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 June 30, 2009

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes [X]    No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X ]    No [  ]
 
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 [  ]
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]

As of July 13, 2009, there were 173,394,620 shares of the registrant’s common stock,
par value $3.33 1/3 per share, outstanding.

 
 

 

 
 
 
   
Page
   
Item 1.
Financial Statements
 
 
3
 
4
 
5
 
6
 
7
     
Item 2.
25
     
Item 3.
39
     
Item 4.
40
     
   
Item 1.
41
     
Item 1A.
41
     
Item 2.
41
     
Item 3.
41
     
Item 4.
41
     
Item 5.
42
     
Item 6.
42



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 

NOBLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)

         
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
         
2009
   
2008
   
2009
   
2008
 
Revenues
                             
Oil, Gas and NGL Sales
        $ 460     $ 1,130     $ 866     $ 2,074  
Income from Equity Method Investees
          16       56       27       118  
Other Revenues
          15       19       39       38  
Total Revenues
          491       1,205       932       2,230  
Costs and Expenses
                                     
Lease Operating Expense
          93       88       193       170  
Production and Ad Valorem Taxes
          23       51       42       94  
Transportation Expense
          13       16       25       29  
Exploration Expense
          33       103       75       143  
Depreciation, Depletion and Amortization
          196       196       396       399  
General and Administrative
          60       61       119       121  
Asset Impairments
          -       -       437       -  
Other Operating (Income) Expense, Net
          (3 )     20       (11 )     46  
Total Operating Expenses
          415       535       1,276       1,002  
Operating Income (Loss)
          76       670       (344 )     1,228  
Other (Income) Expense
                                     
Loss on Commodity Derivative Instruments
          139       828       66       1,065  
Interest, Net of Amount Capitalized
          23       17       41       34  
Other Non-Operating (Income) Expense, Net
          4       23       12       10  
Total Non-Operating (Income) Expense
            166       868       119       1,109  
Income (Loss) Before Income Taxes
            (90 )     (198 )     (463 )     119  
Income Tax Provision (Benefit)
            (33 )     (54 )     (218 )     48  
Net Income (Loss)
          $ (57 )   $ (144 )   $ (245 )   $ 71  
                                         
Earnings (Loss) Per Share, Basic
          $ (0.33 )   $ (0.84 )   $ (1.42 )   $ 0.41  
Earnings (Loss) Per Share, Diluted
            (0.33 )     (0.84 )     (1.42 )     0.41  
                                         
Weighted Average Number of Shares Outstanding, Basic
            173       172       173       172  
Weighted Average Number of Shares Outstanding, Diluted
            173       172       173       175  
                                         
The accompanying notes are an integral part of these financial statements.
                         
 


NOBLE ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)

   
(unaudited)
June 30,
   
December 31,
 
   
2009
   
2008
 
ASSETS
           
Current Assets
           
Cash and Cash Equivalents
  $ 956     $ 1,140  
Accounts Receivable, Net
    450       423  
Commodity Derivative Assets, Current
    203       437  
Other Current Assets
    128       158  
Total Assets, Current
    1,737       2,158  
Property, Plant and Equipment
               
Oil and Gas Properties (Successful Efforts Method of Accounting)
    12,161       11,963  
Property, Plant and Equipment, Other
    224       175  
Total Property, Plant and Equipment, Gross
    12,385       12,138  
Accumulated Depreciation, Depletion and Amortization
    (3,504 )     (3,134 )
Total Property, Plant and Equipment, Net
    8,881       9,004  
Goodwill
    758       759  
Other Noncurrent Assets
    475       463  
Total Assets
  $ 11,851     $ 12,384  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts Payable - Trade
  $ 493     $ 579  
Income Taxes Payable
    69       130  
Deferred Income Taxes, Net, Current
    25       142  
Other Current Liabilities
    303       323  
Total Liabilities, Current
    890       1,174  
Long-Term Debt
    2,416       2,241  
Deferred Income Taxes, Noncurrent
    1,947       2,174  
Other Noncurrent Liabilities
    539       486  
Total Liabilities
    5,792       6,075  
                 
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; 193 Million and 192 Million Shares Issued, Respectively
    645       641  
Additional Paid in Capital
    2,229       2,193  
Accumulated Other Comprehensive Loss
    (91 )     (110 )
Treasury Stock, at Cost; 19 Million Shares
    (615 )     (614 )
Retained Earnings
    3,891       4,199  
Total Shareholders’ Equity
    6,059       6,309  
Total Liabilities and Shareholders’ Equity
  $ 11,851     $ 12,384  
                 
The accompanying notes are an integral part of these financial statements.
         
 



NOBLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)

   
Six Months Ended 
June 30,
 
   
2009
   
2008
 
Cash Flows From Operating Activities
           
Net Income (Loss)
  $ (245 )   $ 71  
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
         
Depreciation, Depletion and Amortization
    396       399  
Asset Impairments
    437       -  
Deferred Income Taxes
    (359 )     10  
Income from Equity Method Investees
    (27 )     (118 )
Dividends from Equity Method Investees
    5       121  
Unrealized Loss on Commodity Derivative Instruments
    358       934  
Settlement of Previously Recognized Hedge Losses
    -       (101 )
Allowance for Doubtful Accounts
    (38 )     6  
Gain on Asset Sale
    (24 )     -  
Other Adjustments for Noncash Items Included in Income
    46       122  
Changes in Operating Assets and Liabilities:
               
(Increase) Decrease in Accounts Receivable
    7       (276 )
(Increase) Decrease in Other Current Assets
    17       (28 )
Increase in Accounts Payable
    10       64  
(Decrease) in Other Current Liabilities
    (47 )     (41 )
Other Assets and Liabilities, Net
    (38 )     (9 )
Net Cash Provided by Operating Activities
    498       1,154  
                 
Cash Flows From Investing Activities
               
Additions to Property, Plant and Equipment
    (777 )     (932 )
Proceeds from Sale of Property, Plant and Equipment
    -       109  
Net Cash Used in Investing Activities
    (777 )     (823 )
                 
Cash Flows From Financing Activities
               
Exercise of Stock Options
    13       24  
Excess Tax Benefits from Stock-Based Awards
    3       23  
Dividends Paid, Common Stock
    (63 )     (53 )
Purchase of Treasury Stock
    (1 )     (2 )
Proceeds from Credit Facilities
    340       450  
Repayment of Credit Facilities
    (1,161 )     (425 )
Net Proceeds from Issuance of 8 ¼% Senior Notes
    989       -  
Repayment of Installment Note
    (25 )     (25 )
Net Cash Provided by (Used in) Financing Activities
    95       (8 )
Increase (Decrease) in Cash and Cash Equivalents
    (184 )     323  
Cash and Cash Equivalents at Beginning of Period
    1,140       660  
Cash and Cash Equivalents at End of Period
  $ 956     $ 983  
                 
The accompanying notes are an integral part of these financial statements.
               
 


NOBLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in millions)
(unaudited)

   
Six Months Ended
June 30,
 
   
2009
   
2008
 
             
Common Stock
           
Balance, Beginning of Period
  $ 641     $ 636  
Exercise of Stock Options
    2       4  
Restricted Stock Awards, Net
    2       1  
Balance, End of Period
    645       641  
Capital in Excess of Par Value
               
Balance, Beginning of Period
    2,193       2,106  
Stock-Based Compensation Expense
    24       20  
Exercise of Stock Options
    11       20  
Tax Benefits Related to Exercise of Stock Options
    3       23  
Restricted Stock Awards, Net
    (2 )     (1 )
Rabbi Trust Shares Sold
    -       2  
Balance, End of Period
    2,229       2,170  
Accumulated Other Comprehensive Loss
               
Balance, Beginning of Period
    (110 )     (284 )
Oil and Gas Cash Flow Hedges:
               
Realized Amounts Reclassified Into Earnings
    20       97  
Interest Rate Cash Flow Hedges:
               
Unrealized Change in Fair Value
    -       (7 )
Net Change in Other
    (1 )     (1 )
Balance, End of Period
    (91 )     (195 )
Treasury Stock at Cost
               
Balance, Beginning of Period
    (614 )     (613 )
Purchases of Treasury Stock
    (1 )     (2 )
Rabbi Trust Shares Sold
    -       2  
Balance, End of Period
    (615 )     (613 )
Retained Earnings
               
Balance, Beginning of Period
    4,199       2,964  
Net Income (Loss)
    (245 )     71  
Cash Dividends ($0.36 Per Share and $0.30 Per Share, Respectively)
    (63 )     (53 )
Balance, End of Period
    3,891       2,982  
                 
Total Shareholders' Equity
  $ 6,059     $ 4,985  
                 
The accompanying notes are an integral part of these financial statements.
               
 



 
Note 1 – Organization and Nature of Operations
Noble Energy, Inc. (Noble Energy, we or us) is an independent energy company engaged in worldwide crude oil, natural gas and natural gas liquids (NGL) acquisition, exploration and production. We operate primarily in the Rocky Mountains, Mid-continent, and deepwater Gulf of Mexico areas in the US, with significant international operations offshore Israel, UK and West Africa.
 
Note 2 – Basis of Presentation
Presentation – Our consolidated accounts include our accounts and the accounts of our wholly-owned subsidiaries. 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 June 30, 2009 and December 31, 2008 and for the three months and six months ended June 30, 2009 and 2008 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 three-month and six-month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. 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, 2008.
 
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. Current credit market conditions combined with volatile commodity prices have resulted in increased uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined accurately, actual results could differ significantly from our estimates.
 
Statements of Operations Information – Other statements of operations information is as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
 
Other Revenues
                       
Electricity Sales (1)
  $ 11     $ 14     $ 32     $ 29  
Gathering, Marketing and Processing Revenues
    4       5       7       9  
Total
  $ 15     $ 19     $ 39     $ 38  
Other Operating (Income) Expense, Net
                               
Gain on Asset Sale (2)
  $ (24 )   $ -     $ (24 )   $ -  
Electricity Generation Expense (1)
    11       13       (19 )     28  
Gathering, Marketing and Processing Expense
    5       4       10       8  
Settlement of Legal Proceedings (3)
    4       -       9       -  
Gain on Involuntary Conversion (4)
    (3 )     -       (3 )     -  
Other Operating (Income) Expense, Net
    4       3       16       10  
Total
  $ (3 )   $ 20     $ (11 )   $ 46  
Other Non-Operating (Income) Expense, Net
                               
Deferred Compensation Expense
  $ 5     $ 29     $ 10     $ 22  
Interest Income
    (1 )     (6 )     (1 )     (12 )
Other (Income) Expense, Net
    -       -       3       -  
Total
  $ 4     $ 23     $ 12     $ 10  
 
(1)
Includes amounts related to our 100%-owned Ecuador integrated power project. The project includes the Amistad natural gas field, offshore Ecuador, which supplies natural gas to fuel the Machala power plant located in Machala, Ecuador. Electricity generation expense includes all operating and non-operating expenses associated with the plant, including depreciation, depletion and amortization expense (DD&A) and changes in the allowance for doubtful accounts. We recognized a net increase of $2 million in the allowance during second quarter 2009 and a net decrease of $40 million in the allowance during the first six months of 2009. We recognized net increases of $3 million and $6 million in the allowance during the second quarter and first six months of 2008, respectively. See Allowance for Doubtful Accounts below.
 

7

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


 
(2)
In February 2008, effective July 1, 2007, we sold our interest in Argentina for a sales price of $117.5 million. The gain on sale was deferred until second quarter 2009 when the Argentine government approved the sale.
 
(3)
Second quarter 2009 includes a $19 million charge on legal settlement (See Note 14 Commitments and Contingencies), offset by a $15 million gain on legal settlement related to reimbursement of bonuses paid for federal leases offshore California.
 
(4)
Amount represents receipt of insurance claims related to Hurricane Katrina damage.
 
Balance Sheet Information – Other balance sheet information is as follows:
 
   
June 30,
 
December 31,
 
      2009      2008  
     
(in millions)
 
Other Current Assets
             
Inventories, Current
  $
107
  $
105
 
Prepaid Expenses and Other Assets, Current
   
         21
   
          27
 
Asset Held for Sale (1)
   
           -
   
          26
 
Total
  $
128
  $
158
 
Other Noncurrent Assets
             
Equity Method Investments
  $
335
  $
311
 
Mutual Fund Investments
   
         90
   
          84
 
Commodity Derivative Assets, Noncurrent
   
           7
   
          33
 
Other Assets, Noncurrent
   
         43
   
          35
 
Total
  $
475
  $
463
 
Other Current Liabilities
             
Accrued and Other Liabilities, Current
  $
182
  $
215
 
Commodity Derivative Liabilities, Current
   
         39
   
          23
 
Asset Retirement Obligations, Current
   
         44
   
          27
 
Interest Payable
   
         38
   
            9
 
Short-Term Borrowings
   
           -
   
          25
 
Deferred Gain on Asset Sale, Current (2)
   
           -
   
          24
 
Total
  $
303
  $
323
 
Other Noncurrent Liabilities
             
Deferred Compensation Liabilities, Noncurrent
  $
182
  $
159
 
Asset Retirement Obligations, Noncurrent
   
       187
   
        184
 
Accrued Benefit Costs, Noncurrent
   
         83
   
          81
 
Commodity Derivative Liabilities, Noncurrent
   
         53
   
            2
 
Other Liabilities, Noncurrent
   
         34
   
          60
 
Total
  $
539
  $
486
 
 
(1)
The Main Pass asset was reclassified as held-and-used and impaired during first quarter 2009. Estimated proved reserves attributed to this property were less than 1% of our total estimated proved reserves. See Note 5 Fair Value Measurements
 
(2)
See footnote (2) to Statements of Operations Information above.
 
Allowance for Doubtful Accounts – Through December 31, 2008, we had recorded an allowance for doubtful accounts of $57 million related to our Ecuador power operations. The allowance was necessary to cover potentially uncollectible balances, as certain entities purchasing electricity in Ecuador have been slow to pay amounts due us. As a result of pursuing various strategies to protect our interests, including international arbitration and litigation, we reached a settlement in fourth quarter 2008. In March and April 2009, we received total payments of $60 million in accordance with the terms of the settlement, against which a reserve of $46 million had previously been recorded.  Accordingly, we reduced the allowance for doubtful accounts by $46 million and included the amount as a reduction in electricity generation expense during first quarter 2009. We recorded additions to the allowance for doubtful accounts of $2 million and $8 million during the second quarter and first six months of 2009, respectively, related to current period commodity and electricity sales. 
 

8

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

 
Adoption of FSP SFAS 132(R) – In December 2008, the FASB issued FSP SFAS 132(R), “Employers’ Disclosures About Postretirement Benefit Plan Assets” (FSP SFAS 132(R)). FSP SFAS 132(R) requires employers to make additional disclosures about plan assets for defined benefit pension and other postretirement benefit plans beginning with annual periods ending after December 15, 2009. The requirements apply to entities that are subject to the disclosure requirements of SFAS 132(R). Disclosures are to provide an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair-value measurements using significant unobservable inputs on changes in plan assets for the period, and significant concentrations of risk within plan assets. We adopted FSP SFAS 132(R) as of January 1, 2009. The statement provides only for enhanced annual disclosures and does not require additional interim disclosures. Adoption had no impact on our financial position or results of operations.
 
Adoption of SFAS 141(R) and SFAS 160 – In 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS 141(R)) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). These statements require most identifiable assets, liabilities and noncontrolling interests to be recorded at full fair value and require noncontrolling interests to be reported as a component of equity. Both statements are effective for periods beginning on or after December 15, 2008. SFAS 141(R) will be applied to business combinations occurring after the effective date and SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We adopted SFAS 141(R) and SFAS 160 as of January 1, 2009. There were no non-controlling interests at adoption date. Adoption had no impact on our financial position or results of operations.
 
Adoption of SFAS 157 – SFAS No. 157, “Fair Value Measurements” (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 of January 1, 2008, we adopted the provisions of SFAS 157 related to our financial assets and liabilities. As of January 1, 2009, we adopted the provisions of SFAS 157 related to our nonfinancial assets and liabilities, including nonfinancial assets and liabilities measured at fair value in a business combination; impaired property, plant and equipment; goodwill impairment assessments; and initial recognition of asset retirement obligations. Adoption of SFAS 157 did not have a significant impact on our consolidated financial statements. See Note 5 – Fair Value Measurements. See also Note 15 – Recently Issued Pronouncements.
 
Adoption of SFAS 161 – In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of derivative instruments and related gains and losses, and disclosures about credit risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted SFAS 161 as of January 1, 2009. The statement provides only for enhanced disclosures. Therefore, adoption had no impact on our financial position or results of operations. See Note 4 – Derivative Instruments and Hedging Activities.
 
Adoption of SFAS 165 – In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, SFAS 165 sets forth:
 
 
·
The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (through the date that the financial statements are issued or are available to be issued);
 
·
The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and
 
·
The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

9

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


SFAS 165 is effective for interim or annual periods ending after June 15, 2009, and is to be applied prospectively. We adopted SFAS 165 as of June 30, 2009. We have evaluated subsequent events after the balance sheet date of June 30, 2009 through July 30, 2009 which is the date the financial statements were issued.
 
Adoption of SFAS 168 – In June 2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles” (SFAS 168).  SFAS 168 establishes the FASB Accounting Standards Codification (Codification), which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification.  Generally, the Codification is not expected to change US GAAP.  All other accounting literature excluded from the Codification will be considered nonauthoritative.  SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We will adopt SFAS 168 for our quarter ending September 30, 2009.  We are currently evaluating the effect on our financial statement disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification.
 
Adoption of EITF Issue 08-06 – In November 2008, the FASB ratified the consensus reached in EITF Issue 08-06, “Equity Method Investment Accounting Considerations” (EITF 08-06). EITF 08-06 was issued to address questions that arose regarding the application of the equity method subsequent to the issuance of SFAS 141(R). EITF 08-06 concluded that equity method investments should continue to be recognized using a cost accumulation model, thus continuing to include transaction costs in the carrying amount of the equity method investment. In addition, EITF 08-06 clarifies that an impairment assessment should be applied to the equity method investment as a whole, rather than to the individual assets underlying the investment. EITF 08-06 is effective for fiscal years beginning on or after December 15, 2008. We adopted EITF 08-06 as of January 1, 2009. Adoption had no impact on our financial position or results of operations.
 
Adoption of Recent Staff Positions In April 2009, the FASB issued three related staff positions to clarify the application of SFAS 157 to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods. The final staff positions are effective for interim and annual periods ending after June 15, 2009.
 
 
·
FSP SFAS 157-4 FASB Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly” provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
 
·
FSP SFAS 115-2 and SFAS 124-2 – FASB Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.
 
·
FSP SFAS 107-1 and APB 28-1 – FASB Staff Position No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” requires disclosures of the fair value of financial instruments within the scope of SFAS 107 in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements. The staff position also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period.
 
We adopted the new staff positions for the quarter ended June 30, 2009. Adoption had no impact on our financial position or results of operations. See Note 5 – Fair Value Measurements for interim disclosures required by FSP SFAS 107-1 and APB 28-1.
 

10

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


Note 3 – Debt
On February 27, 2009, we closed an offering of $1 billion senior unsecured notes receiving net proceeds of $989 million, after deducting the discount and underwriting fees. The notes are due March 1, 2019, and pay interest semi-annually at 8¼%. Debt issuance costs of approximately $2 million were incurred and are being amortized to expense over the life of the debt issue. Substantially all of the net proceeds from the offering were used to repay outstanding indebtedness under our revolving credit facility maturing 2012. The notes are senior unsecured debt and will rank pari passu with any of our other senior unsecured indebtedness with respect to the payment of both principal and interest.
 
On May 11, 2009, we made the final $25 million installment payment to the seller of properties we purchased in 2007. Interest on the unpaid amount was due quarterly and accrued at a LIBOR rate plus .30%. The interest rate was 1.51% at the date of payment.
 
Our debt consists of the following:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
Debt
   
Interest Rate
   
Debt
   
Interest Rate
 
   
(in millions, except percentages)
 
Credit Facility
  $ 785       0.62 %   $ 1,606       0.80 %
5 ¼% Senior Notes, due April 15, 2014
    200       5.25 %     200       5.25 %
8 ¼% Senior Notes, due March 1, 2019
    1,000       8.25 %     -       -  
7 ¼% Notes, due October 15, 2023
    100       7.25 %     100       7.25 %
8% Senior Notes, due April 1, 2027
    250       8.00 %     250       8.00 %
7 ¼% Senior Debentures, due August 1, 2097
    89       7.25 %     89       7.25 %
Long-term Debt
    2,424               2,245          
Installment Payment, due May 11, 2009
    -       -       25       4.18 %
Total Debt
    2,424               2,270          
Unamortized Discount
    (8 )             (4 )        
Total Debt, Net of Discount
  $ 2,416             $ 2,266          
 
Note 4 – Derivative Instruments and Hedging Activities
Objectives and Strategies for Using Derivative Instruments – We are exposed to certain risks relating to our ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk. We use various commodity derivative instruments in connection with forecasted crude oil and natural gas sales to minimize the impact of commodity price fluctuations. Such instruments include variable to fixed price swaps, collars and basis swaps.
 
We may also use derivative instruments to manage interest rate risk by entering into forward contracts or swap agreements to minimize the impact of interest rate fluctuations associated with fixed or floating rate borrowings. We may designate these as cash flow hedges.
 
In accordance with US GAAP for derivative instruments and hedging activities, all of our derivative instruments are reflected as either assets or liabilities at fair value in our consolidated balance sheets. See Note 5 – Fair Value Measurements for a discussion of methods and assumptions used to estimate the fair values of our commodity derivative instruments and gross amounts of commodity derivative assets and liabilities.
 
Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of financial institutions, a majority of which are lenders under our credit facility arrangement.  Certain of these financial institutions have received capital injections and other forms of support from government sources, and may require additional financial assistance in the future to remain viable.  Discontinuance of government support to these institutions could have an adverse impact on the collectibility of our derivative receivables. We generally execute commodity derivative instruments 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 cash settled at the time of election.
 
We monitor the creditworthiness of our counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices as well as incur a loss. See also Note 5 – Fair Value Measurements.
 

11

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


Commodity Derivative Instruments – During 2009 and 2008 we accounted for our commodity derivative instruments using mark-to-market accounting, and we recognize all gains and losses on such instruments in earnings during the period in which they occur.  Prior to January 1, 2008, we elected to designate certain of our commodity derivative instruments as cash flow hedges. Net derivative gains and losses that were deferred in accumulated other comprehensive loss (AOCL) as of January 1, 2008, as a result of previous cash flow hedge accounting, are reclassified to earnings in future periods as the original hedged transactions occur.  See Derivatives in SFAS 133 Cash Flow Hedging Relationships table below.
 
As of June 30, 2009, we had entered into the following crude oil derivative instruments:
 
   
Variable to Fixed Price Swaps
 
Collars
 
           
Weighted
         
Weighted
 
Weighted
 
Production
     
Bbls
 
Average
     
Bbls
 
Average
 
Average
 
Period
 
Index
 
Per Day
 
Fixed Price
 
Index
 
Per Day
 
Floor Price
 
Ceiling Price
 
2009
 
NYMEX WTI
    9,000   $ 88.43  
NYMEX WTI
    6,700   $ 79.70   $ 90.60  
2009
 
Dated Brent
    2,000     87.98  
Dated Brent
    4,924     71.40     88.36  
2009 Average
        11,000     88.35         11,624     76.19     89.65  
                                         
2010
                 
NYMEX WTI
    14,500     61.48     75.63  
2010
                 
Dated Brent
    6,000     63.83     73.79  
2010 Average
                        20,500     62.17     75.10  

From July 1, 2009 to July 27, 2009, we entered into an additional Dated Brent collar covering 1,000 Bbls per day for calendar year 2010 with floor and ceiling prices of $65.00 and $75.00, respectively.  We also entered into an additional NYMEX WTI collar covering 1,000 Bbls per day for calendar year 2011 with floor and ceiling prices of $70.00 and $82.40, respectively.
 
As of June 30, 2009, we had entered into the following natural gas derivative instruments:
 
     
Collars
 
               
Weighted
   
Weighted
 
Production
       
MMBtu
   
Average
   
Average
 
Period
   
Index
 
Per Day
   
Floor Price
   
Ceiling Price
 
2009
   
NYMEX HH
    170,000     $ 9.15     $ 10.81  
2009
   
IFERC CIG (1)
    15,000       6.00       9.90  
2009 Average
          185,000       8.90       10.73  
                               
2010
   
NYMEX HH
    160,000       5.88       6.84  
2010
   
IFERC CIG
    15,000       6.25       8.10  
2010 Average
          175,000       5.91       6.95  
                               
2011
   
NYMEX HH
    90,000       5.92       7.04  
 
(1)    Colorado Interstate Gas – Northern System
 
From July 1, 2009 to July 27, 2009, we entered into additional NYMEX HH collars covering 50,000 MMBtu per day for calendar years 2010 and 2011 with weighted average floor and ceiling prices of $6.00 and $6.40, respectively.
 

12

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

As of June 30, 2009, we had entered into the following natural gas basis swaps:
 
       Basis Swaps          
                 
Weighted
 
Production
       
Index Less
 
MMBtu
 
Average
 
Period
   
Index
 
Differential
 
Per Day
 
Differential
 
2009
   
IFERC CIG
 
 NYMEX HH
    140,000   $ (2.49 )
2010
   
IFERC CIG
 
 NYMEX HH
    90,000     (1.68 )
 
From July 1, 2009 to July 27, 2009, we entered into additional IFERC CIG for NYMEX HH basis swaps covering 10,000 MMBtu per day for calendar year 2010, and 40,000 MMBtu per day for calendar year 2011, with weighted average differential prices of $(0.90) and $(0.88), respectively.
 
Interest Rate Derivative Instruments Changes in fair value of interest rate swaps or interest rate “locks” designated as cash flow hedges are reported in AOCL, to the extent the hedge is effective, until the forecasted transaction occurs, at which time they are recorded as adjustments to interest expense over the term of the related notes. During the first six months of 2008, we had 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. The locks were designated as cash flow hedges. The net increase in fair value of $20 million (net of tax) for second quarter 2008 and the net decrease in fair value of $7 million (net of tax) for the first six months of 2008 were reported in AOCL. The locks were settled in July 2008 at a cost of $0.2 million.
 
Fair Value Amounts and Gains and Losses on Derivative Instruments – The fair values of derivative instruments in our consolidated balance sheets were as follows:
 
Derivative Instruments Not Designated as Hedging Instruments Under SFAS 133
 
 
   
Asset Derivative Instruments
 
Liability Derivative Instruments
 
   
June 30,
   
December 31,
 
June 30,
 
December 31,
 
   
2009
   
2008
 
2009
 
2008
 
(in 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
  $ 203    
Current Assets
  $ 437  
Current Liabilities
  $ 39  
Current Liabilities
  $ 23  
   
Noncurrent Assets
    7    
Noncurrent Assets
    33  
Noncurrent Liabilities
    53  
Noncurrent Liabilities
    2  
Total
      $ 210         $ 470       $ 92       $ 25  

 

 

 

 

 

 

 

 

 

 

13

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


The effect of derivative instruments on our consolidated statements of operations was as follows:
 
Derivative Instruments Not Designated as Hedging Instruments Under SFAS 133
 
 
   
 Amount of (Gain) Loss on Derivative
Instruments Recognized in Income
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
 
Commodity Derivative Instruments
                       
Realized Mark-to-Market (Gain) Loss (1)
  $ (138 )   $ 112     $ (292 )   $ 131  
Unrealized Mark-to-Market Loss (1)
    277       716       358       934  
Total (Gain) Loss on Commodity Derivative Instruments
  $ 139     $ 828     $ 66     $ 1,065  
 
(1)
Amounts are included in the line item “Loss on Commodity Derivative Instruments” in our consolidated statements of operations.
 

 
Derivative Instruments in Previously Designated SFAS 133 Cash Flow Hedging Relationships
 
 
   
Amount of (Gain) Loss on Derivative Instruments Recognized in OCI
   
Amount of (Gain) Loss on Derivative Instruments Reclassified from AOCL
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
   
(in millions)
 
Three Months Ended June 30,
                       
Commodity Derivative Instruments (1)
                       
Crude Oil (2)
  $ -     $ -     $ 15     $ 93  
Natural Gas (2)
    -       -       -       2  
                                 
Treasury Rate Locks
    -       (32 )     -       -  
Total
  $ -     $ (32 )   $ 15     $ 95  
                                 
Six Months Ended June 30,
                               
Commodity Derivative Instruments (1)
                               
Crude Oil (2)
  $ -     $ -     $ 32     $ 190  
Natural Gas (2)
    -       -       -       (35 )
                                 
Treasury Rate Locks
    -       11       -       -  
Total
  $ -     $ 11     $ 32     $ 155  
 
(1)
Includes effect of commodity derivative instruments previously accounted for as cash flow hedges. Net derivative gains and losses that were deferred in AOCL as of January 1, 2008, as a result of previous cash flow hedge accounting, are reclassified to earnings in future periods as the original hedged transactions occur.
 
(2)
The amount of (Gain) Loss reclassified from AOCL on Derivative Instrument is recognized in Oil, Gas and NGL Sales within our consolidated statement of operations.
 

 

 

 

14

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)


AOCL – As of June 30, 2009, the balance in AOCL included net deferred losses of $29 million related to the fair value of commodity derivative instruments previously accounted for as cash flow hedges. The net deferred losses are net of deferred income tax benefits of $17 million. Approximately $22 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 June 30, 2009 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 approximately $36 million before tax. All forecasted transactions currently being hedged and for which amounts remain in AOCL at June 30, 2009, are expected to occur by December 2010.
 
Note 5 – Fair Value Measurements
US GAAP for fair value measurements 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. 
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Certain assets and liabilities are reported 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, collars and basis swaps. We estimate the fair values of these instruments based on published commodity futures price strips 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 of commodity derivative instruments in an asset position include a measure of counterparty credit 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 value of the contract floors and ceilings using an option pricing model which takes into account market volatility, market prices and contract terms. See Note 4 – Derivative Instruments and Hedging Activities.
 
Patina Deferred Compensation Liability - The value is dependant upon the fair values of mutual fund investments and shares of Noble Energy common stock held in a rabbi trust. See Mutual Fund Investments above.
 

15

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

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)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Adjustment (1)
   
Fair Value Measurement
 
   
(in millions)
 
As of June 30, 2009
                             
Financial Assets:
                             
Mutual Fund Investments
  $ 90     $ -     $ -     $ -     $ 90  
Commodity Derivative Instruments
    -       245       -       (35 )     210  
Financial Liabilities:
                                       
Commodity Derivative Instruments
    -       (127 )     -       35       (92 )
Patina Deferred Compensation Liability
    (139 )     -       -       -       (139 )
As of December 31, 2008
                                       
Financial Assets:
                                       
Mutual Fund Investments
    84       -       -       -       84  
Commodity Derivative Instruments
    -       492       -       (22 )     470  
Financial Liabilities:
                                       
Commodity Derivative Instruments
    -       (47 )     -       22       (25 )
Patina Deferred Compensation Liability
    (123 )     -       -       -       (123 )
 
(1) Amount represents the impact of master netting agreements that allow us to net cash settle asset and liability positions with the same counterparty.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
Certain assets and liabilities are reported at fair value on a nonrecurring basis in our consolidated balance sheets.  The following methods and assumptions were used to estimate the fair values: 
 
Asset Impairments – In accordance with US GAAP for the impairment or disposal of long-lived assets, we review a proved oil and gas property for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such property. We estimate the future cash flows expected in connection with the property and compare such future cash flows to the carrying amount of the property to determine if the carrying amount is recoverable. If the carrying amount of the property exceeds its estimated undiscounted future cash flows, the carrying amount of the property is reduced to its estimated fair value. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and gas production, commodity prices based on published commodity futures price strips as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate.
 
As a result of a significant decline in the forward natural gas futures price strip at March 31, 2009, we reviewed our oil and gas properties that are sensitive to natural gas price decreases for impairment. We determined that the carrying amount of Granite Wash, an onshore US area where we have significantly reduced investments beginning in 2007, was not recoverable from future cash flows and, therefore, was impaired at March 31, 2009.  We reduced Granite Wash to its fair value, which was determined using the discounted cash flow method described above, as comparable market data was not available.  We also impaired the Main Pass asset which had been reclassified from held-for-sale to held-and-used. Total pre-tax (non-cash) impairments for first quarter 2009 were $437 million. The impaired assets, which had a total carrying amount of $753 million, were reduced to their estimated fair value of $316 million. The asset impairments were Level 3 fair value measurements.
 
Asset Retirement Obligations Incurred in Current Period – We estimate the fair values of asset retirement obligations (AROs) based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO; estimated probabilities, amounts and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates. See Note 7 – Asset Retirement Obligations for a summary of changes in AROs. Asset retirement obligations incurred in the current period were Level 3 fair value measurements.
 

16

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

Debt –The fair value of fixed-rate debt is estimated based on the published market prices for the same or similar issues.  The fair value of floating-rate debt is estimated using the carrying amounts because the interest rates paid on such debt are set for periods of three months or less. See Note 3 Debt.
 
Additional information regarding our debt is as follows:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
   
(in millions)
 
Total Debt, Net of Unamortized Discount
  $ 2,416     $ 2,566     $ 2,266     $ 2,172  
 
 
Note 6 – Capitalized Exploratory Well Costs
Changes in capitalized exploratory well costs are as follows and exclude amounts that were capitalized and subsequently expensed in the same period:
 
   
Six Months Ended
June 30,
     
(in millions)
Capitalized Exploratory Well Costs, Beginning of Period
  $
501
 
Additions to Capitalized Exploratory Well Costs Pending Determination of Proved Reserves
             96
 
Reclassified to Property, Plant and Equipment Based on Determination of Proved Reserves
            (88
)
Capitalized Exploratory Well Costs Charged to Expense
   
              (9
Capitalized Exploratory Well Costs, End of Period
  $
500
 

 
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:
 
   
June 30,
 
December 31,
 
   
2009
   
2008
 
   
(in millions)
 
Exploratory Well Costs Capitalized for a Period of One Year or Less
  $ 225     $ 256  
Exploratory Well Costs Capitalized for a Period Greater Than One Year After Completion of Drilling
    275       245  
Balance at End of Period
  $ 500     $ 501  
Number of Projects with Exploratory Well Costs That Have Been Capitalized for a Period Greater Than One Year After Completion of Drilling
    4       6  
 

17

NOBLE ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

The following table provides a further aging of those exploratory well costs that have been capitalized for a period greater than one year since the completion of drilling as of June 30, 2009:
 
         
Suspended Since
 
   
Total
   
2008
   
2007
   
2006 &
Prior
 
   
(in millions)
 
Project
                       
West Africa
  $ 221     $ 61     $ 140     $ 20  
Redrock (deepwater Gulf of Mexico)
    17       -       -       17  
Flyndre (North Sea)
    15       -       12       3  
Selkirk (North Sea)
    22       -       22       -