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Noble Energy 10-Q 2012
NBL-2012.9.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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
  
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 ý    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 ý    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 ý
 
As of October 9, 2012, there were 177,890,973 shares of the registrant’s common stock,
par value $0.01 per share, outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. Other Information  
 
 
Item 1.  Legal Proceedings 
 
 
Item 1A.  Risk Factors 
 
 
 
 
 
 
 
 
 
 
Item 6.  Exhibits 
 
 
 
 


2


Part I. Financial Information
Item 1. Financial Statements
Noble Energy, Inc.
Consolidated Statements of Operations
(millions, except per share amounts)
(unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Oil, Gas and NGL Sales
$
954

 
$
829

 
$
2,925

 
$
2,328

Income from Equity Method Investees
51

 
50

 
137

 
146

Other Revenues
1

 

 

 
33

Total
1,006

 
879

 
3,062

 
2,507

Costs and Expenses
 

 
 

 
 
 
 
Production Expense
158

 
142

 
492

 
406

Exploration Expense
95

 
56

 
322

 
193

Depreciation, Depletion and Amortization
368

 
215

 
987

 
619

General and Administrative
93

 
89

 
286

 
253

(Gain) Loss on Divestitures
(157
)
 

 
(167
)
 
(26
)
Asset Impairments

 

 
73

 
137

Other Operating (Income) Expense, Net
(1
)
 
2

 
19

 
45

Total
556

 
504

 
2,012

 
1,627

Operating Income
450

 
375

 
1,050

 
880

Other (Income) Expense
 

 
 

 
 
 
 
(Gain) Loss on Commodity Derivative Instruments
135

 
(322
)
 
(46
)
 
(179
)
Interest, Net of Amount Capitalized
36

 
14

 
95

 
51

Other Non-Operating (Income) Expense, Net
4

 
(16
)
 
2

 
(16
)
Total
175

 
(324
)
 
51

 
(144
)
Income from Continuing Operations Before Income Taxes
275

 
699

 
999

 
1,024

Income Tax Provision
111

 
208

 
312

 
297

Income from Continuing Operations
164

 
491

 
687

 
727

Discontinued Operations, Net of Tax
57

 
(50
)
 
89

 
22

Net Income
$
221

 
$
441

 
$
776

 
$
749

 
 
 
 
 
 
 
 
Earnings Per Share, Basic


 


 


 


Income from Continuing Operations
$
0.92

 
$
2.78

 
$
3.87

 
$
4.11

Discontinued Operations, Net of Tax
0.32

 
(0.28
)
 
0.50

 
0.14

Net Income
$
1.24

 
$
2.50

 
$
4.37

 
$
4.25

Earnings Per Share, Diluted
 
 
 
 
 
 
 
Income from Continuing Operations
$
0.91

 
$
2.67

 
$
3.81

 
$
3.99

Discontinued Operations, Net of Tax
0.32

 
(0.28
)
 
0.49

 
0.13

Net Income
$
1.23

 
$
2.39

 
$
4.30

 
$
4.12

 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding
 
 
 
 
 
 
 
   Basic
178

 
177

 
178

 
176

   Diluted
180

 
180

 
180

 
179


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

3


Noble Energy, Inc.
Consolidated Statements of Comprehensive Income
(millions)
(unaudited)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
Net Income
$
221

 
$
441

 
$
776

 
$
749

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
3

 
1

 
6

 
4

Other Comprehensive Income
3

 
1

 
6

 
19

Comprehensive Income
$
224

 
$
442

 
$
782

 
$
768


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


4


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

 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents
$
1,617

 
$
1,455

Accounts Receivable, Net
686

 
783

Other Current Assets
422

 
180

Total Current Assets
2,725

 
2,418

Property, Plant and Equipment
 

 
 

Oil and Gas Properties (Successful Efforts Method of Accounting)
18,422

 
19,057

Property, Plant and Equipment, Other
335

 
294

Total Property, Plant and Equipment, Gross
18,757

 
19,351

Accumulated Depreciation, Depletion and Amortization
(5,882
)
 
(6,569
)
Total Property, Plant and Equipment, Net
12,875

 
12,782

Goodwill
635

 
696

Other Noncurrent Assets
625

 
548

Total Assets
$
16,860

 
$
16,444

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 

 
 

Accounts Payable - Trade
$
1,243

 
$
1,343

Other Current Liabilities
1,014

 
925

Total Current Liabilities
2,257

 
2,268

Long-Term Debt
3,747

 
4,100

Deferred Income Taxes, Noncurrent
2,157

 
2,059

Other Noncurrent Liabilities
691

 
752

Total Liabilities
8,852

 
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 $0.01 and $3.33 1/3 per share; 500 Million and 250 Million Shares Authorized; 198 Million and 197 Million Shares Issued, Respectively
2

 
656

Additional Paid in Capital
3,244

 
2,497

Accumulated Other Comprehensive Loss
(94
)
 
(100
)
Treasury Stock, at Cost; 19 Million Shares
(651
)
 
(638
)
Retained Earnings
5,507

 
4,850

Total Shareholders’ Equity
8,008

 
7,265

Total Liabilities and Shareholders’ Equity
$
16,860

 
$
16,444


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


5


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

 
Nine Months Ended
September 30,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net Income
$
776

 
$
749

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
 

 
 

Depreciation, Depletion and Amortization
1,020

 
681

Asset Impairments
73

 
139

Dry Hole Cost
141

 
57

Deferred Income Taxes
57

 
147

Dividends (Income) from Equity Method Investees, Net
4

 
23

Unrealized Gain on Commodity Derivative Instruments
(74
)
 
(140
)
Gain on Divestitures
(83
)
 
(26
)
Other Adjustments for Noncash Items Included in Income
115

 
52

Changes in Operating Assets and Liabilities
 
 
 

(Increase) Decrease in Accounts Receivable
68

 
(7
)
Increase in Other Current Assets
(51
)
 
(17
)
Increase in Accounts Payable
122

 
131

Increase in Current Income Taxes Payable
51

 
52

Decrease in Other Current Liabilities
(13
)
 
(25
)
Other Operating Assets and Liabilities, Net
(35
)
 
(31
)
Net Cash Provided by Operating Activities
2,171

 
1,785

Cash Flows From Investing Activities
 

 
 

Additions to Property, Plant and Equipment
(2,685
)
 
(1,868
)
Marcellus Shale Acquisition

 
(519
)
Additions to Equity Method Investments
(35
)
 
(73
)
Proceeds from Divestitures
1,161

 
77

Net Cash Used in Investing Activities
(1,559
)
 
(2,383
)
Cash Flows From Financing Activities
 

 
 

Exercise of Stock Options
28

 
32

Excess Tax Benefits from Stock-Based Awards
14

 
11

Dividends Paid, Common Stock
(119
)
 
(104
)
Purchase of Treasury Stock
(13
)
 
(16
)
Proceeds from Credit Facilities
150

 
520

Repayment of Credit Facilities
(150
)
 
(470
)
Repayment of CONSOL Installment Loan
(328
)
 

Proceeds from Issuance of Senior Long-Term Debt, Net

 
836

Settlement of Interest Rate Derivative Instrument

 
(40
)
Repayment of Capital Lease Obligation
(32
)
 

Net Cash Provided By (Used In) Financing Activities
(450
)
 
769

Increase in Cash and Cash Equivalents
162

 
171

Cash and Cash Equivalents at Beginning of Period
1,455

 
1,081

Cash and Cash Equivalents at End of Period
$
1,617

 
$
1,252

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


6


Noble Energy, Inc.
Consolidated Statements of Shareholders' Equity
(millions)
(unaudited)

 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated 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

 

 

 

 
776

 
776

Stock-based Compensation

 
51

 

 

 

 
51

Exercise of Stock Options

 
28

 

 

 

 
28

Tax Benefits Related to Exercise of Stock Options

 
14

 

 

 

 
14

Dividends (66 cents per share)

 

 

 

 
(119
)
 
(119
)
Changes in Treasury Stock, Net

 

 

 
(13
)
 

 
(13
)
Change in Par Value
(654
)
 
654

 


 

 

 

Net Change in Other

 

 
6

 

 

 
6

September 30, 2012
$
2

 
$
3,244

 
$
(94
)
 
$
(651
)
 
$
5,507

 
$
8,008

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
$
651

 
$
2,385

 
$
(104
)
 
$
(624
)
 
$
4,540

 
$
6,848

Net Income

 

 

 

 
749

 
749

Stock-based Compensation

 
43

 

 

 

 
43

Exercise of Stock Options
2

 
30

 

 

 

 
32

Tax Benefits Related to Exercise of Stock Options

 
11

 

 

 

 
11

Dividends (58 cents per share)

 

 

 

 
(104
)
 
(104
)
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
)
 
4

 

 

 
4

September 30, 2011
$
655

 
$
2,467

 
$
(85
)
 
$
(640
)
 
$
5,185

 
$
7,582


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

7

Noble Energy, Inc.
Notes to Consolidated 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 US, 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 September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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 reflect the operations of our North Sea geographical segment as discontinued, as well as to conform to current year presentations. See Note 3. Acquisitions and Divestitures.

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.

Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. Commodity prices have been volatile during 2012. Such volatility results in increased uncertainty inherent in our estimates and assumptions. Declines in commodity prices during the fourth quarter of 2012 could result in a reduction in our fair value estimates and cause us to perform analysis to determine if our oil and gas properties and/or goodwill are impaired.
 

8

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Statements of Operations Information   Other statements of operations information is as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Other Revenues (1)
$
1

 
$

 
$

 
$
33

Production Expense
 

 
 

 
 
 
 
Lease Operating Expense
$
103

 
$
89

 
$
309

 
$
251

Production and Ad Valorem Taxes
31

 
38

 
112

 
108

Transportation and Gathering Expense
24

 
15

 
71

 
47

Total
$
158

 
$
142

 
$
492

 
$
406

Other Operating (Income) Expense, Net
 

 
 

 
 
 
 
Deepwater Gulf of Mexico Moratorium Expense (2)
$

 
$
(1
)
 
$

 
$
18

Electricity Generation Expense (1)

 

 

 
26

Other, Net
(1
)
 
3

 
19

 
1

Total
$
(1
)
 
$
2

 
$
19

 
$
45

Other Non-Operating (Income) Expense, Net
 

 
 

 
 
 
 
Deferred Compensation (Income) Expense (3)
$
7

 
$
(18
)
 
$
(1
)
 
$
(15
)
Interest Income
(1
)
 
(2
)
 
(1
)
 
(7
)
Other (Income) Expense, Net
(2
)
 
4

 
4

 
6

Total
$
4

 
$
(16
)
 
$
2

 
$
(16
)
 
(1) 
Other revenues consist primarily of electricity sales from the Machala power plant, located in Machala, Ecuador, through May 2011. 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) 
Amounts relate to rig stand-by expense incurred prior to receiving a permit to resume drilling activities in the deepwater Gulf of Mexico. 
(3) 
Amounts represent increases (decreases) in the fair value of shares of our common stock held in a rabbi trust.
 

9

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Balance Sheet Information   Other balance sheet information is as follows:
 
September 30,
2012
 
December 31,
2011
(millions)
 
 
 
Accounts Receivable, Net
 
 
 
Commodity Sales
$
264

 
$
356

Joint Interest Billings
295

 
313

Other
136

 
123

Allowance for Doubtful Accounts
(9
)
 
(9
)
Total
$
686

 
$
783

Other Current Assets
 

 
 

Inventories, Current
$
88

 
$
78

Commodity Derivative Assets
35

 
10

Deferred Income Taxes, Net (1)
104

 
41

Probable Insurance Claims (2)
39

 
15

Assets Held for Sale (3)
73

 

Prepaid Expenses and Other Current Assets
83

 
36

Total
$
422

 
$
180

Other Noncurrent Assets
 

 
 

Equity Method Investments
$
363

 
$
329

Mutual Fund Investments
110

 
99

Commodity Derivative Assets
24

 
37

Other Assets, Noncurrent
128

 
83

Total
$
625

 
$
548

Other Current Liabilities
 

 
 

Production and Ad Valorem Taxes
$
117

 
$
121

Commodity Derivative Liabilities
16

 
76

Income Taxes Payable
209

 
127

Asset Retirement Obligations
41

 
33

Interest Payable
40

 
56

CONSOL Installment Payment (4)
322

 
324

Current Portion of FPSO Lease Obligation
48

 
45

Liabilities Associated with Assets Held for Sale (3)
34

 

Other
187

 
143

Total
$
1,014

 
$
925

Other Noncurrent Liabilities
 

 
 

Deferred Compensation Liabilities
$
237

 
$
222

Asset Retirement Obligations
279

 
344

Accrued Benefit Costs
88

 
88

Commodity Derivative Liabilities
5

 
7

Other
82

 
91

Total
$
691

 
$
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 and expected well abandonment costs in excess of the insurance deductible less insurance proceeds received to date. See Note 9. Asset Retirement Obligations.
(3) 
Assets held for sale consists primarily of oil and gas properties and liabilities held for sale consists primarily of asset retirement obligations.
(4) 
See Note 3. Acquisitions and Dispositions and Note 5. Debt.


10

Noble Energy, Inc.
Notes to Consolidated Financial Statements

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. See the Consolidated Statements of Shareholders' Equity.
 
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. See Note 7. Fair Value Measurements and 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 and Divestitures
 
Sale of North Sea Properties On August 13, 2012, we closed the sale of our 30% non-operated working interest in the Dumbarton and Lochranza fields, located in the UK sector of the North Sea. Proceeds from the transaction were $117 million, and included final closing adjustments from the effective date of January 1, 2012. The net book value of assets sold was $256 million. Asset retirement obligations associated with the sale were $55 million. We reversed a deferred tax liability and recognized a corresponding income tax benefit of $106 million when the sale closed.
We continue to market our remaining North Sea properties. As of September 30, 2012, all the properties remaining in our North Sea geographical segment are included in assets held for sale in our consolidated balance sheet. Our consolidated statements of operations have been reclassified for all periods presented to reflect the operations of our North Sea geographical segment as discontinued. Upon reclassification as held for sale, depreciation, depletion, and amortization (DD&A) ceased. Our long-term debt is recorded at the consolidated level; therefore no interest expense has been allocated to discontinued operations.
Summarized results of discontinued operations are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Oil and Gas Sales
$
54

 
$
45

 
$
194

 
$
271

Income Before Income Taxes
38

 
23

 
117

 
161

Income Tax Expense
3

 
73

 
50

 
139

Operating Income (Loss), Net of Tax
35

 
(50
)
 
67

 
22

Gain on Sale, Net of Tax
22

 

 
22

 

Discontinued Operations, Net of Tax
$
57

 
$
(50
)
 
$
89

 
$
22


11

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Sale of Onshore US Properties During the third quarter of 2012, we closed the sales of certain crude oil and natural gas properties in Kansas, western Oklahoma, western Texas, and the Texas Panhandle with an effective date of April 1, 2012. Additionally, in June 2012, we closed the sale of certain non-core assets located in Wyoming. The information regarding the assets sold is as follows:
 
 
Nine Months Ended
September 30,
 
 
2012
(millions)
 
 
Cash Proceeds
 
$
1,044

Less
 
 
     Net Book Value of Assets Sold
 
(838
)
     Goodwill Allocated to Assets Sold
 
(61
)
     Asset Retirement Obligations Associated with Assets Sold
 
20

     Other Closing Adjustments
 
2

Gain on Divestitures
 
$
167


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 $938 million as of September 30, 2012, including the first payment under an installment loan. The second payment under the installment loan will be paid in 2013. See Note 5. 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). 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 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:
 
September 30,
2012
(millions)
 
Unproved Oil and Gas Properties
$
803

Proved Oil and Gas Properties
386

Investment in CONE Gathering LLC
69

Total Assets Acquired (1)
$
1,258


(1) 
Total reflects impact of $17 million imputed interest 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.
 

12

Noble Energy, Inc.
Notes to Consolidated Financial Statements

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.

Note 4. Asset Impairments
Pre-tax (non-cash) asset impairment charges were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
South Raton (Deepwater Gulf of Mexico)
$

 
$

 
$
34

 
$

Piceance (Onshore US)

 

 
39

 

East Texas (Onshore US)

 

 

 
116

Other (Onshore US)

 

 

 
21

Total
$

 
$

 
$
73

 
$
137

2012 During the second quarter of 2012, we determined that the carrying amounts of our South Raton and Piceance developments were not recoverable from future cash flows and were impaired. The South Raton and Piceance impairments were primarily due to declines in near-term crude oil and natural gas prices, respectively. The assets were written down to their estimated fair values, which were determined using discounted cash flow models.
2011 Due to field performance combined with a low natural gas price environment, we determined that the carrying amounts of certain of our onshore US developments, primarily in East Texas, were not recoverable from future cash flows and, therefore, were impaired. The assets were written down to their estimated fair values, which were determined using discounted cash flow models.
See Note 7. Fair Value Measurements and Disclosures.



13

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 5. Debt
 
Our debt consists of the following:
 
September 30,
2012
 
 
December 31,
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
328

 
1.79
%
(2) 
 
656

 
1.76
%
(2) 
FPSO Lease Obligation
322

 

 
 
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
4,134

 
 

 
 
4,495

 
 

 
Unamortized Discount
(17
)
 
 

 
 
(26
)
 
 

 
Total Debt, Net of Discount
4,117

 
 

 
 
4,469

 
 

 
Less Amounts Due Within One Year
 

 
 

 
 
 

 
 

 
Current portion of CONSOL Installment Payment, net of discount
(322
)
 
 

 
 
(324
)
 
 

 
FPSO Lease Obligation
(48
)
 
 

 
 
(45
)
 
 

 
Long-Term Debt Due After One Year
$
3,747

 
 

 
 
$
4,100

 
 

 

(1) 
Our Credit Agreement provides for a $4.0 billion unsecured revolving Credit Facility. The Credit Facility is available for general corporate purposes.
(2) 
Imputed rate based on the prevailing market rates for similar debt instruments at the date of assessment.
 
On September 28, 2012 we exercised our option to increase the Credit Facility's overall commitment amount from $3.0 billion to $4.0 billion. Debt issuance costs of approximately $4 million were incurred and are being amortized to expense over the remaining term of the Credit Facility.

See Note 7. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of debt.

Note 6.  Derivative Instruments and Hedging Activities
 
Objective and Strategies for Using Derivative Instruments   In order to mitigate the effect of commodity price volatility 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

14

Noble Energy, Inc.
Notes to Consolidated Financial Statements

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.
 
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 7. 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 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 commodity derivatives 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 net liability position on the swap was marked to market, and we recognized a corresponding 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.
 

15

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Unsettled Derivative Instruments   As of September 30, 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 September 30, 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
NYMEX WTI
3,000
87.00

 



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
7,000

 
63.57

83.57

109.04

2013
Three-Way Collars
Dated Brent
26,000

 
82.88

100.86

127.32

2014
Swaps
NYMEX WTI
11,000
90.26

 



2014
Swaps
Dated Brent
8,000
105.94

 



2014
Three-Way Collars
NYMEX WTI
4,000

 
77.00

92.00

106.13

2014
Three-Way Collars
Dated Brent
10,000

 
85.00

98.50

129.24

 
(1) 
West Texas Intermediate

As of September 30, 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 September 30, 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

2014
Three-Way Collars
NYMEX HH
55,000

 
2.50

3.50

5.25

 
(1) 
Henry Hub
 
As of September 30, 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


16

Noble Energy, Inc.
Notes to Consolidated Financial Statements

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
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
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
 
$
35

 
Current Assets
 
$
10

 
Current Liabilities
 
$
16

 
Current Liabilities
 
$
76

 
Noncurrent Assets
 
24

 
Noncurrent Assets
 
37

 
Noncurrent Liabilities
 
5

 
Noncurrent Liabilities
 
7

Total
 
 
$
59

 
 
 
$
47

 
 
 
$
21

 
 
 
$
83

 
The effect of derivative instruments on our consolidated statements of operations was as follows: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Realized Mark-to-Market (Gain) Loss
$
4

 
$
(22
)
 
$
28

 
$
(39
)
Unrealized Mark-to-Market (Gain) Loss
131

 
(300
)
 
(74
)
 
(140
)
Total (Gain) Loss on Commodity Derivative Instruments
$
135

 
$
(322
)
 
$
(46
)
 
$
(179
)
 
AOCL at September 30, 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 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, 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

17

Noble Energy, Inc.
Notes to Consolidated Financial Statements

takes into account market volatility, market prices and contract terms. See Note 6. 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)