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 March 31, 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 April 15, 2008: 172,212,293.



 

 

                                                                   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
 
   
March 31,
 
   
2008
   
2007
 
Revenues
           
Oil, gas and NGL sales
  $ 944     $ 667  
Income from equity method investees
    62       46  
Other revenues
    19       30  
Total
    1,025       743  
Costs and Expenses
               
Lease operating costs
    82       79  
Production and ad valorem taxes
    43       25  
Transportation expense
    13       11  
Exploration expense
    40       45  
Depreciation, depletion and amortization
    203       166  
General and administrative
    60       45  
Other operating expense, net
    21       29  
Total
    462       400  
Operating Income
    563       343  
Other (Income) Expense
               
Loss (gain) on commodity derivative instruments
    237       (1 )
Interest, net of amount capitalized
    17       27  
Other (income) expense, net
    (7 )     13  
Total
    247       39  
Income Before Income Taxes
    316       304  
Income Tax Provision
    101       92  
Net Income
  $ 215     $ 212  
                 
Earnings Per Share
               
Basic
  $ 1.25     $ 1.24  
Diluted
  $ 1.20     $ 1.22  
                 
Weighted average number of shares outstanding
               
    Basic
    172       171  
    Diluted
    175       173  
                 
The accompanying notes are an integral part of these financial statements.
         
 
 

 
2

 
 
Noble Energy, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
(in millions)
 
             
   
(unaudited)March 31,
     
December 31,
 
   
2008
   
2007
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
$ 
       807
  $
660
 
Accounts receivable - trade, net
 
          727
   
          594
 
Deferred income taxes
 
          125
   
          131
 
Other current assets
 
          117
   
          184
 
    Total current assets
 
       1,776
   
       1,569
 
Property, plant and equipment
           
Oil and gas properties (successful efforts method of accounting)
 
     10,684
   
     10,217
 
Other property, plant and equipment
 
          117
   
          112
 
   
     10,801
   
     10,329
 
Accumulated depreciation, depletion and amortization
 
     (2,594)
   
     (2,384)
 
Total property, plant and equipment, net
 
       8,207
   
       7,945
 
Goodwill
 
          759
   
          761
 
Other noncurrent assets
 
          540
   
          556
 
Total Assets
$ 
   11,282
  $
10,831
 
             
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Current Liabilities
           
Accounts payable - trade
$ 
        731
 
$
781
 
Commodity derivative instruments
 
          623
   
          540
 
Other current liabilities
 
          429
   
          315
 
    Total current liabilities
 
       1,783
   
       1,636
 
Deferred income taxes
 
       2,019
   
       1,984
 
Asset retirement obligations
 
          148
   
          131
 
Commodity derivative instruments
 
          109
   
            83
 
Other noncurrent liabilities
 
          329
   
          337
 
Long-term debt
 
       1,851
   
       1,851
 
Total Liabilities
 
       6,239
   
       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
 
          639
   
          636
 
Capital in excess of par value
 
       2,133
   
       2,106
 
Accumulated other comprehensive loss
 
        (274)
   
        (284)
 
Treasury stock, at cost; 19 million shares
 
        (613)
   
        (613)
 
Retained earnings
 
       3,158
   
       2,964
 
Total Shareholders’ Equity
 
       5,043
   
       4,809
 
Total Liabilities and Shareholders’ Equity
   11,282
  $
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)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
Cash Flows From Operating Activities
           
Net income
  $ 215     $ 212  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation, depletion and amortization - oil and gas production
    203       166  
Deferred income taxes
    35       48  
Income from equity method investees
    (62 )     (46 )
Dividends received from equity method investees
    76       53  
Unrealized loss (gain) on commodity derivative instruments
    218       (1 )
Settlement of previously recognized hedge losses
    (62 )     (51 )
Other
    20       58  
Changes in operating assets and liabilities:
               
(Increase) in accounts receivable
    (137 )     (51 )
(Increase) decrease in other current assets
    (5 )     34  
(Decrease) increase in accounts payable
    (61 )     12  
Increase (decrease) in other current liabilities
    66       (12 )
Net Cash Provided by Operating Activities
    506       422  
                 
Cash Flows From Investing Activities
               
Additions to property, plant and equipment
    (464 )     (332 )
Proceeds from sale of property, plant and equipment
    109       -  
Net Cash Used in Investing Activities
    (355 )     (332 )
                 
Cash Flows From Financing Activities
               
Exercise of stock options
    10       13  
Excess tax benefits from stock-based awards
    9       8  
Cash dividends paid
    (21 )     (13 )
Purchases of treasury stock
    (2 )     (102 )
Proceeds from credit facilities
    500       115  
Repayment of credit facilities
    (500 )     (115 )
Proceeds from short term borrowings, net
    -       100  
Net Cash (Used in) Provided by Financing Activities
    (4 )     6  
Increase in Cash and Cash Equivalents
    147       96  
Cash and Cash Equivalents at Beginning of Period
    660       153  
Cash and Cash Equivalents at End of Period
  $ 807     $ 249  
                 
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
    -       -       -       -       -       -       215       215  
Stock-based compensation expense
    -       -       -       9       -       -       -       9  
Exercise of stock options
    1       -       2       8       -       -       -       10  
Tax benefits related to exercise of stock options
    -       -       -       9       -       -       -       9  
Restricted stock awards, net
    -       -       1       (1 )     -       -       -       -  
Dividends ($0.12 per share)
    -       -       -       -       -       -       (21 )     (21 )
Changes in treasury stock, net
    -       -       -       2       -       -       -       2  
Oil and gas cash flow hedges:
                                                               
Realized amounts reclassified into earnings
    -       -       -       -       38       -       -       38  
Interest rate cash flow hedges:
                                                               
Unrealized change in fair value
                                    (27 )                     (27 )
Net change in other
    -       -       -       -       (1 )     -       -       (1 )
March 31, 2008
    192       19     $ 639     $ 2,133     $ (274 )   $ (613 )   $ 3,158     $ 5,043  
                                                                 
December 31, 2006
    188       17     $ 629     $ 2,041     $ (140 )   $ (511 )   $ 2,095     $ 4,114  
Net income
    -       -       -       -       -       -       212       212  
Stock-based compensation expense
    -       -       -       5       -       -       -       5  
Exercise of stock options
    1       -       3       10       -       -       -       13  
Tax benefits related to exercise of stock options
    -       -       -       8       -       -       -       8  
Restricted stock awards, net
    1       -       2       (2 )     -       -       -       -  
Dividends ($0.075 per share)
    -       -       -       -       -       -       (13 )     (13 )
Purchases of treasury stock
    -       2       -       -       -       (102 )     -       (102 )
Oil and gas cash flow hedges:
                                                               
Realized amounts reclassified into earnings
    -       -       -       -       (9 )     -       -       (9 )
Unrealized change in fair value
    -       -       -       -       (63 )     -       -       (63 )
Net change in other
    -       -       -       -       1       -       -       1  
March 31, 2007
    190       19     $ 634     $ 2,062     $ (211 )   $ (613 )   $ 2,294     $ 4,166  
                                                                 
The accompanying notes are an integral part of these financial statements.
                                 



 
5

 

Noble Energy, Inc. and Subsidiaries
 
Consolidated Statements of Comprehensive Income
 
(in millions)
 
(unaudited)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
             
Net income
  $ 215     $ 212  
Other items of comprehensive income (loss)
               
Oil and gas cash flow hedges
               
Realized amounts reclassified into earnings
    60       (15 )
Less tax provision
    (22 )     6  
Unrealized change in fair value
    -       (100 )
Less tax provision
    -       37  
Interest rate cash flow hedges
               
Unrealized change in fair value
    (43 )     -  
Less tax provision
    16       -  
Net change in other
    (1 )     1  
Other comprehensive income (loss)
    10       (71 )
Comprehensive income
  $ 225     $ 141  
                 
The accompanying notes are an integral part of these financial statements.
         

 
6

 

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 NGLs. We have exploration, exploitation and production operations domestically 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 March 31, 2008 (unaudited) and December 31, 2007 and for the three months ended March 31, 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 three-month period ended March 31, 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.

Sale of Argentina Assets – In February 2008, we closed on the sale of our interest in Argentina for a sales price of $117.5 million, effective July 1, 2007. The gain on sale has been deferred as the sale is contingent upon approval of the Argentine government. The Argentina operations, financial position and cash flows are not material and have not been reflected as discontinued operations.

Statements of Operations Information – Other statements of operations information is as follows:
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
   
(in millions)
 
Other Revenues
           
Electricity sales
  $ 15     $ 23  
Gathering, marketing and processing revenues
    4       7  
Total
  $ 19     $ 30  
Other Operating Expense, net
               
Electricity generation expense
  $ 15     $ 16  
Gathering, marketing and processing expense
    5       5  
Other operating expense, net
    1       8  
Total
  $ 21     $ 29  
Other (Income) Expense, net
               
Deferred compensation (income) expense
  $ (7 )   $ 12  
Interest income
    (6 )     (3 )
Other expense, net
    6       4  
Total
  $ (7 )   $ 13  

 
7

 


Balance Sheet Information – Other balance sheet information is as follows:
 
 
March 31,
 
December 31,
 
 
2008
 
2007
 
 
(in millions)
 
Other Current Assets
         
Inventories
$ 70     $ 60  
Commodity derivative instruments
  24       15  
Prepaid expenses and other current assets
  21       25  
Assets held for sale
  -       82  
Probable insurance claims
  2       2  
Total
$ 117     $ 184  
Other Noncurrent Assets
             
Equity method investments
$ 343     $ 357  
Mutual fund investments
  118       124  
Probable insurance claims
  37       37  
Commodity derivative instruments
  10       5  
Other noncurrent assets
  32       33  
Total
$ 540     $ 556  
Other Current Liabilities
             
Accrued and other current liabilities
$ 222     $ 206  
Current income taxes payable
  84       52  
Current installment of long-term debt
  25       25  
Asset retirement obligations
  11       13  
Interest payable
  19       18  
Interest rate lock derivative instruments
  45       1  
Deferred gain on asset sale
  23       -  
Total
$ 429     $ 315  
Other Noncurrent Liabilities
             
Deferred compensation liability
$ 214     $ 225  
Accrued benefit costs
  55       51  
Other noncurrent liabilities
  60       61  
Total
$ 329     $ 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 have begun incorporating our own credit standing into the measurement of certain liabilities. Adoption did not have a significant impact on our consolidated financial statements. See Note 3 – Fair Value Measurements. We will adopt SFAS No. 157 as it relates to non-financial assets and liabilities on January 1, 2009.
 
Adoption of SFAS 159 – We adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) as of January 1, 2008. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. Adoption had no effect on our financial position or results of operations as we made no elections to report selected financial assets or liabilities at fair value.
 
Adoption of FSP FIN 39-1 – We adopted FSP 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 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 March 31, 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 March 31, 2008, includes the following:

   
Fair Value Measurements Using
           
   
Quoted Prices in
   
Significant Other
Significant
       
Fair
 
   
Active Markets
   
Observable Inputs
Unobservable Inputs
Netting
 
Value
 
   
(Level 1)
   
(Level 2)
 
(Level 3)
   
Adjustment (1)
 
Measurement
 
   
  (in millions)
 
Financial assets:
                             
Mutual fund investments
$
   118
   $
       -
  $
-
   $
-
   $
 118
 
Commodity derivative instruments
 
  -
   
       49
   
-
   
   (15
 )  
      34
 
Financial liabilities:
                             
Commodity derivative instruments
 
  -
   
    (747
 )  
 -
   
     15
   
   (732
Interest rate lock derivative instruments
 
  -
   
      (45
 )  
 -
   
 -
   
     (45
                               
(1)   Amount represents the impact of legally enforceable 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 that 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 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 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 includes a measure of nonperformance risk. 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.

Interest Rate Lock Derivative Instruments – We have interest rate locks of $1 billion notional value, based on US Treasury rates. We estimate the fair values of the locks based on published interest rate yield curves as of the date of the estimate. The discount rate used in the discounted cash flow projections includes a measure of nonperformance risk. 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. Such instruments include variable to fixed price swaps, costless collars and basis swaps. Although these derivative instruments may expose us to credit risk, we monitor the creditworthiness of our counterparties and believe that losses from nonperformance are unlikely to be significant. 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, 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 discontinued cash flow hedge accounting on all existing commodity derivative instruments. We voluntarily 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. The discontinuance 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 loss (gain) on commodity derivative instruments are as follows:
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
   
(in millions)
 
Unrealized loss on commodity derivative instruments
  $ 218     $ -  
Realized loss on commodity derivative instruments
    19       -  
Ineffectiveness gain
    -       (1 )
Loss (gain) on commodity derivative instruments
  $ 237     $ (1 )

Crude oil and natural gas sales include amounts reclassified from AOCL as follows:
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
   
(in millions)
 
Decrease in crude oil sales
  $ (97 )   $ (28 )
Increase in natural gas sales
    37       43  
Total (decrease) increase in oil and gas sales
  $ (60 )   $ 15  

As of April 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
 
2nd Qtr 2008
 
NYMEX WTI
    16,500     $ 38.33  
NYMEX WTI
    3,100     $ 60.00     $ 72.40  
3rd Qtr 2008
 
NYMEX WTI
    16,500       38.11  
NYMEX WTI
    3,100       60.00       72.40  
4th Qtr 2008
 
NYMEX WTI
    16,500       37.92  
NYMEX WTI
    3,100       60.00       72.40  
2nd Qtr 2008
 
Dated Brent
    2,000       88.18  
Dated Brent
    4,220       45.00       66.65  
3rd Qtr 2008
 
Dated Brent
    2,000       88.18  
Dated Brent
    3,848       45.00       66.19  
4th Qtr 2008
 
Dated Brent
    2,000       88.18  
Dated Brent
    3,587       45.00       65.90  
                                               
2009
 
NYMEX WTI
    9,000       88.43  
NYMEX WTI
    4,700       68.51       79.11  
2009
 
Dated Brent
    2,000       87.98  
Dated Brent
    3,074       45.00       63.04  
                                               
2010
                   
NYMEX WTI
    5,500       69.00       85.65  

 
10

 

As of April 23, 2008, we had entered into the following natural gas derivative instruments:

   
Variable to Fixed Price Swaps (1)
 
Costless Collars
 
             
Weighted
           
Weighted
   
Weighted
 
Production
     
MMBtu
   
Average
     
MMBtu
   
Average
   
Average
 
Period
 
Index
 
Per Day
   
Fixed Price
 
Index
 
Per Day
   
Floor Price
   
Ceiling Price
 
2nd Qtr 2008
 
NYMEX HH
    170,000     $ 5.34  
 IFERC CIG
    14,000     $ 6.75     $ 8.70  
3rd Qtr 2008
 
NYMEX HH
    170,000       5.33  
 IFERC CIG
    14,000       6.75       8.70  
4th Qtr 2008
 
NYMEX HH
    170,000       5.63  
 IFERC CIG
    14,000       6.75       8.70  
                                               
2009
                   
NYMEX HH
    120,000       8.74       10.49  
2009
                   
 IFERC CIG
    15,000       6.00       9.90  
                                               
2010
                   
 IFERC CIG
    15,000       6.25       8.10  

(1)
In addition to the NYMEX HH variable to fixed price swaps shown above for 2008, we have 100,000 MMBtu per day of IFERC CIG basis swaps with an average differential to NYMEX HH of $(1.66) per MMBtu, 40,000 MMBtu per day of IFERC ANR-OK basis swaps with an average differential to NYMEX HH of $(1.01) per MMBtu, and 10,000 MMBtu per day of  IFERC PEPL basis swaps with an average differential to NYMEX HH of $(0.98) per MMBtu.

Approximately $180 million of deferred losses (net of taxes) related to the fair values of the commodity derivative instruments previously designated as cash flow hedges and remaining in AOCL at March 31, 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.

Interest Rate Lock Derivative Instruments We have entered into two interest rate swaps, or interest rate “locks”, each in the notional amount of $500 million. The locks are based on five and ten year US Treasury rates of 3.55% and 4.15%, respectively, and expire in September 2008. The locks are designated as cash flow hedges and changes in their fair values are reported in AOCL, to the extent the hedges are effective, until the forecasted transactions occur. At that time, we will begin recording the amounts remaining in AOCL as adjustments to interest expense. At March 31, 2008, AOCL included a deferred loss of $28 million, net of tax, related to these interest rate locks.

Note 5 – Capitalized Exploratory Well Costs
Changes in capitalized exploratory well costs during the period were as follows:
 
 
Three Months Ended
 
 
March 31, 2008 (1)
 
   
(in millions)
 
Capitalized exploratory well costs at beginning of period
  $ 249  
Additions to capitalized exploratory well costs pending determination of proved reserves
    31  
Reclassified to property, plant and equipment based on determination of proved reserves
    -  
Capitalized exploratory well costs charged to expense
    -  
Capitalized exploratory well costs at end of period
  $ 280  

(1)
Changes in capitalized exploratory well costs exclude amounts that were capitalized and subsequently expensed in the same period.

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:
 
   
March 31,
   
December 31,
 
   
2008
   
2007
 
   
(in millions)
 
Capitalized exploratory well costs that have been capitalized for a period of one year or less
  $ 203     $ 187  
Capitalized exploratory well costs that have been capitalized for a period greater than one year after completion of drilling
    77       62  
Balance at end of period
  $ 280     $ 249  
Number of projects that have exploratory well costs that have been capitalized for a period greater than one year after completion of drilling
    7       6  

 
11

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 March 31, 2008:
 
         
Suspended Since
 
   
Total
   
2007
   
2006
   
2005
 
   
(in millions)
 
Project
                       
Raton South (deepwater Gulf of Mexico)
  $ 23     $ -     $ 23     $ -  
Redrock (deepwater Gulf of Mexico)
    17       -       17       -  
Blocks O and I (West Africa)
    19       -       -       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
  $ 77     $ 12     $ 46     $ 19  

Exploratory well costs capitalized for more than one year at March 31, 2008 included seven projects, two of which included activity in the deepwater Gulf of Mexico.  One project relates to Raton South (Mississippi Canyon Block 292) and includes $23 million of suspended exploratory well costs. We are currently evaluating a possible sidetrack-appraisal well to be drilled during late 2008 or 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 a successful sidetrack-appraisal well at Raton South. In addition, we are currently evaluating options to tie back to subsea pipelines and other facilities.

We also incurred exploratory well costs for the Blocks O and I projects in West Africa. These exploratory well costs totaled $19 million. 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 Block O and Block I projects, we have incurred $160 million in suspended costs related to additional drilling activity in West Africa through March 31, 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 we are working with the operator to formulate a development plan.

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



 
12

 


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:

   
Three Months Ended
 
   
March 31, 2008
 
   
(in millions)
 
Asset retirement obligations at beginning of period
  $ 144  
Liabilities incurred in current period
    14  
Liabilities settled in current period
    (4 )
Revisions
    3  
Accretion expense
    2  
Asset retirement obligations at end of period
  $ 159  
 
Accretion expense is included in depreciation, depletion and amortization expense in the consolidated statements of operations.

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 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 retirement and restoration plans was as follows:
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
   
(in millions)
 
Service cost
  $ 3     $ 3  
Interest cost
    3       3  
Expected return on plan assets
    (3 )     (3 )
Other
    -       1  
Net periodic benefit cost
  $ 3     $ 4  

Note 8 – Stock-Based Compensation
We recognized stock-based compensation expense as follows:
 
   
Three Months Ended
 
   
March 31,
 
   
2008
   
2007
 
   
(in millions)
 
Stock-based compensation expense
  $ 9     $ 5  
Tax benefit recognized
    (3 )     (2 )

During the three months ended March 31, 2008, we granted 1,114,288 stock options with a weighted-average grant-date fair value of $20.34 per share and awarded 438,976 shares of restricted stock subject to service conditions with a weighted-average grant-date fair value of $72.98 per share.


 
13

 

Note 9 – Basic and Diluted Earnings Per Share
Basic earnings per share of common stock were computed using the weighted average number of shares of common stock outstanding during each period. The diluted earnings per share of common stock include the effect of outstanding stock options and 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:

   
Three Months Ended March 31,
 
   
2008
   
2007
 
         
Weighted
       
Weighted
 
   
Net
   
Average
   
Net
   
Average
 
   
Income
   
Shares
   
Income
   
Shares
 
   
(in millions, except per share amounts)
 
Net income
  $ 215       172     $ 212       171  
Basic Earnings Per Share
  $ 1.25             $ 1.24          
Net income
  $ 215       172     $ 212       171  
Plus incremental shares from assumed conversions:
                         
Dilutive options, restricted stock awards and shares of common stock in rabbi trust
    (4 )     3       -       2  
Net income available to common shareholders
  $ 211       175     $ 212       173  
Diluted Earnings Per Share
  $ 1.20             $ 1.22          

A total of 1.2 million weighted average stock options and restricted shares were antidilutive for first quarter 2008 and were excluded from the calculation of diluted earnings per share.  A total of 2.5 million weighted average stock options, restricted shares and shares of our common stock held in a rabbi trust were antidilutive for first quarter 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
 
   
March 31,
 
   
2008
   
2007
 
   
(in millions)
 
Current
  $ 66     $ 44  
Deferred
    35       48  
Total income tax provision
  $ 101     $ 92  

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 as of March 31, 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 March 31, 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 - 2004, Equatorial Guinea - 2006, China - 2006, Israel - 2000, UK - 2006 and the Netherlands - 2005.

Note 11 – 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 and production:  the United States, West Africa, the North Sea, Israel, and Other International, Corporate and Marketing. Other International includes Argentina, China, Ecuador and Suriname. The following data was prepared on the same basis as our consolidated financial statements and excludes the effects of income taxes.

 
14

 

 
                                 
Other Int'l
 
         
United
   
West
   
North
         
Corporate &
 
   
Consolidated
   
States
   
Africa
   
Sea
   
Israel
   
Marketing
 
   
(in millions)
 
Three Months Ended March 31, 2008
                                   
Revenues from third parties (1)
  $ 963     $ 529     $ 129     $ 92     $ 40     $ 173  
Intersegment revenue
    -       116       -       -       -       (116 )
Income from equity method investments
    62       -       62       -       -       -  
Total Revenues
    1,025       645       191       92       40       57  
                                                 
DD&A
    203       164       9       16       6       8  
Loss on commodity derivative instruments
    237       209       28       -       -       -  
Income (loss) before income taxes
    316       145       150       55       31       (65 )
                                                 
Three Months Ended March 31, 2007
                                               
Revenues from third parties (1)
  $ 697     $ 398     $ 64     $ 55     $ 25     $ 155  
Intersegment revenue
    -       96       -       -       -       (96 )
Income from equity method investments
    46       -       46       -       -       -  
Total Revenues
    743       494       110       55       25       59  
                                                 
DD&A
    166       140       3       12       4       7  
Gain on commodity derivative instruments
    (1 )     (1 )     -       -       -       -  
Income (loss) before income taxes
    304       218       83       32       20       (49 )
Total assets at March 31, 2008 (2)
  $ 11,282     $ 8,276     $ 1,472     $ 588     $ 272     $ 674  
Total assets at December 31, 2007(2)
    10,831       7,918       1,355       562       268       728  

(1)
The US reporting unit includes a $48 million decrease to revenues for first quarter 2008 and a $15 million increase to revenues for first quarter 2007 from hedging activities. The West Africa reporting unit includes a $12 million decrease to revenues for first quarter 2008 from hedging activities. Hedging activities had no effect on West Africa revenues first quarter 2007. The 2008 decreases resulted from hedge gains and losses that were deferred in AOCL as of December 31, 2007 and subsequently reclassified to revenues.
(2)
The US reporting unit includes goodwill of $759 million at March 31, 2008 and $761 million at December 31, 2007.

Note 12 – Commitments and Contingencies
Legal Proceedings – We are among a group of 18 defendants named in a lawsuit filed August 23, 2002 by Dore Energy Corporation under Docket Number 10-16202 in the 38th Judicial District Court, Cameron Parish, Louisiana.  The lawsuit alleges damage to property owned by Dore resulting from oil and gas activities dating to the 1930’s.  Our predecessor, Samedan Oil Corporation, operated on a portion of the property from 1989 to 1999.  Dore has delivered documents alleging approximately $140 million in damages.  By order dated April 15, 2008, the April 14, 2008 trial was postponed without the setting of a new date. We intend to vigorously defend against these allegations and believe that our share of damages, if any, will not have a material adverse effect on our financial position, results of operations, or cash flows.

We are involved in various other legal proceedings in the ordinary course of business.  These proceedings are subject to the uncertainties inherent in any litigation.  We are defending ourselves vigorously in all such matters and we do not believe that the ultimate disposition of such proceedings will have a material adverse effect on our financial position, results of operations or cash flows.
 
Note 13 – Recently Issued Pronouncements
SFAS 141(R) and SFAS 160 – In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”) and SFAS 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, and earlier adoption is prohibited. 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 are currently evaluating the provisions of SFAS 141(R) and SFAS 160 and assessing the impact, if any, they may have on our financial position and results of operations.

SFAS 161 – In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS 133 and requires qualitative disclosures about objectives and strategies for using derivatives, 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 are currently evaluating the provisions of SFAS 161. The statement provides only for enhanced disclosures. Therefore, adoption will have no impact on our financial position or results of operations.
 
 
15

 
 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

We are a worldwide producer of crude oil, natural gas and NGLs. Our strategy is to achieve growth in earnings and cash flow through the development of a high quality portfolio of producing assets that is diversified among domestic and international projects.

Effective January 1, 2008, we discontinued cash flow hedge accounting on all existing commodity derivative instruments. We voluntarily 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 in the period in which they occur. The discontinuance of cash flow hedge accounting for commodity derivative instruments has no impact on our net assets or cash flows and previously reported amounts have not been adjusted. However, the use of mark-to-market accounting adds volatility to our reported earnings. For first quarter 2008, net income included an unrealized $218 million mark-to-market loss on commodity derivative instruments.
 
First quarter 2008 financial results also included the following:
 
·
net income of $215 million, as compared with $212 million for first quarter 2007;
 
·
diluted earnings per share of $1.20, as compared with $1.22 for first quarter 2007; and
 
·
cash flow from operating activities of $506 million, as compared with $422 million for first quarter 2007.

First quarter 2008 operational results included the following:
 
·
a 22% overall increase in sales volumes over first quarter 2007;
 
·
continued production growth in the Rocky Mountain area of our US operations;
 
·
record natural gas sales in Israel;
 
·
new Ticonderoga development wells brought online in the deepwater Gulf of Mexico; and
 
·
successful high bids on 15 deepwater lease blocks in the Central Gulf of Mexico Lease Sale 206.

OUTLOOK

We expect crude oil, natural gas and condensate production to increase in 2008 compared to 2007. The expected year-over-year increase in production is impacted by several factors including:
 
·
higher sales of natural gas from the Alba field in Equatorial Guinea;
 
·
growing production from our Rocky Mountain assets, where we are continuing active drilling programs;
 
offset by
 
·
natural field decline in the Gulf Coast and Mid-continent areas of our US operations.
 
Factors impacting our expected production profile for 2008 include:
 
·
potential hurricane-related volume curtailments in the Gulf of Mexico and Gulf Coast areas of our US operations;
 
·
potential winter storm-related volume curtailments in the Northern region of our US operations;
 
·
potential pipeline and processing facility capacity constraints in the Rocky Mountain area of our US operations;
 
·
infrastructure development in Israel;
 
·
potential downtime at the methanol, LPG and/or LNG facilities in Equatorial Guinea;
 
·
seasonal variations in rainfall in Ecuador that affect our natural gas-to-power project; and
 
·
timing of capital expenditures, as discussed below, which are expected to result in near-term production.

2008 Capital Expenditures – We have forecasted capital expenditures of approximately $1.9 billion for 2008.  Approximately 33% of the 2008 capital forecast has been allocated to exploration opportunities, including additions for the deepwater lease sale and other leasehold acquisitions. Approximately 67% of the 2008 capital forecast has been allocated to production, development and other projects. US expenditures are forecast at $1.4 billion, international expenditures are forecast at $463 million and corporate expenditures are forecast at $31 million. We expect that our 2008 capital forecast will be funded primarily from cash flows from operations and borrowings under our revolving credit facility. We will evaluate the level of capital spending throughout the year based upon drilling results, commodity prices, cash flows from operations, and property acquisitions and divestitures.

 
16

 


Recently Issued Pronouncements – See Item 1. Financial Statements – Note 13 – Recently Issued Pronouncements.

RESULTS OF OPERATIONS

Oil, Gas and NGL Sales
Average daily sales volumes and average realized sales prices were as follows:

   
Sales Volumes
   
Average Realized Sales Prices
 
   
Crude Oil &
   
Natural
         
Crude Oil &
   
Natural
       
   
Condensate
   
Gas (1)
   
NGLs (1)
   
Condensate
   
Gas (1)
   
NGLs (1)
 
   
(MBopd)
   
(MMcfpd)
   
(MBpd)
   
(Per Bbl)
   
(Per Mcf)
   
(Per Bbl)
 
Three Months Ended March 31, 2008
                                   
United States (2)
    43       393       9     $ 71.33     $ 8.97     $ 55.15  
West Africa (3)
    15       220       -       88.79       0.27       -  
North Sea
    9       6       -       100.46       9.65       -  
Israel
    -       145       -       -       3.04       -  
Ecuador (4)
    -       23       -       -       -       -  
Other International
    6       -       -       73.37       -       -  
Total Consolidated Operations
    73       787       9       78.89       5.34       55.15  
Equity Investees (5)
    2       -       6       98.55       -       60.78  
Total
    75       787       15     $ 79.43     $ 5.34     $ 57.47  
Three Months Ended March 31, 2007