferred our assets in Ecuador to the Ecuadorian government.
 
(2)
Amount relates to rig stand-by expense incurred prior to receiving a permit to resume drilling activities in the deepwater Gulf of Mexico in 2011. 
 
(3)
Amounts represent increases in the fair value of shares of our common stock held in a rabbi trust.
 
 
Balance Sheet Information   Other balance sheet information is as follows:
   
March 31,
   
December 31,
 
 
 
2012
   
2011
 
(millions)
           
Accounts Receivable, Net
           
Commodity Sales
  $ 467     $ 356  
Joint Interest Billings
    344       313  
Other
    117       123  
Allowance for Doubtful Accounts
    (9 )     (9 )
Total
  $ 919     $ 783  
Other Current Assets
               
Inventories, Current
  $ 77     $ 78  
Commodity Derivative Assets, Current
    17       10  
Deferred Income Taxes, Net, Current (1)
    159       41  
Probable Insurance Claims (2)
    22       15  
Prepaid Expenses and Other Current Assets, Current
    55       36  
Total
  $ 330     $ 180  
Other Noncurrent Assets
               
Equity Method Investments
  $ 376     $ 329  
Mutual Fund Investments
    108       99  
Commodity Derivative Assets, Noncurrent
    22       37  
Other Assets, Noncurrent
    86       83  
Total
  $ 592     $ 548  
Other Current Liabilities
               
Production and Ad Valorem Taxes
  $ 123     $ 121  
Commodity Derivative Liabilities, Current
    119       76  
Income Taxes Payable
    131       127  
Asset Retirement Obligations, Current
    41       33  
Interest Payable
    41       56  
CONSOL Installment Payment (3)
    325       324  
Current Portion of FPSO Lease Obligation
    48       45  
Other
    123       143  
Total
  $ 951     $ 925  
Other Noncurrent Liabilities
               
Deferred Compensation Liabilities, Noncurrent
  $ 237     $ 222  
Asset Retirement Obligations, Noncurrent
    350       344  
Accrued Benefit Costs, Noncurrent
    90       88  
Commodity Derivative Liabilities, Noncurrent
    29       7  
Other
    113       91  
Total
  $ 819     $ 752  
 
 (1)
Increase from December 31, 2011 is due to reclassification of deferred income tax assets from long-term to short-term as certain foreign entities are estimated to begin utilizing net operating loss carryforwards in 2012 and 2013.
 
 (2)
Amounts represent the costs incurred to date of the Leviathan-2 appraisal well in excess of the insurance deductible and insurance proceeds received to date.
 
 (3)
See Note 3. Acquisitions and Note 4. Debt.
 
Changes in Shareholders’ Equity   On April 24, 2012, our shareholders voted to approve an amendment to the Company’s Certificate of Incorporation to (i) increase the number of authorized shares of our common stock from 250 million to 500 million shares and (ii) reduce the par value of the Company’s common stock from $3.33 1/3 per share to $0.01 per share.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
Recently Issued Accounting Standards Updates   In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 clarifies application of fair value measurement and disclosure requirements and is effective for annual and interim periods beginning after December 15, 2011. As of March 31, 2012, we have adopted the provisions of ASU 2011-04, which did not impact our consolidated financial statements. The only impact was to our fair value disclosures.
 
In December 2011, the FASB issued Accounting Standards Update No. 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). ASU 2011-11 requires that an entity disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013. We are currently evaluating the provisions of ASU 2011-11 and assessing the impact, if any, it may have on our financial position and results of operations.
 
Note 3.   Acquisitions
 
Marcellus Shale Joint Venture   On September 30, 2011, we closed an agreement with a subsidiary of CONSOL Energy Inc. (CONSOL) for the development of Marcellus Shale properties in southwest Pennsylvania and northwest West Virginia. Under the agreement, we acquired a 50% interest in approximately 628,000 net undeveloped acres, certain producing properties, and existing infrastructure, such as pipeline and gathering facilities, for approximately $1.3 billion, including post-closing adjustments. We and CONSOL also formed CONE Gathering LLC (CONE) to own and operate the existing and future infrastructure. We have paid a total of $596 million as of March 31, 2012, and, other than post-closing adjustments, the remainder will be paid in two annual installments. See Note 4. Debt.
 
As part of the joint venture transaction, we agreed to fund one-third of CONSOL’s 50% working interest share of future drilling and completion costs, capped at $400 million each year, up to approximately $2.1 billion (CONSOL Carried Cost Obligation), which is expected to be paid out over approximately eight years or more. The CONSOL Carried Cost Obligation is suspended if average Henry Hub natural gas prices fall and remain below $4.00 per MMBtu in any three consecutive month period and will remain suspended until average Henry Hub natural gas prices are above $4.00 per MMBtu for three consecutive months. The CONSOL Carried Cost Obligation is currently suspended due to low natural gas prices.
 
As a result of the transaction, we recorded the following:

 
 
March 31,
 
 
 
2012
 
(millions)
     
Unproved Oil and Gas Properties
  $ 853  
Proved Oil and Gas Properties
    386  
Investment in CONE Gathering LLC
    69  
Total Assets Acquired (1)
  $ 1,308  

(1) Total reflects impact of $17 million imputed discount on CONSOL installment payments.
 
We used an income approach to estimate the fair value of the proved oil and gas properties as of the acquisition date. 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 reserves prepared by our qualified petroleum engineers;
 
 
management’s estimates of future commodity prices based on NYMEX Henry Hub natural gas futures prices and adjusted for estimated location and quality differentials;
 
 
estimated future production rates based on our experience with similar properties which we operate; and
 
 
estimated timing and amounts of future operating and development costs based on our experience with similar properties which we operate.
 
We discounted the resulting future net cash flows using a market-based weighted average cost of capital rate determined appropriate at the acquisition date. The fair value of the proved producing properties is considered a Level 3 fair value measurement.
 
Certain data necessary to complete the final purchase price allocation for proved oil and gas properties 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.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
Note 4. Debt
 
Our debt consists of the following:
 
   
March 31,
   
December 31,
 
 
 
2012
   
2011
 
 
 
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
(millions, except percentages)
                       
Credit Facility, due October 14, 2016 (1)
  $ -       -     $ -       -  
CONSOL Installment Payments, due September 30, 2012 and 2013
    656       1.76 % (2)     656       1.76 % (2)
FPSO Lease Obligation
    344       -       355       -  
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 %
4.15% Senior Notes, due December 15, 2021
    1,000       4.15 %     1,000       4.15 %
7¼% Senior 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 %     850       6.00 %
7¼% Senior Debentures, due August 1, 2097
    84       7.25 %     84       7.25 %
Total
    4,484               4,495          
Unamortized Discount
    (23 )             (26 )        
Total Debt, Net of Discount
    4,461               4,469          
Less Amounts Due Within One Year
                               
CONSOL Installment Payment, due September 30, 2012, net of discount
    (325 )             (324 )        
FPSO Lease Obligation
    (48 )             (45 )        
Long-Term Debt Due After One Year
  $ 4,088             $ 4,100          
 
(1)  Our Credit Agreement provides for a $3.0 billion unsecured five-year revolving credit facility. The Credit Facility is available for general corporate purposes.
 
(2) Imputed rate.
 
See Note 6. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our debt.
 
Note 5.  Derivative Instruments and Hedging Activities
 
Objective and Strategies for Using Derivative Instruments   In order to mitigate the effect of 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.
 
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 may enter into forward contracts to hedge anticipated exposure to interest rate risk associated with public debt financing.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
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 6. 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 monitor and manage 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 March 2011 debt issuance. During first quarter 2011, the fair value of the swap increased and we recognized a gain of $23 million, net of tax, in AOCL. On February 15, 2011 we settled the interest rate swap, which had a net liability position of $40 million at the time of settlement. Approximately $26 million, net of tax, was recorded in accumulated other comprehensive loss (AOCL) and is being reclassified to interest expense over the term of the notes. The ineffective portion of the interest rate swap was de minimis.
 
Unsettled Derivative Instruments   As of March 31, 2012, we had entered into the following crude oil derivative instruments:
 
             
Swaps
   
Collars
 
Settlement
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
 
Instruments Entered Into as of March 31, 2012
                         
2012
Swaps
NYMEX WTI  (1)
    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
Two-Way Collars
 NYMEX WTI
    5,000       -       -       95.00       115.00  
2013
Three-Way Collars
 NYMEX WTI
    5,000       -       65.00       85.00       113.63  
2013
Three-Way Collars
 Dated Brent
    26,000       -       82.88       100.86       127.32  
2014
Swaps
Dated Brent
    3,000       107.15       -       -       -  
2014
Three-Way Collars
 Dated Brent
    10,000       -       85.00       98.50       129.24  
 
(1)
West Texas Intermediate
 
As of March 31, 2012, we had entered into the following natural gas derivative instruments:
 
             
Swaps
   
Collars
 
Settlement
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
 
Instruments Entered Into as of March 31, 2012
                             
2012
Swaps
NYMEX HH (1)
    30,000     $ 5.10     $ -     $ -     $ -  
2012
Two-Way Collars
NYMEX HH
    40,000       -       -       3.25       5.14  
2012
Three-Way Collars
NYMEX HH
    110,000       -       4.44       5.25       6.66  
2013
Swaps
NYMEX HH
    30,000       5.25       -       -       -  
2013
Two-Way Collars
NYMEX HH
    40,000       -       -       3.25       5.14  
2013
Three-Way Collars
NYMEX HH
    100,000       -       3.88       4.75       5.63  
 
(1)
Henry Hub
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
As of March 31, 2012, we had entered into the following natural gas basis swaps:
 
Settlement
Period
Index
Index Less Differential
 
MMBtu Per Day
   
Weighted Average
Differential
 
2012
IFERC CIG (1)
 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,
 
   
2012
 
2011
 
2012
 
2011
 
 
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
 Value
 
Balance Sheet Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
Value
 
(millions)
                 
 
             
Commodity Derivative Instruments
 
Current
Assets
  $ 17  
Current Assets
  $ 10  
Current Liabilities
  $ 119  
Current Liabilities
  $ 76  
   
Noncurrent Assets
    22  
Noncurrent Assets
    37  
Noncurrent Liabilities
    29  
Noncurrent Liabilities
    7  
Total
 
 
  $ 39  
 
  $ 47  
 
  $ 148  
 
  $ 83  
 
The effect of derivative instruments on our consolidated statements of operations was as follows:
 
 
 
Three Months Ended
March 31,
 
 
 
2012
   
2011
 
(millions)
           
Realized Mark-to-Market (Gain) Loss
  $ 23     $ (17 )
Unrealized Mark-to-Market Loss
    73       303  
Total Loss on Commodity Derivative Instruments
  $ 96     $ 286  
 
AOCL at March 31, 2012 included deferred losses of $26 million, net of tax, related to interest rate derivative instruments. This amount will be reclassified to 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 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, 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 5. Derivative Instruments and Hedging Activities.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
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, 2012
 
 
   
 
   
 
   
 
   
 
 
Financial Assets
 
 
   
 
   
 
   
 
   
 
 
Mutual Fund Investments
  $ 108     $ -     $  -     $ -     $ 108  
Commodity Derivative Instruments
    -       105       -       (66 )     39  
Financial Liabilities
                                       
Commodity Derivative Instruments
    -       (214 )     -       66       (148 )
Portion of Deferred Compensation
                                       
Liability Measured at Fair Value
    (172 )     -       -       -       (172 )
December 31, 2011
 
 
                 
Financial Assets
                                       
Mutual Fund Investments
  $ 99     $ -     $ -     $ -     $ 99  
Commodity Derivative Instruments
    -       99       -       (52 )     47  
Financial Liabilities
                                       
Commodity Derivative Instruments
    -       (135 )     -       52       (83 )
Portion of Deferred Compensation Liability
                                       
Measured at Fair Value
    (162 )     -       -       -       (162 )
 
(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.
 
Additional Fair Value Disclosures
 
Debt   The fair value of fixed-rate, public debt is estimated based on the published market prices for the same or similar issues. As such, we consider the fair value of our public fixed rate debt to be a level 1 measurement on the fair value hierarchy.  The carrying amounts of floating-rate debt approximate fair value because the interest rate paid on such debt was set for periods of three months or less. The carrying amounts of the CONSOL installment payments approximate fair value because they have been discounted at the prevailing market rates for similar instruments. As such, we consider the fair value of our floating-rate debt and CONSOL installment payments to be level 2 measurements on the fair value hierarchy. See Note 4. Debt. Fair value information regarding our debt is as follows:
 
   
March 31,
   
December 31,
 
 
 
2012
   
2011
 
 
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
(millions)
                       
Long-Term Debt, Net of Unamortized Discount (1)
  $ 4,117     $ 4,606     $ 4,114     $ 4,733  
 
(1)
Excludes Aseng FPSO lease obligation. No floating rate debt was outstanding at March 31, 2012 or December 31, 2011. See Note 4. Debt.
 
Note 7.  Capitalized Exploratory Well Costs
 
We capitalize exploratory well costs until a determination is made that the well has found proved reserves or is deemed noncommercial. If a well is deemed to be noncommercial, the well costs are immediately charged to exploration expense.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
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, 2012
 
(millions)
       
Capitalized Exploratory Well Costs, Beginning of Period
  $
696
 
Additions to Capitalized Exploratory Well Costs Pending Determination of Proved Reserves
   
        93
 
Reclassified to Proved Oil and Gas Properties Based on Determination of Proved Reserves
   
           -
 
Capitalized Exploratory Well Costs Charged to Expense
   
           -
 
Capitalized Exploratory Well Costs, End of Period
 
$
789
 
 
The following table provides an aging of capitalized exploratory well costs based on the date that drilling commenced, and the number of projects that have been capitalized for a period greater than one year:
 
   
March 31,
   
December 31,
 
 
 
2012
   
2011
 
(millions)
 
 
       
Exploratory Well Costs Capitalized for a Period of One Year or Less
  $ 345     $ 318  
Exploratory Well Costs Capitalized for a Period Greater Than One Year Since Commencement of Drilling
    444       378  
Balance at End of Period
  $ 789     $ 696  
Number of Projects with Exploratory Well Costs That Have Been Capitalized for a Period Greater Than One Year Since Commencement of Drilling
    10       9  
 
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 commencement of drilling as of March 31, 2012:

 
 
 
   
Suspended Since
 
 
 
Total
   
2011
   
2010
   
2009 &
Prior
 
(millions)
 
 
   
 
   
 
   
 
 
Country/Project
 
 
   
 
   
 
   
 
 
Offshore Equatorial Guinea
 
 
   
 
   
 
   
 
 
Blocks O and I
  $ 114     $ 2     $ 6     $ 106  
Offshore Cameroon
                               
YoYo
    41       1       2       38  
Offshore Israel
                               
Leviathan
    86       45       41       -  
Dalit
    22       -       1       21  
Deepwater Gulf of Mexico
                               
Gunflint
    70       11       3       56  
Deep Blue
    75       2       54       19  
North Sea
                               
Selkirk
    22       -       1       21  
Other
                               
3 projects of $10 million or less each
    14       6       8       -  
Total
  $ 444     $ 67     $ 116     $ 261  

Blocks O and I   Blocks O and I are crude oil, natural gas and natural gas condensate discoveries.  During the second quarter of 2011, we drilled the successful Diega appraisal well which encountered both crude oil and natural gas. We have drilled two sidetracks, each of which encountered hydrocarbons. We are currently finalizing our appraisal of Diega and are evaluating regional development scenarios.
 
YoYo   YoYo is a 2007 natural gas and condensate discovery. During 2011 we acquired and processed additional 3-D seismic information and are continuing evaluations for future drilling potential.
 
Leviathan   Leviathan is a 2010 natural gas discovery. We are continuing to evaluate the discovery with the successful drilling of the Leviathan-3 appraisal well. We will require an additional one or two appraisal wells to further define Leviathan’s natural gas areal extent in order to determine the best development option including subsea tieback to existing shallow water platform, semi-submersible platform, FPSO, or LNG. 
 
In January 2012, we resumed drilling at the Leviathan-1 well in order to evaluate two additional intervals for the existence of crude oil. Results from these deeper tests are expected during the second quarter of 2012.
 
 
Noble Energy, Inc.
Notes to Consolidated Financial Statements
 
Dalit   Dalit is a 2009 natural gas discovery. We are currently working with our partners on a cost-effective development plan.
 
Gunflint   Gunflint (Mississippi Canyon Block 948) is a 2008 crude oil discovery. We are currently drilling the first of up to three appraisal wells that we anticipate drilling to fully evaluate the extent of the reservoir. We are also reviewing host platform options including subsea tieback to an existing third-party host and construction of a new facility.
 
Deep Blue   Deep Blue (Green Canyon Block 723) was a significant test well which began drilling in 2009. When the Deepwater Moratorium was announced in May 2010, we were required to suspend side track drilling activities. We resumed drilling activities and found additional hydrocarbons in high quality reservoirs in 2011. We have completed the analysis of the data obtained from the side track well and are working with our existing and potential new partners regarding their participation in an appraisal well.
 
Selkirk   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 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,
 
 
 
2012
   
2011
 
(millions)
           
Asset Retirement Obligations, Beginning Balance
  $ 377     $ 253  
Liabilities Incurred
    6       1  
Liabilities Settled
    (2 )     (9 )
Revision of Estimate
    3