form10-q.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 September 30, 2008

OR

¨   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
 
CORPORATE LOGO
NOBLE ENERGY, INC.
(Exact name of registrant as specified in its charter)


Delaware
 
73-0785597
(State of incorporation)
 
(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 [  ]

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
(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 [  ]    No [X]

Number of shares of common stock outstanding as of October 15, 2008: 172,745,476.



 
 

 

  PART I. FINANCIAL INFORMATION  
  ITEM 1. FINANCIAL STATEMENTS  
                         
  Noble Energy, Inc. and Subsidiaries  
  Consolidated Statements of Operations  
  (in millions, except per share amounts)  
  (unaudited)  
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues
                       
Oil, gas and NGL sales
  $ 1,040     $ 746     $ 3,115     $ 2,140  
Income from equity method investees
    40       46       158       140  
Other revenues
    18       22       55       70  
Total
    1,098       814       3,328       2,350  
Costs and Expenses
                               
Lease operating expense
    98       82       268       243  
Production and ad valorem taxes
    47       27       141       81  
Transportation expense
    14       13       43       40  
Exploration expense
    39       46       181       145  
Depreciation, depletion and amortization
    194       197       593       547  
General and administrative
    63       49       184       142  
Other operating expense, net
    97       24       136       106  
Total
    552       438       1,546       1,304  
Operating Income
    546       376       1,782       1,046  
Other (Income) Expense
                               
(Gain) loss on commodity derivative instruments
    (875 )     2       190       (1 )
Interest, net of amount capitalized
    18       29       52       87  
Other (income) expense, net
    (51 )     2       (33 )     20  
Total
    (908 )     33       209       106  
Income Before Income Taxes
    1,454       343       1,573       940  
Income Tax Provision
    480       120       528       296  
Net Income
  $ 974     $ 223     $ 1,045     $ 644  
                                 
Earnings Per Share
                               
Basic
  $ 5.64     $ 1.30     $ 6.06     $ 3.76  
Diluted
  $ 5.37     $ 1.28     $ 5.86     $ 3.72  
                                 
Weighted average number of shares outstanding
                               
    Basic
    173       171       172       171  
    Diluted
    176       173       176       173  
                                 
The accompanying notes are an integral part of these financial statements.
                         
                                 
 
 
 
2

 
 
Noble Energy, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
(in millions, except share amounts)
 
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
   
2008
   
2007
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 992     $ 660  
Accounts receivable - trade, net
    641       594  
Other current assets
    236       315  
Total current assets
    1,869       1,569  
Property, plant and equipment
               
Oil and gas properties (successful efforts method of accounting)
    11,769       10,217  
Other property, plant and equipment
    158       112  
Total property, plant and equipment
    11,927       10,329  
Accumulated depreciation, depletion and amortization
    (2,946 )     (2,384 )
Total property, plant and equipment, net
    8,981       7,945  
Goodwill
    759       761  
Other noncurrent assets
    507       556  
Total Assets
  $ 12,116     $ 10,831  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable - trade
  $ 646     $ 781  
Commodity derivative instruments
    189       540  
Other current liabilities
    541       315  
Total current liabilities
    1,376       1,636  
Deferred income taxes
    2,169       1,984  
Asset retirement obligations
    147       131  
Commodity derivative instruments
    69       83  
Other noncurrent liabilities
    299       337  
Long-term debt
    2,051       1,851  
Total Liabilities
    6,111       6,022  
                 
Commitments and Contingencies
               
                 
Shareholders’ Equity
               
Preferred stock - par value $1.00; 4 million shares authorized, none issued
    -       -  
Common stock - par value $3.33 1/3; 250 million shares authorized; 192 million and 191 million shares issued, respectively
    641       636  
Capital in excess of par value
    2,182       2,106  
Accumulated other comprehensive loss
    (129     (284 )
Treasury stock, at cost; 19 million shares
    (614 )     (613 )
Retained earnings
    3,925       2,964  
Total Shareholders’ Equity
    6,005       4,809  
Total Liabilities and Shareholders’ Equity
  $ 12,116     $ 10,831  
                 
The accompanying notes are an integral part of these financial statements.
         


 
 
3

 
 
Noble Energy, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
(in millions)
 
(unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Cash Flows From Operating Activities
           
Net income
  $ 1,045     $ 644  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    593       547  
Dry hole expense
    78       48  
Deferred income taxes
    173       192  
Income from equity method investees
    (158 )     (140 )
Dividends received from equity method investees
    192       153  
Unrealized (gain) on commodity derivative instruments
    (9 )     (1 )
Settlement of previously recognized hedge losses
    (144 )     (133 )
Loss on involuntary conversion
    9       51  
Impairment of operating assets
    38       4  
Allowance for doubtful accounts
    47       11  
Other
    12       69  
Changes in operating assets and liabilities:
               
(Increase) decrease in accounts receivable, trade
    (94 )     21  
(Increase) decrease in other current assets
    (19 )     92  
(Decrease) in accounts payable
    (135 )     (12 )
Increase (decrease) in other current liabilities
    239       (225 )
Net Cash Provided by Operating Activities
    1,867       1,321  
                 
Cash Flows From Investing Activities
               
Additions to property, plant and equipment
    (1,852 )     (1,017 )
Proceeds from property sales
    131       -  
Distributions from equity method investees
    -       2  
Net Cash Used in Investing Activities
    (1,721 )     (1,015 )
                 
Cash Flows From Financing Activities
               
Exercise of stock options
    26       19  
Excess tax benefits from stock-based awards
    23       14  
Cash dividends paid
    (84 )     (54 )
Purchases of treasury stock
    (2 )     (102 )
Proceeds from credit facility
    650       280  
Repayment of credit facility
    (425 )     (165 )
Repayment of installment notes
    (25 )     -  
Proceeds from short term borrowings
    23       -  
Net Cash Provided by (Used in) Financing Activities
    186       (8 )
Increase in Cash and Cash Equivalents
    332       298  
Cash and Cash Equivalents at Beginning of Period
    660       153  
Cash and Cash Equivalents at End of Period
  $ 992     $ 451  
                 
The accompanying notes are an integral part of these financial statements.
               


 
 
4

 
 
Noble Energy, Inc. and Subsidiaries
 
Consolidated Statements of Shareholders' Equity
 
(in millions)
 
(unaudited)
 
                                   
                   
Accumulated
             
     Shares of Stock      
 Capital in
 
 Other
 
 Treasury
     
 Total
 
   
Common
 
Treasury
 
Common
 
Excess of
 
Comprehensive
 
Stock
 
Retained
 
Shareholders'
 
   
Stock
 
Stock
 
Stock
 
Par Value
 
Loss
 
at Cost
 
Earnings
 
Equity
 
December 31, 2007
    191     19   $ 636   $ 2,106   $ (284 ) $ (613 ) $ 2,964   $ 4,809  
Net income
    -     -     -     -     -     -     1,045     1,045  
Stock-based compensation expense
    -     -     -     30     -     -     -     30  
Exercise of stock options
    1     -     4     22     -     -     -     26  
Tax benefits related to exercise of stock options
    -     -     -     23     -     -     -     23  
Restricted stock awards, net
    -     -     1     (1 )   -     -     -     -  
Dividends ($0.48 per share)
    -     -     -     -     -     -     (84 )   (84 )
Changes in treasury stock, net
    -     -     -     2     -     (1 )   -     1  
Oil and gas cash flow hedges:
                                                 
Realized amounts reclassified into earnings
    -     -     -     -     155     -     -     155  
Interest rate cash flow hedges:
                                                 
Unrealized change in fair value
    -     -     -     -     1     -     -     1  
Net change in other
    -     -     -     -     (1 )   -     -     (1 )
September 30, 2008
    192     19   $ 641   $ 2,182   $ (129 ) $ (614 ) $ 3,925   $ 6,005  
                                                   
December 31, 2006
    188     17   $ 629   $ 2,041   $ (140 ) $ (511 ) $ 2,095   $ 4,114  
Net income
    -     -     -     -     -     -     644     644  
Stock-based compensation expense
    -     -     -     20     -     -     -     20  
Exercise of stock options
    1     -     4     15     -     -     -     19  
Tax benefits related to exercise of stock options
    -     -     -     14     -     -     -     14  
Restricted stock awards, net
    1     -     2     (2 )   -     -     -     -  
Dividends ($0.315 per share)
    -     -     -     -     -     -     (54 )   (54 )
Purchases of treasury stock
    -     2     -     -     -     (102 )   -     (102 )
Oil and gas cash flow hedges:
                                                 
Realized amounts reclassified into earnings
    -     -     -     -     5     -     -     5  
Unrealized change in fair value
    -     -     -     -     (44 )   -     -     (44 )
Net change in other
    -     -     -     -     2     -     -     2  
September 30, 2007
    190     19   $ 635   $ 2,088   $ (177 ) $ (613 ) $ 2,685   $ 4,618  
                                                   
The accompanying notes are an integral part of these financial statements.
                         

 

 
5

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

Note 1 – Organization and Nature of Operations
Noble Energy, Inc. (Noble Energy, we or us) is an independent energy company engaged in the acquisition, exploration, development, production and marketing of crude oil, natural gas and natural gas liquids (NGLs). We have exploration, exploitation and production operations in the US and internationally. We operate throughout major basins in the US including Colorado’s Wattenberg field and Piceance basin, the Mid-continent region of western Oklahoma and the Texas Panhandle, the San Juan Basin in New Mexico, the Gulf Coast and the Gulf of Mexico. In addition, we conduct business internationally in China, Ecuador, the Mediterranean Sea, the North Sea, West Africa (Equatorial Guinea and Cameroon) and in other areas.

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 for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US generally accepted accounting principles (GAAP) for complete financial statements. The accompanying consolidated financial statements at September 30, 2008 (unaudited) and December 31, 2007 and for the three months and nine months ended September 30, 2008 and 2007 contain all normally recurring adjustments considered necessary for a fair presentation of our financial position, results of operations and cash flows for such periods. Operating results for the nine-month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. 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, 2007, as amended.

Estimates – The preparation of consolidated financial statements in conformity with GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
 
Mid-continent Acquisition – In July 2008, we acquired producing properties in western Oklahoma for $292 million in cash. Properties acquired cover approximately 15,500 net acres and are currently producing 25 MMcfepd. The total purchase price has been preliminarily allocated to the proved and unproved properties acquired based on fair values at the acquisition date. Approximately $254 million was allocated to proved properties and $38 million to unproved properties.

Sale of Main Pass Assets – We expect to sell essentially all of our remaining non-core Gulf of Mexico shelf assets in the near future. These assets, located at Main Pass, suffered significant hurricane damage in 2004 and 2005 and have undergone cleanup activities that were completed in the third quarter of 2007. During third quarter 2008, in anticipation of the sale, we recorded an impairment loss of $38 million (based on anticipated sales proceeds less costs to sell) related to the Main Pass assets and reclassified their remaining net book value of $11 million to assets held for sale. We also recorded a loss on involuntary conversion of $9 million upon resolution of our insurance claims related to the hurricane damage sustained in 2005.


 
6

 

Statements of Operations Information – Other statements of operations information is as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
Other Revenues
                       
Electricity sales
  $ 14     $ 17     $ 42     $ 54  
Gathering, marketing and processing revenues
    4       5       13       16  
Total
  $ 18     $ 22     $ 55     $ 70  
Other Operating Expense, net
                               
Electricity generation (1)
  $ 13     $ 14     $ 41     $ 42  
Gathering, marketing and processing
    5       4       14       13  
Loss on involuntary conversion
    9       -       9       51  
Impairment of operating assets (2)
    38       4       38       4  
Other operating (income) expense, net (3)
    32       2       34       (4 )
Total
  $ 97     $ 24     $ 136     $ 106  
Other Expense, net
                               
Deferred compensation (4)
  $ (47 )   $ 8     $ (25 )   $ 23  
Interest income
    (6 )     (2 )     (18 )     (8 )
Other (income) expense, net
    2       (4 )     10       5  
Total
  $ (51 )   $ 2     $ (33 )   $ 20  
 
(1)
Includes increases in the allowance for doubtful accounts of $3 million each in third quarter 2008 and 2007 and $9 million and $11 million for the first nine months of 2008 and 2007, respectively.
(2)
Includes third quarter 2008 impairment loss on Gulf of Mexico Main Pass assets.
(3) 
Includes $38 million write-down of SemCrude L.P. receivable in third quarter 2008. See Note 13 – Commitments and Contingencies.
(4)
Amount represents increases or (decreases) in the fair value of Noble Energy common stock held in a rabbi trust.

 
7

 


Balance Sheet Information – Other balance sheet information is as follows:
 
 
September 30,
 
December 31,
 
 
2008
 
2007
 
 
(in millions)
 
Other Current Assets
       
Inventories
$ 91   $ 60  
Commodity derivative instruments
  40     15  
Prepaid expenses and other current assets
  28     25  
Deferred income taxes
  49     131  
Assets held for sale
  11     82  
Probable insurance claims
  17     2  
Total
$ 236   $ 315  
Other Noncurrent Assets
           
Equity method investments
$ 324   $ 357  
Mutual fund investments
  101     124  
Probable insurance claims
  8     37  
Commodity derivative instruments
  18     5  
Other noncurrent assets
  56     33  
Total
$ 507   $ 556  
Other Current Liabilities
           
Accrued and other current liabilities
$ 258   $ 207  
Current income taxes payable
  181     52  
Short-term borrowings
  48     25  
Asset retirement obligations
  13     13  
Interest payable
  17     18  
Deferred gain on sale of assets
  24     -  
Total
$ 541   $ 315  
Other Noncurrent Liabilities
           
Deferred compensation liability
$ 185   $ 225  
Accrued benefit costs
  53     51  
Other noncurrent liabilities
  61     61  
Total
$ 299   $ 337  

 
Adoption of SFAS 157 – We adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), as of January 1, 2008 as related to our financial assets and liabilities. SFAS 157 establishes a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and creates a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, additional disclosures are required, including disclosures of fair value measurements by level within the fair value hierarchy. As a result of adoption, we began incorporating a credit risk assumption into the measurement of certain assets and liabilities. Adoption of SFAS 157 did not have a significant impact on our consolidated financial statements. See Note 3 – Fair Value Measurements. On January 1, 2009, we will adopt SFAS 157 as it relates to nonfinancial assets and liabilities, including nonfinancial assets and liabilities measured at fair value in a business combination; impaired property, plant and equipment; goodwill; and initial recognition of asset retirement obligations. We do not expect any significant impact to our consolidated financial statements when we implement SFAS 157 for our existing nonfinancial assets and liabilities.
 
Adoption of FSP FIN 39-1 – We adopted FASB Staff Position FIN 39-1, “An Amendment of FASB Interpretation No. 39” (FSP FIN 39-1), as of January 1, 2008. FSP FIN 39-1 addresses certain modifications to FIN 39, “Offsetting of Amounts Related to Certain Contracts.” FIN 39-1 allows companies to offset fair value amounts recognized for derivative instruments and the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. The cash collateral (commonly referred to as a “margin”) must arise from derivative instruments recognized at fair value that are executed with the same counterparty under a master netting arrangement. Upon adoption, we elected to offset the right to reclaim cash collateral or the obligation to return cash collateral against our net derivative positions for which master netting agreements exist. As of September 30, 2008 and December 31, 2007, we had no significant cash collateral obligations.

 
8

 
 
 
Note 3 – Fair Value Measurements
Measurement information for financial assets and liabilities reported at fair value at September 30, 2008, includes the following:
 
    Fair Value Measurements Using            
 
  Quoted Prices in Active Markets
(Level 1)
 
  Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
   
 
Netting Adjustment (1)
    Fair Value Measurement
   
(in millions)
Financial assets:
                           
Mutual fund investments
$
 101
  $
                -
  $
-
 
 $
-
  $
 101
Commodity derivative instruments
 
           -
   
             149
   
         -
   
   (91)
   
         58
Financial liabilities:
                           
Commodity derivative instruments
 
           -
   
            (349)
   
         -
   
     91
   
     (258)
 
(1) 
Amount represents the impact of master netting agreements that allow us to settle asset and liability positions with the same counterparty.

SFAS 157, which we adopted as of January 1, 2008, establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority to quoted market prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. We use Level 1 inputs when available as Level 1 inputs generally provide the most reliable evidence of fair value. We use the following methods and assumptions to estimate the fair values of the assets and liabilities in the table above:

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.

Commodity Derivative Instruments – Our commodity derivative instruments consist of variable to fixed price commodity swaps, costless collars and basis swaps. We estimate the fair values of these instruments based on published forward commodity price curves for the underlying commodities as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates, Eurodollar futures rates and interest swap rates. The fair values also include a measure of counterparty credit risk or our own nonperformance risk based on the current published credit default swap rates. In addition, for costless collars, we estimate the option value of the contract floors and ceilings using an option pricing model which takes into account market volatility, market prices and contract parameters. See Note 4 – Derivative Instruments and Hedging Activities.

Note 4 – Derivative Instruments and Hedging Activities
Commodity Derivative Instruments – We use various derivative instruments in connection with forecasted crude oil and natural gas sales to minimize the impact of commodity price fluctuations on cash flows. Such instruments include variable to fixed price commodity swaps, costless collars and basis swaps. Although these derivative instruments expose us to credit risk, we monitor the creditworthiness of our counterparties, and we are not currently aware of any inability on the part of our counterparties to perform under the contracts. However, we are not able to predict sudden changes in the creditworthiness of our counterparties.

 
9

 

We account for derivative instruments and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), and all derivative instruments are reflected at fair value on our consolidated balance sheets. We elected to designate certain of our commodity derivative instruments as cash flow hedges through December 31, 2007. However, effective January 1, 2008, we voluntarily discontinued cash flow hedge accounting on all existing commodity derivative instruments. We made this change to provide greater flexibility in our use of derivative instruments. From January 1, 2008 forward, we recognize all gains and losses on such instruments in earnings during the period in which they occur. Net derivative losses that were deferred in accumulated other comprehensive income (loss) (AOCL) as of December 31, 2007, as a result of previous cash flow hedge accounting, will be reclassified to earnings in future periods as the original hedged transactions occur. Our discontinuation of cash flow hedge accounting for commodity derivative instruments did not affect our net assets or cash flows at December 31, 2007 and does not require adjustments to our previously reported financial statements.

The components of (gain) loss on commodity derivative instruments included in the consolidated statements of operations are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
Unrealized (gain) on commodity derivative instruments
  $ (943 )   $ -     $ (9 )   $ -  
Realized loss on commodity derivative instruments
    68       -       199       -  
Ineffectiveness loss (gain)
    -       2       -       (1 )
(Gain) loss on commodity derivative instruments
  $ (875 )   $ 2     $ 190     $ (1 )
 
Crude oil and natural gas sales include amounts reclassified from AOCL as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
(Decrease) in crude oil sales
  $ (89 )   $ (60 )   $ (279 )   $ (128 )
(Decrease) increase in natural gas sales
    (4 )     48       31       120  
Total (decrease) in oil and gas sales
  $ (93 )   $ (12 )   $ (248 )   $ (8 )

 
 
10

 

Approximately $80 million of deferred losses (net of tax) related to the fair values of the commodity derivative instruments previously designated as cash flow hedges and remaining in AOCL at September 30, 2008 will be reclassified to earnings during the next 12 months as the forecasted transactions occur, and will be recorded as a reduction in oil and gas sales. Of the $80 million deferred losses (net of tax) approximately $52 million is expected to be reclassified to earnings during the fourth quarter of 2008.

As of October 23, 2008, we had entered into the following crude oil derivative instruments:
 
   
Variable to Fixed Price Swaps
   
Costless Collars
 
           
Weighted
             
Weighted
 
Weighted
 
Production
     
Bbls
 
Average
       
Bbls
   
Average
 
Average
 
Period
 
Index
 
Per Day
 
Fixed Price
   
Index
 
Per Day
   
Floor Price
 
Ceiling Price
 
4th Qtr 2008
 
NYMEX WTI
    16,500   $ 37.92    
NYMEX WTI
    3,100     $ 60.00   $ 72.40  
4th Qtr 2008
 
Dated Brent
    2,000     88.18    
Dated Brent
    3,587       45.00     65.90  
4th Qtr 2008 Average
    18,500     43.35           6,687       51.95     68.91  
                                             
2009
 
NYMEX WTI
    9,000     88.43    
NYMEX WTI
    6,700       79.70     90.60  
2009
 
Dated Brent
    2,000     87.98    
Dated Brent
    5,074       70.62     87.93  
2009 Average
        11,000     88.35           11,774       75.79     89.45  
                                             
2010
 
                    -
    -     -    
NYMEX WTI
    5,500       69.00     85.65  

As of October 23, 2008, we had entered into the following natural gas derivative instruments:
 
   
Variable to Fixed Price Swaps
   
Costless Collars
 
           
Weighted
             
Weighted
 
Weighted
 
Production
     
MMBtu
 
Average
       
MMBtu
   
Average
 
Average
 
Period
 
Index
 
Per Day
 
Fixed Price
   
Index
 
Per Day
   
Floor Price
 
Ceiling Price
 
4th Qtr 2008
 
NYMEX HH
    170,000   $ 5.63    
 IFERC CIG
    14,000     $ 6.75   $ 8.70  
                                             
2009
    -     -     -    
NYMEX HH
    170,000       9.15     10.81  
2009
    -     -     -    
 IFERC CIG
    15,000       6.00     9.90  
2009 Average
          -     -           185,000       8.90     10.73  
                                               
2010
    -     -     -    
 IFERC CIG
    15,000       6.25     8.10  



 
11

 
As of October 23, 2008, we had entered into the following natural gas basis swaps:
 
   
Basis Swaps
 
                 
Weighted
 
Production
     
Index Less
 
MMBtu
   
Average
 
Period
 
Index
 
Differential
 
Per Day
   
Differential
 
4th Qtr 2008
 
IFERC CIG
 
 NYMEX HH
    100,000     $ 1.66  
4th Qtr 2008
 
IFERC ANR-OK
 
 NYMEX HH
    40,000       1.01  
4th Qtr 2008
 
IFERC PEPL
 
 NYMEX HH
    10,000       0.98  
4th Qtr 2008 Average
        150,000       1.44  
                         
2009
 
IFERC CIG
 
 NYMEX HH
    140,000       2.49  
 
Interest Rate Lock Derivative Instruments We entered into two interest rate swaps, or interest rate “locks”, each in the notional amount of $500 million. The locks were based on five and ten year US Treasury rates of 3.55% and 4.15%, respectively, and were scheduled to expire in September 2008. We settled the locks in July 2008 at a total cost of $0.2 million.

Note 5 – Capitalized Exploratory Well Costs
Changes in capitalized exploratory well costs during the period were as follows:
 
   
Nine Months Ended
 
   
September 30, 2008 (1)
 
   
(in millions)
 
       
Capitalized exploratory well costs at beginning of period
  $ 249  
Additions to capitalized exploratory well costs pending determination of proved reserves
    267  
Reclassified to proved oil and gas properties based on determination of proved reserves
    -  
Capitalized exploratory well costs charged to expense
    (1 )
Capitalized exploratory well costs at end of period
  $ 515  
 
(1) 
Changes in capitalized exploratory well costs exclude amounts that were capitalized and subsequently expensed in the same period.


 
12

 

The following table provides an aging of capitalized exploratory well costs (suspended well costs) based on the date the drilling was completed and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling:
 
   
September 30,
 
December 31,
 
   
2008
 
2007
 
   
(in millions, except
number of projects)
 
Exploratory well costs capitalized for a period of one year or less
  $ 364   $ 187  
Exploratory well costs capitalized for a period greater than one year after completion of drilling
    151     62  
Balance at end of period
  $ 515   $ 249  
Number of projects with exploratory well costs that have been capitalized for a period greater than one year after completion of drilling
    5     5  
               
 
The following table provides a further aging of those exploratory well costs that have been capitalized for a period greater than one year since the completion of drilling as of September 30, 2008:
         
Suspended Since
 
   
Total
   
2007
   
2006
   
2005
 
         
(in millions)
 
Project
                       
Raton South (deepwater Gulf of Mexico)
  $ 28     $ 5     $ 23     $ -  
Redrock (deepwater Gulf of Mexico)
    17       -       17       -  
Blocks O and I (West Africa)
    88       68       1       19  
Flyndre (North Sea)
    15       12       3       -  
Other
    3       -       3       -  
Total capitalized exploratory well costs that have been
                               
capitalized for a period greater than one year since completion of drilling
  $ 151     $ 85     $ 47     $ 19  
 

 
 
13

 

Exploratory well costs capitalized for more than one year at September 30, 2008 include five projects, two of which include activity in the deepwater Gulf of Mexico.  One project relates to Raton South (Mississippi Canyon Block 292) and includes $28 million of suspended exploratory well costs. A successful sidetrack well was recently completed on this prospect and tie back to a host facility is anticipated in late 2009. The other project relates to Redrock (Mississippi Canyon Block 204) and includes $17 million of suspended exploratory well costs. Redrock is currently considered a co-development candidate to the completed sidetrack well at Raton South.

We also incurred exploratory well costs of $88 million for the Blocks O and I project in West Africa. Since drilling the initial well for the project, additional seismic work has been completed and exploration and appraisal wells have been drilled to further evaluate our discoveries. The West Africa development team is proceeding with a program to further define the resources in this area such that an optimal development program may be designed. In addition to the amount of exploratory well costs that have been capitalized for a period greater than one year for the Blocks O and I project, we have incurred $175 million in suspended costs related to additional drilling activity in West Africa through September 30, 2008.

Another project, Flyndre, is located in the UK sector of the North Sea and incurred exploratory well costs of $15 million.  We successfully completed an exploratory appraisal well in 2007 and are working with the operator to formulate a development plan.

The remaining project, which totals $3 million in suspended exploratory well costs, continues to be evaluated by various means including additional seismic work, drilling additional wells and evaluating the potential of the exploration well.

Note 6 – 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:

   
Nine Months Ended
 
   
September 30, 2008
 
   
(in millions)
 
Asset retirement obligations at January 1, 2008
  $ 144  
Liabilities incurred in current period
    15  
Liabilities settled in current period
    (16 )
Revisions
    10  
Accretion expense
    7  
Asset retirement obligations at September 30, 2008
  $ 160  
 
Accretion expense is included in depreciation, depletion and amortization expense in the consolidated statements of operations.

 
14

 

Note 7 – Employee Benefit Plans
We have a noncontributory, tax-qualified defined benefit pension plan covering employees who were hired prior to May 1, 2006. We also have an unfunded, nonqualified restoration plan that provides the pension plan formula benefits that cannot be provided by the tax-qualified pension plan because of pay deferrals and the compensation and benefit limitations imposed on the pension plan by the Internal Revenue Code of 1986, as amended. Net periodic benefit cost related to the pension and restoration plans is as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
Service cost
  $ 3     $ 3     $ 9     $ 9  
Interest cost
    3       3       9       7  
Expected return on plan assets
    (3 )     (3 )     (9 )     (8 )
Other
    1       -       2       2  
Net periodic benefit cost
  $ 4     $ 3     $ 11     $ 10  
 
Cash contributions to the pension plan totaled $32 million and $10 million during the first nine months of 2008 and 2007, respectively.

Note 8 – Stock-Based Compensation
We recognized stock-based compensation expense as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
Stock-based compensation expense
  $ 10     $ 8     $ 30     $ 20  
Tax benefit recognized
  $ (4 )   $ (3 )   $ (11 )   $ (8 )
 
During the nine months ended September 30, 2008, we granted 1.1 million stock options with a weighted-average grant-date fair value of $20.42 per share and awarded 0.5 million shares of restricted stock subject to time vesting with a weighted-average grant-date fair value of $74.04 per share.

15

 
Note 9 – Basic and Diluted Earnings Per Share
Basic earnings per share of common stock is computed using the weighted average number of shares of common stock outstanding during each period. The diluted earnings per share of common stock may include the effect of Noble Energy shares held in a rabbi trust, outstanding stock options or shares of restricted stock, except in periods in which there is a net loss. The following table summarizes the calculation of basic and diluted earnings per share:
 
         
Weighted
         
Weighted
 
   
Net
   
Average
   
Net
   
Average
 
   
Income
   
Shares
   
Income
   
Shares
 
   
2008
   
2007
 
   
(in millions, except per share amounts)
 
Three Months Ended September 30:
                       
Net income
  $ 974       173     $ 223       171  
Basic Earnings Per Share
  $ 5.64             $ 1.30          
                                 
Net income
  $ 974       173     $ 223       171  
Effect of dilutive stock options and restricted stock
    -       2       -       2  
Effect of shares of Noble Energy stock in rabbi trust (1)
    (29 )     1       -       -  
Net income available to common shareholders
  $ 945       176     $ 223       173  
Diluted Earnings Per Share
  $ 5.37             $ 1.28          
                                 
Nine Months Ended September 30:
                               
Net income
  $ 1,045       172     $ 644       171  
Basic Earnings Per Share
  $ 6.06             $ 3.76          
                                 
Net income
  $ 1,045       172     $ 644       171  
Effect of dilutive stock options and restricted stock
    -       3       -       2  
Effect of shares of Noble Energy stock in rabbi trust (1)
    (16 )     1       -       -  
Net income available to common shareholders
  $ 1,029       176     $ 644       173  
Diluted Earnings Per Share
  $ 5.86             $ 3.72          
 
(1)
The diluted earnings per share calculation for the three and nine months ended September 30, 2008 includes decreases to net income of $29 million and $16 million (net of tax) respectively, related to a deferred compensation gain from Noble Energy shares held in a rabbi trust. When dilutive, the deferred compensation gain or loss (net of tax) is excluded from net income while the Noble Energy shares held in the rabbi trust are included in the diluted share count.

Approximately 1 million weighted average stock options and shares of restricted stock were antidilutive for each of the third quarter and the first nine months of 2008 and were excluded from the calculation of diluted earnings per share. Approximately 2 million weighted average shares of Noble Energy common stock held in a rabbi trust, stock options and shares of restricted stock were antidilutive for each of the third quarter and the first nine months of 2007 and were excluded from the calculation of diluted earnings per share.

Note 10 Income Taxes
The income tax provision consists of the following:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
Current
  $ 316     $ 32     $ 355     $ 104  
Deferred
    164       88       173       192  
Total income tax provision
  $ 480     $ 120     $ 528     $ 296  
 
The deferred tax assets associated with the foreign loss carryforwards of certain controlled foreign corporations, primarily Suriname, have increased during 2008.  In addition, because management currently does not believe it is more likely than not that the deferred tax assets related to these foreign loss carryforwards will be realized, the valuation allowance has been increased. The Suriname valuation allowance is expected to increase by $36 million during 2008 to a balance of $51 million at year end.

 
16

 

In 2007, China’s legislature, the National People’s Congress, enacted the China Corporate Income Tax Law.  This new legislation decreased our tax rate in China from 33% to 25% starting in 2008.

Unrecognized Tax Positions  We do not have significant unrecognized tax benefits resulting from differences between positions taken in tax returns and amounts recognized in the financial statements as of September 30, 2008. Our policy is to recognize any interest and penalties related to unrecognized tax benefits in income tax expense. We did not accrue interest or penalties at September 30, 2008, because the jurisdiction in which we have unrecognized tax benefits does not currently impose interest on underpayments of tax and we believe that we are below the minimum statutory threshold for imposition of penalties.

In our major tax jurisdictions, the earliest years remaining open to examination are as follows: US – 2005, Equatorial Guinea – 2006, China – 2006, Israel – 2000, UK – 2006 and the Netherlands – 2005.

Note 11 – Comprehensive Income
Comprehensive income includes net income and certain items recorded directly to shareholders’ equity and classified as AOCL. Comprehensive income was calculated as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in millions)
 
Net income
  $ 974     $ 223     $ 1,045     $ 644  
Other items of comprehensive income (loss)
                               
Oil and gas cash flow hedges:
                               
Realized amounts reclassified into earnings
    93       12       248       8  
Less tax provision
    (35 )     (5 )     (93 )     (3 )
Unrealized change in fair value
    -       12       -       (71 )
Less tax provision
    -       (4 )     -       27  
Interest rate cash flow hedges:
                               
Unrealized change in fair value
    12       -       1       -  
Less tax provision
    (5 )     -       -       -  
Net change in other
    -       -       (1 )     2  
Other comprehensive income (loss)
    65       15       155       (37 )
                                 
                                 
Comprehensive income
  $ 1,039     $ 238     $ 1,200     $ 607  

Note 12 – Segment Information
We have operations throughout the world and manage our operations by country. The following information is grouped into five components that are all primarily in the business of natural gas and crude oil acquisition, exploration, development, production and marketing:  the US, West Africa, the North Sea, Israel, and Other International, Corporate and Marketing. Other International includes  primarily Argentina (through February 2008), China, Ecuador and Suriname.

17

The following data was prepared on the same basis as our consolidated financial statements and excludes the effects of income taxes.
 
                                 
Other Int'l
 
         
United
   
West
   
North
         
Corporate &
 
   
Consolidated
   
States
   
Africa
   
Sea
   
Israel
   
Marketing
 
   
(in millions)
 
Three Months Ended September 30, 2008
                                   
Revenues from third parties
  $ 1,151     $ 646     $ 156     $ 136     $ 51     $ 162  
Amount reclassified from AOCL (1)
    (93 )     (84 )     (9 )     -       -       -  
Intersegment revenue
    -       112       -       -       -       (112 )
Income from equity method investees
    40       -       40       -       -       -  
Total Revenues
    1,098       674       187       136       51       50  
                                                 
DD&A
    194       158       8       12       7       9  
Loss on involuntary conversion
    9       9       -       -       -       -  
Impairment of operating assets
    38       38       -       -       -       -