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Noble Energy 10-Q 2015
10-Q
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, 2015

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)
1001 Noble Energy Way
 
 
Houston, Texas
 
77070
(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 September 30, 2015, there were 428,554,158 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,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Oil, Gas and NGL Sales
$
765

 
$
1,228

 
$
2,227

 
$
3,893

Income from Equity Method Investees
36

 
41

 
60

 
138

Total
801

 
1,269

 
2,287

 
4,031

Costs and Expenses
 

 
 

 
 
 
 
Production Expense
235

 
216

 
693

 
689

Exploration Expense
203

 
217

 
308

 
350

Depreciation, Depletion and Amortization
539

 
460

 
1,444

 
1,297

General and Administrative
109

 
132

 
308

 
399

Asset Impairments

 
33

 
43

 
164

Other Operating (Income) Expense, Net
182

 
(19
)
 
252

 
(31
)
Total
1,268

 
1,039

 
3,048

 
2,868

Operating Income (Loss)
(467
)
 
230

 
(761
)
 
1,163

Other (Income) Expense
 

 
 

 
 
 
 
Gain on Commodity Derivative Instruments
(267
)
 
(385
)
 
(331
)
 
(74
)
Interest, Net of Amount Capitalized
71

 
52

 
183

 
151

Other Non-Operating (Income) Expense, Net
(12
)
 
(13
)
 
(20
)
 
1

Total
(208
)
 
(346
)
 
(168
)
 
78

Income (Loss) Before Income Taxes
(259
)
 
576

 
(593
)
 
1,085

Income Tax (Benefit) Provision
24

 
157

 
(180
)
 
274

Net Income (Loss)
$
(283
)
 
$
419

 
$
(413
)
 
$
811

 
 
 
 
 
 
 
 
Earnings (Loss) Per Share, Basic
$
(0.67
)
 
$
1.16

 
$
(1.05
)
 
$
2.25

Earnings (Loss) Per Share, Diluted
$
(0.67
)
 
$
1.12

 
$
(1.05
)
 
$
2.21

 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding
 
 
 
 
 
 
 
   Basic
420

 
362

 
392

 
361

   Diluted
420

 
367

 
392

 
367


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,
 
2015
 
2014
 
2015
 
2014
Net Income (Loss)
$
(283
)
 
$
419

 
$
(413
)
 
$
811

Other Items of Comprehensive Income
 
 
 
 
 
 
 
Net Change in Mutual Fund Investment

 

 
(11
)
 

Less Tax Benefit

 

 
3

 

Net Change in Pension and Other
69

 
6

 
94

 
16

      Less Tax Expense
(23
)
 
(2
)
 
(33
)
 
(6
)
Other Comprehensive Income
46

 
4

 
53

 
10

Comprehensive Income (Loss)
$
(237
)
 
$
423

 
$
(360
)
 
$
821


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


4


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

 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents
$
1,028

 
$
1,183

Accounts Receivable, Net
571

 
857

Commodity Derivative Assets, Current
650

 
710

Other Current Assets
281

 
325

Total Current Assets
2,530

 
3,075

Property, Plant and Equipment
 

 
 

Oil and Gas Properties (Successful Efforts Method of Accounting)
30,456

 
25,599

Property, Plant and Equipment, Other
830

 
630

Total Property, Plant and Equipment, Gross
31,286

 
26,229

Accumulated Depreciation, Depletion and Amortization
(9,537
)
 
(8,086
)
Total Property, Plant and Equipment, Net
21,749

 
18,143

Goodwill
945

 
620

Other Noncurrent Assets
741

 
715

Total Assets
$
25,965

 
$
22,553

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 

 
 

Accounts Payable - Trade
$
1,297

 
$
1,578

Other Current Liabilities
795

 
944

Total Current Liabilities
2,092

 
2,522

Long-Term Debt
8,033

 
6,103

Deferred Income Taxes, Noncurrent
2,286

 
2,516

Other Noncurrent Liabilities
1,104

 
1,087

Total Liabilities
13,515

 
12,228

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 per share; 1 Billion and 500 Million Shares Authorized, respectively; 469 Million and 402 Million Shares Issued, respectively
5

 
4

Additional Paid in Capital
6,342

 
3,624

Accumulated Other Comprehensive Loss
(37
)
 
(90
)
Treasury Stock, at Cost; 38 Million Shares
(691
)
 
(671
)
Retained Earnings
6,831

 
7,458

Total Shareholders’ Equity
12,450

 
10,325

Total Liabilities and Shareholders’ Equity
$
25,965

 
$
22,553


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,
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net Income (Loss)
$
(413
)
 
$
811

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

 
 

Depreciation, Depletion and Amortization
1,444

 
1,297

Asset Impairments
43

 
164

Dry Hole Cost
154

 
163

Deferred Income Tax (Benefit) Expense
(244
)
 
61

Income (Loss) from Equity Method Investees, Net of Dividends
(4
)
 
53

(Gain) Loss on Commodity Derivative Instruments
(331
)
 
(74
)
Net Cash Received (Paid) in Settlement of Commodity Derivative Instruments
683

 
(95
)
Gain on Divestitures

 
(72
)
Stock Based Compensation
69

 
67

Non-cash Pension Termination Expense
81

 

Other Adjustments for Noncash Items Included in Income
78

 
42

Changes in Operating Assets and Liabilities
 
 
 

Decrease in Accounts Receivable
370

 
166

(Decrease) Increase in Accounts Payable
(248
)
 
103

(Decrease) in Current Income Taxes Payable
(118
)
 
21

Other Current Assets and Liabilities, Net
(28
)
 
16

Other Operating Assets and Liabilities, Net
(50
)
 
(20
)
Net Cash Provided by Operating Activities
1,486

 
2,703

Cash Flows From Investing Activities
 

 
 

Additions to Property, Plant and Equipment
(2,519
)
 
(3,585
)
Rosetta Merger
61

 

Additions to Equity Method Investments
(86
)
 
(58
)
Distribution from Equity Method Investee

 
156

Proceeds from Divestitures
151

 
312

Net Cash Used in Investing Activities
(2,393
)
 
(3,175
)
Cash Flows From Financing Activities
 

 
 

Exercise of Stock Options
7

 
45

Excess Tax Benefits from Stock-Based Awards
2

 
18

Dividends Paid, Common Stock
(214
)
 
(182
)
Purchase of Treasury Stock
(20
)
 
(15
)
Proceeds from Issuance of Shares of Common Stock to Public, Net of Offering Costs
1,112

 

Proceeds from Credit Facility

 
900

Repayment of Credit Facility
(74
)
 

Repayment of Senior Notes
(12
)
 
(200
)
Repayment of Capital Lease Obligation
(49
)
 
(42
)
Net Cash Provided by Financing Activities
752

 
524

Increase (Decrease) in Cash and Cash Equivalents
(155
)
 
52

Cash and Cash Equivalents at Beginning of Period
1,183

 
1,117

Cash and Cash Equivalents at End of Period
$
1,028

 
$
1,169

 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, 2014
$
4

 
$
3,624

 
$
(90
)
 
$
(671
)
 
$
7,458

 
$
10,325

Net Loss

 

 

 

 
(413
)
 
(413
)
Rosetta Merger
1

 
1,528

 

 

 

 
1,529

Stock-based Compensation

 
69

 

 

 

 
69

Exercise of Stock Options

 
7

 

 

 

 
7

Tax Benefits Related to Exercise of Stock Options

 
2

 

 

 

 
2

Dividends (54 cents per share)

 

 

 

 
(214
)
 
(214
)
Changes in Treasury Stock, Net

 

 

 
(20
)
 

 
(20
)
Issuance of Shares of Common Stock to Public, Net of Offering Costs

 
1,112

 

 

 

 
1,112

Net Change in Pension and Other

 

 
53

 

 

 
53

September 30, 2015
$
5

 
$
6,342

 
$
(37
)
 
$
(691
)
 
$
6,831

 
$
12,450

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
$
4

 
$
3,463

 
$
(117
)
 
$
(659
)
 
$
6,493

 
$
9,184

Net Income

 

 

 

 
811

 
811

Stock-based Compensation

 
67

 

 

 

 
67

Exercise of Stock Options

 
45

 

 

 

 
45

Tax Benefits Related to Exercise of Stock Options

 
18

 

 

 

 
18

Dividends (50 cents per share)

 

 

 

 
(182
)
 
(182
)
Changes in Treasury Stock, Net

 

 

 
(15
)
 

 
(15
)
Net Change in Pension and Other

 

 
10

 

 

 
10

September 30, 2014
$
4

 
$
3,593

 
$
(107
)
 
$
(674
)
 
$
7,122

 
$
9,938



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 include onshore US, primarily in the DJ Basin, Eagle Ford Shale, Delaware Basin and Marcellus Shale, 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, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 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. Certain prior-period amounts have been reclassified to conform to the current-period presentation. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
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, 2014.
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.
Pension Plan In third quarter 2015, we completed the process of terminating our noncontributory, tax-qualified defined benefit pension plan through the purchase of annuities for the remaining participants. As a result, we expensed all remaining unamortized prior service costs and actuarial losses from accumulated other comprehensive loss (AOCL). For the nine months ended September 30, 2015, we have expensed $88 million related to the termination of the plan. As of September 30, 2015, we have $16 million remaining in AOCL related to our non-qualified defined benefit plan.
Equity Offerings On March 3, 2015, we closed an underwritten public offering of 21 million shares of common stock, par value $0.01 per share, at a price of $47.50 per share. In addition, on March 25, 2015, we completed the issuance of an additional 3.15 million shares of common stock, par value $0.01 per share, in connection with the exercise of the option of the underwriters to purchase additional shares of common stock. The aggregate net proceeds of the offerings were approximately $1.1 billion (after deducting underwriting discounts and commissions and offering expenses). We used approximately $150 million of the net proceeds to repay outstanding indebtedness under our revolving credit facility and the remainder was used for general corporate purposes, including the funding of our capital investment program.
On July 20, 2015, we issued approximately 41 million shares of common stock in exchange for all outstanding shares of Rosetta Resources Inc. (Rosetta) using a ratio of 0.542 of a share of Noble Energy common stock for each share of Rosetta common stock. See Note 3. Rosetta Merger.
Increase in Authorized Shares On April 28, 2015, our stockholders approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 500 million to 1 billion.
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.
Update on Core Area Israel The Israeli government has developed a framework (Framework) to support the development of offshore natural gas reserves and natural gas exports. After a public hearing process, the Framework was approved by the Israeli Cabinet and Knesset. Enactment of the Framework provides that certain antitrust matters will be resolved. Authority resides with the Minister of Economy to provide the stipulated exemption related to these antitrust matters. Legal challenges may still be brought against the Framework in the Israeli courts. We continue to monitor this effort and if necessary, we are prepared to defend our legal rights to our Israel assets to the fullest extent in both Israel and international venues.

8

Noble Energy, Inc.
Notes to Consolidated Financial Statements

The Framework requires divestiture of Tanin and Karish, and we, therefore, continue to hold these assets for sale. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview for further discussion.
Recently Issued Accounting Standards In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-11 (ASU 2015-11): Simplifying the Measurement of Inventory, effective for annual and interim periods beginning after December 15, 2016. ASU 2015-11 changes the inventory measurement principle for entities using the first-in, first out (FIFO) or average cost methods. For entities utilizing one of these methods, the inventory measurement principle will change from lower of cost or market to the lower of cost and net realizable value. We follow the average cost method and are currently evaluating the provisions of ASU 2015-11 and assessing the impact, if any, it may have on our financial position and results of operations.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03): Simplifying the Presentation of Debt Issuance Costs, effective for annual and interim periods beginning after December 15, 2015. ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. It is effective retrospectively for all prior periods presented in the financial statements beginning in the first quarter 2016 and is only expected to impact the presentation of our consolidated balance sheet. In August 2015, the FASB issued ASU 2015-15 to specifically address the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 allows entities to defer and present debt issuance costs related to line-of-credit arrangements as an asset and amortize the costs ratably over the term of the line-of-credit arrangement. As of September 30, 2015 and December 31, 2014, we had $49 million and $50 million of capitalized, unamortized debt issuance costs, respectively, included in other long-term assets in our consolidated balance sheet.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02): Consolidation - Amendments to the Consolidation Analysis, effective for annual and interim periods beginning after December 15, 2015. ASU 2015-02 changes the guidance as to whether an entity is a variable interest entity (VIE) or a voting interest entity and how related parties are considered in the VIE model. We are currently evaluating the provisions of ASU 2015-02 and assessing the impact, if any, it may have on our financial position and results of operations.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU 2014-09 requires enhanced financial statement disclosures over revenue recognition as part of the new accounting guidance. Initially, the amendments in ASU 2014-09 were effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application was not permitted. In August 2015, the FASB agreed to give companies an extra year to comply with the new standard. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We are currently evaluating the provisions of ASU 2014-09 and awaiting implementation guidance to determine the impact, if any, it may have on our financial position and results of operations.


9

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,
(millions)
2015
 
2014
 
2015
 
2014
Production Expense
 

 
 

 
 
 
 
Lease Operating Expense
$
133

 
$
132

 
$
419

 
$
424

Production and Ad Valorem Taxes
28

 
44

 
89

 
146

Transportation and Gathering Expense
74

 
40

 
185

 
119

Total
$
235

 
$
216

 
$
693

 
$
689

Other Operating (Income) Expense, Net
 

 
 

 
 
 
 
Midstream Gathering and Processing (Income) Expense, Net
$
4

 
$
1

 
$
10

 
$
8

Corporate Restructuring Expense (1)
21

 

 
39

 

Stacked Drilling Rig Expense (2)
13

 

 
20

 

Pension Plan Expense(3)
67

 

 
88

 

Rosetta Merger Expenses(4)
71

 

 
73

 

Gain on Divestitures

 
(30
)
 

 
(72
)
Other, Net
6

 
10

 
22

 
33

Total
$
182

 
$
(19
)
 
$
252

 
$
(31
)
Other Non-Operating (Income) Expense, Net
 

 
 

 
 
 
 
Deferred Compensation (Income) Expense (5)
$
(13
)
 
$
(12
)
 
(19
)
 
$

Other (Income) Expense, Net
1

 
(1
)
 
(1
)
 
1

Total
$
(12
)
 
$
(13
)
 
$
(20
)
 
$
1


(1) 
Amount represents expenses associated with the relocation of our personnel. The expenses primarily include the relocation of our Ardmore, Oklahoma office, as well as the consolidation of our Houston personnel to our corporate headquarters in Houston.
(2) 
Amount represents the day rate cost associated with drilling rigs under contract, but not currently being utilized in our US onshore drilling programs.
(3) 
Amount includes the expensing of the actuarial loss from AOCL related to the termination and re-measurement of our defined benefit pension plan.
(4) 
Amount represents expenses associated with the completion of the Rosetta Merger. See Note 3. Rosetta Merger.
(5) 
Amounts represent decreases in the fair value of shares of our common stock held in a rabbi trust.

10

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Balance Sheet Information   Other balance sheet information is as follows:
(millions)
September 30,
2015
 
December 31,
2014
Accounts Receivable, Net
 
 
 
Commodity Sales
$
284

 
$
405

Joint Interest Billings
166

 
297

Other
140

 
171

Allowance for Doubtful Accounts
(19
)
 
(16
)
Total
$
571

 
$
857

Other Current Assets
 

 
 

Inventories, Materials and Supplies
$
116

 
$
81

Inventories, Crude Oil
28

 
24

Assets Held for Sale (1)
78

 
180

Prepaid Expenses and Other Current Assets
59

 
40

Total
$
281

 
$
325

Other Noncurrent Assets
 

 
 

Investments in Unconsolidated Subsidiaries
$
427

 
$
325

Mutual Fund Investments
106

 
111

Commodity Derivative Assets
104

 
180

Other Assets
104

 
99

Total
$
741

 
$
715

Other Current Liabilities
 

 
 

Production and Ad Valorem Taxes
$
165

 
$
110

Income Taxes Payable
60

 
180

Deferred Income Taxes, Current
86

 
158

Accrued Benefit Costs, Current
30

 
125

Asset Retirement Obligations
141

 
81

Interest Payable
119

 
70

Current Portion of Capital Lease Obligations
57

 
68

Other
137

 
152

Total
$
795

 
$
944

Other Noncurrent Liabilities
 

 
 

Deferred Compensation Liabilities
$
229

 
$
218

Asset Retirement Obligations
746

 
670

Accrued Benefit Costs
17

 
24

Other
112

 
175

Total
$
1,104

 
$
1,087

(1) Assets held for sale at September 30, 2015 include our Tanin and Karish natural gas discoveries, offshore Israel. See Update on Core Area Israel, above.


Note 3. Rosetta Merger

On July 20, 2015, Noble Energy completed the merger of Rosetta into a subsidiary of Noble Energy (Rosetta Merger). The results of Rosetta's operations since the merger date are included in our consolidated statement of operations. The merger was effected through the issuance of approximately 41 million shares of Noble Energy common stock in exchange for all outstanding shares of Rosetta using a ratio of 0.542 of a share of Noble Energy common stock for each share of Rosetta common stock and the assumption of Rosetta's liabilities, including approximately $2 billion fair value of outstanding debt. The merger adds two new onshore US shale positions to our portfolio including approximately 50,000 net acres in the Eagle Ford Shale and 54,000 net acres in the Permian (45,000 acres in the Delaware Basin and 9,000 acres in the Midland Basin). In connection with the Rosetta Merger, we incurred merger-related costs of approximately $73 million to date, including (i) $58 million of severance, consulting, investment, advisory, legal and other merger-related fees, and (ii) $15 million of noncash share-based compensation expense, all of which were expensed and are included in Other Operating (Income) Expense, Net.

Allocation of Purchase Price - The merger has been accounted for as a business combination, using the acquisition method. The following table represents the preliminary allocation of the total purchase price of Rosetta to the assets acquired and the

11

Noble Energy, Inc.
Notes to Consolidated Financial Statements

liabilities assumed based on the fair value at the merger date, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, valuation of pre-merger contingencies, final tax returns that provide the underlying tax basis of Rosetta's assets and liabilities, and final appraisals of assets acquired and liabilities assumed. We expect to complete the purchase price allocation during the 12-month period following the merger date, in line with the acquisition method of accounting, during which time the value of the assets and liabilities, including any goodwill, may be revised as appropriate.
The following table sets forth our preliminary purchase price allocation:
 
(in millions, except stock price)
Shares of Noble Energy common stock issued to Rosetta shareholders
41

Noble Energy common stock price on July 20, 2015
$
36.97

Fair value of common stock issued
$
1,516

Plus: fair value of Rosetta's restricted stock awards and performance awards assumed
11

Plus: Rosetta stock options assumed
1

Total purchase price
1,528

Plus: liabilities assumed by Noble Energy
 
Accounts Payable
96

Current Liabilities
37

Long-Term Debt
1,992

Other Long Term Liabilities
24

Asset Retirement Obligation
27

Total purchase price plus liabilities assumed
$
3,704

 
 
Fair Value of Rosetta Assets
 
Cash and Equivalents
$
61

Other Current Assets
74

Derivative Instruments
209

Oil and Gas Properties:
 
Proved Reserves
1,541

Undeveloped Leaseholds
1,165

Gathering & Processing Assets
207

Asset Retirement
27

Other Property Plant & Equipment
5

Long Term Deferred Tax Asset

86

Implied Goodwill
329

Total Asset Value
$
3,704

The fair value measurements of derivative instruments assumed were determined based on published forward commodity price curves as of the date of the merger and represent Level 2 inputs. 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. The fair value measurements of long-term debt were estimated based on published market prices and represent Level 1 inputs.
The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by management at the time of the valuation and are the most sensitive and may be subject to change.

12

Noble Energy, Inc.
Notes to Consolidated Financial Statements

The results of operations attributable to Rosetta are included in our consolidated statement of operations beginning on July 21, 2015. Revenues of $81 million and pre-tax net income of $43 million from Rosetta were generated from July 21, 2015 to September 30, 2015.
Proforma Financial Information - The following pro forma condensed combined financial information was derived from the historical financial statements of Noble Energy and Rosetta and gives effect to the merger as if it had occurred on January 1, 2014. The below information reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including (i) Noble Energy's common stock and equity awards issued to convert Rosetta's outstanding shares of common stock and equity awards as of the closing date of the merger, (ii) adjustments to conform Rosetta's historical policy of accounting for its oil and natural gas properties from the full cost method to the successful efforts method of accounting, (iii) depletion of Rosetta's fair-valued proved oil and gas properties, and (iv) the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings for the three and nine months ended September 30, 2015 were adjusted to exclude $71 million and $73 million, respectively, of merger-related costs incurred by Noble Energy and $32 million and $37 million, respectively, incurred by Rosetta. The pro forma results of operations do not include any cost savings or other synergies that may result from the Rosetta Merger or any estimated costs that have been or will be incurred by us to integrate the Rosetta assets. The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Rosetta Merger taken place on January 1, 2014; furthermore, the financial information is not intended to be a projection of future results.
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in millions, except per share amounts)
2015
2014
2015
2014
Revenues
$
828

$
1,557

$
2,582

$
4,828

Net income
$
(202
)
$
542

$
(338
)
$
1,039

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
$
(0.44
)
$
1.37

$
(0.79
)
$
2.63

Diluted
$
(0.44
)
$
1.35

$
(0.79
)
$
2.59


Note 4. Divestitures
Onshore US Properties   During the first nine months of 2015, we sold certain onshore US crude oil and natural gas properties, generating net proceeds of $151 million. Proceeds were primarily applied to the DJ Basin depletable field, with no recognition of gain or loss, other than a de minimis gain in second quarter 2015.

During the first nine months of 2014, we sold certain non-core onshore US crude oil and natural gas properties. The information regarding the assets sold is as follows:
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
(millions)
2014
2014
Sales Proceeds
$
16

$
126

Less
 
 
     Net Book Value of Assets Sold

(118
)
     Goodwill Allocated to Assets Sold
(1
)
(7
)
     Asset Retirement Obligations Associated with Assets Sold
14

34

     Other Closing Adjustments
1

2

Gain on Divestitures
$
30

$
37

China Sale On June 30, 2014, we closed the sale of our China assets. We determined the sale of our China assets did not meet the criteria for discontinued operations presentation. The information regarding the China assets sold is as follows:
 
Nine Months Ended
September 30,
(millions)
2014
Sales Proceeds
$
186

Less
 
     Net Book Value of Assets Sold
(149
)
     Other Closing Adjustments
(2
)
Gain on Divestiture
$
35


Note 5. Asset Impairments
Pre-tax (non-cash) asset impairment charges were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(millions)
2015
 
2014
 
2015
 
2014
US Properties, Primarily Shelf and Deepwater Gulf of Mexico
$

 
$
2

 
$
11

 
$
56

Eastern Mediterranean

 
31

 
32

 
14

North Sea

 

 

 
94

Total
$

 
$
33

 
$
43

 
$
164

Impairments for 2015 are primarily related to revisions in expected field abandonment or other costs at South Raton and Lorien (Deepwater Gulf of Mexico) and the Noa and Pinnacles fields (Eastern Mediterranean).
Impairments for 2014 were primarily related to an increase in expected field abandonment costs and a change in the timing of abandonment activities at the North Sea MacCulloch field.
See Note 2. Basis of Presentation, Note 8. Fair Value Measurements and Disclosures and Note 10. Asset Retirement Obligations.

13

Noble Energy, Inc.
Notes to Consolidated Financial Statements

 
Note 6.  Derivative Instruments and Hedging Activities
Objective and Strategies for Using Derivative Instruments   We are exposed to fluctuations in crude oil and natural gas prices. In order to mitigate the effect of commodity price volatility and enhance the predictability of cash flows relating to the marketing of our global crude oil and domestic natural gas, we enter into crude oil and natural gas price hedging arrangements.
While these instruments mitigate the cash flow risk of future decreases in commodity prices, they may also curtail benefits from future increases in commodity prices. See Note 8. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.
Unsettled Commodity Derivative Instruments   As of September 30, 2015, the following crude oil derivative contracts were outstanding:
 
 
 
 
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
2015
Swaps
NYMEX WTI
27,000

$
88.80

 
$

$

$

2015
Swaps
Dated Brent
8,000

100.31

 



2015
    Swaps (1)
(2) 
12,000

89.81





2015
Two-Way Collars
NYMEX WTI
5,000


 

50.00

64.94

2015
    Two-Way Collars (1)
(2) 
8,000


 

55.00

84.80

2015
Three-Way Collars
NYMEX WTI
20,000


 
70.50

87.55

94.41

2015
Three-Way Collars
Dated Brent
13,000


 
76.92

96.00

108.49

1H16 (4)
Swaps
NYMEX WTI
15,000

70.31

 



2H16 (4)
Swaps
NYMEX WTI
12,000

74.47

 



2016
Swaps
Dated Brent
9,000

97.96

 



2016
    Swaps (1)
(2) 
6,000

90.28





2016
Two -Way Collars
NYMEX WTI
1,000


 

60.00

70.00

2016
Three-Way Collars
NYMEX WTI
6,000


 
61.00

72.50

86.37

2016
Three-Way Collars
Dated Brent
8,000


 
72.50

86.25

101.79

2H16 (4)
Call (3)
NYMEX WTI
3,000


 


53.65

2017
Call (3)
 NYMEX WTI
3,000


 


57.00

(1) 
Includes derivative instruments assumed by our subsidiary, NBL Texas, LLC, in connection with the Rosetta Merger.
(2) 
The index for these derivative instruments is NYMEX WTI and Argus LLS indices.
(3) We have entered into crude oil derivative enhanced swaps with strike prices that are above the market value as of trade commencement. To effect the enhanced swap structure, we sold call options to the applicable counterparty to receive the above market terms.
(4) We have entered into NYMEX WTI swap contracts for 3,000 Bbls per day for the first half of 2016 resulting in the difference in hedge volumes for the full year.

14

Noble Energy, Inc.
Notes to Consolidated Financial Statements

As of September 30, 2015, the following natural gas derivative contracts were outstanding:
 
 
 
 
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
2015
Swaps
NYMEX HH
140,000

$
4.30

 
$

$

$

2015
Swaps (1)
(2) 
50,000

$
4.13

 
$

$

$

2015
Three-Way Collars
NYMEX HH
150,000


 
3.58

4.25

5.04

2015
Two-Way Collars (1)
(2) 
50,000


 

3.60

5.04

2016
Swaps (3)
NYMEX HH
40,000

3.60

 



2016
Swaps (1)
(2) 
30,000

4.04

 



2016
Two-Way Collars
NYMEX HH
30,000


 

3.00

3.50

2016
Two-Way Collars (1)
(2) 
30,000


 

3.50

5.60

2016
Three-Way Collars
NYMEX HH
90,000


 
2.83

3.42

3.90

(1) 
Includes derivative instruments assumed by our subsidiary, NBL Texas, LLC, in connection with the Rosetta Merger.
(2) 
The index for these derivative instruments includes a combination of Houston Ship Channel and Tennessee Zone 0 indices.
(3) 
We have entered into certain natural gas derivative contracts (swaptions), which give counterparties the option to extend for an additional 12-month period. Options covering a notional volume of 30,000 MMBtu/d are exercisable on December 22 and 23, 2016. If the counterparties exercise all such options, the notional volume of our existing natural gas derivative contracts will increase by 30,000 MMBtu/d at an average price of $3.50 per MMBtu for each month during the period January 1, 2017 through December 31, 2017.
As of September 30, 2015, we had assumed the following natural gas liquid derivative instruments, all of which were assumed by our subsidiary, NBL Texas, LLC, in connection with the Rosetta Merger. The index for these derivative instruments is the Mont Belvieu index.
 
 
 
 
Swaps
 
Collars
Settlement
Period
Type of Contract
Index
Gallons Per Day
Weighted
Average
Fixed
Price
 
Weighted
Average
 Short Put
 Price
Weighted
Average
Floor
Price
Weighted
Average
 Ceiling
Price
2015
Swaps
NGL-Ethane
104,000

$
0.27

 
$

$

$

2015
Swaps
NGL-Propane
73,500

1.03

 



2015
Swaps
NGL-Isobutane
25,900

1.26

 



2015
Swaps
NGL-Normal Butane
24,300

1.25

 



2015
Swaps
NGL-Pentanes Plus
24,300

1.85

 






15

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Fair Value Amounts and (Gain) Loss on Commodity Derivative Instruments   The fair values of commodity derivative instruments in our consolidated balance sheets were as follows:
Fair Value of Derivative Instruments
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
(millions)
Balance Sheet Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
 Value
 
Balance Sheet Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
Value
Commodity Derivative Instruments
Current Assets
 
$
650

 
Current Assets
 
$
710

 
Current Liabilities
 
$

 
Current Liabilities
 
$

 
Noncurrent Assets
 
104

 
Noncurrent Assets
 
180

 
Noncurrent Liabilities
 
6

 
Noncurrent Liabilities
 

Total
 
 
$
754

 
 
 
$
890

 
 
 
$
6

 
 
 
$


The effect of commodity derivative instruments on our consolidated statements of operations was as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(millions)
2015
 
2014
 
2015
 
2014
Cash (Received) Paid in Settlement of Commodity Derivative Instruments
 
 
 
 
 
 
 
  Crude Oil
$
(235
)
 
$
14

 
$
(578
)
 
$
87

  Natural Gas
(42
)
 
(2
)
 
(98
)
 
8

  NGLs
(7
)
 

 
(7
)
 

Total Cash (Received) Paid in Settlement of Commodity Derivative Instruments
(284
)
 
12

 
(683
)
 
95

Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments
 
 
 
 
 
 
 
   Crude Oil
4

 
(374
)
 
301

 
(155
)
   Natural Gas
3

 
(23
)
 
41

 
(14
)
   NGLs
10

 

 
10

 

Total Non-cash Portion of (Gain) Loss on Commodity Derivative Instruments
17

 
(397
)
 
352

 
(169
)
(Gain) Loss on Commodity Derivative Instruments
 
 
 
 
 
 
 
   Crude Oil
(231
)
 
(360
)
 
(277
)
 
(68
)
   Natural Gas
(39
)
 
(25
)
 
(57
)
 
(6
)
   NGLs
3

 

 
3

 

Total (Gain) Loss on Commodity Derivative Instruments
$
(267
)
 
$
(385
)
 
$
(331
)
 
$
(74
)


16

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 7. Debt
Debt consists of the following:
 
September 30,
2015
 
December 31,
2014
(millions, except percentages)
Debt
 
Interest Rate
 
Debt
 
Interest Rate
Credit Facility, due August 27, 2020
$

 
%
 
$

 
%
Capital Lease and Other Obligations
424

 
%
 
413

 
%
8.25% Senior Notes, due March 1, 2019
1,000

 
8.25
%
 
1,000

 
8.25
%
5.625% Senior Notes, due May 1, 2021
693

 
5.625
%
 

 
%
4.15% Senior Notes, due December 15, 2021
1,000

 
4.15
%
 
1,000

 
4.15
%
5.875% Senior Notes, due June 1, 2022
597

 
5.875
%
 

 
%
7.25% Senior Notes, due October 15, 2023
100

 
7.25
%
 
100

 
7.25
%
5.875% Senior Notes, due June 1, 2024
499

 
5.875
%
 

 
%
3.90% Senior Notes, due November 15, 2024
650

 
3.90
%
 
650

 
3.90
%
8.00% Senior Notes, due April 1, 2027
250

 
8.00
%
 
250

 
8.00
%
6.00% Senior Notes, due March 1, 2041
850

 
6.00
%
 
850

 
6.00
%
5.25% Senior Notes, due November 15, 2043
1,000

 
5.25
%
 
1,000

 
5.25
%