form10-q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2008
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____to_____
Commission
file number: 001-07964
NOBLE
ENERGY, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
73-0785597
|
(State
of incorporation)
|
|
(I.R.S.
employer identification number)
|
|
|
|
100
Glenborough Drive, Suite 100
|
|
|
Houston,
Texas
|
|
77067
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(281)
872-3100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
Number of
shares of common stock outstanding as of October 15, 2008:
172,745,476.
PART
I. FINANCIAL INFORMATION |
|
ITEM
1. FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noble
Energy, Inc. and Subsidiaries |
|
Consolidated
Statements of Operations |
|
(in
millions, except per share amounts) |
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil,
gas and NGL sales
|
|
$ |
1,040 |
|
|
$ |
746 |
|
|
$ |
3,115 |
|
|
$ |
2,140 |
|
Income
from equity method investees
|
|
|
40 |
|
|
|
46 |
|
|
|
158 |
|
|
|
140 |
|
Other
revenues
|
|
|
18 |
|
|
|
22 |
|
|
|
55 |
|
|
|
70 |
|
Total
|
|
|
1,098 |
|
|
|
814 |
|
|
|
3,328 |
|
|
|
2,350 |
|
Costs
and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expense
|
|
|
98 |
|
|
|
82 |
|
|
|
268 |
|
|
|
243 |
|
Production
and ad valorem taxes
|
|
|
47 |
|
|
|
27 |
|
|
|
141 |
|
|
|
81 |
|
Transportation
expense
|
|
|
14 |
|
|
|
13 |
|
|
|
43 |
|
|
|
40 |
|
Exploration
expense
|
|
|
39 |
|
|
|
46 |
|
|
|
181 |
|
|
|
145 |
|
Depreciation,
depletion and amortization
|
|
|
194 |
|
|
|
197 |
|
|
|
593 |
|
|
|
547 |
|
General
and administrative
|
|
|
63 |
|
|
|
49 |
|
|
|
184 |
|
|
|
142 |
|
Other
operating expense, net
|
|
|
97 |
|
|
|
24 |
|
|
|
136 |
|
|
|
106 |
|
Total
|
|
|
552 |
|
|
|
438 |
|
|
|
1,546 |
|
|
|
1,304 |
|
Operating
Income
|
|
|
546 |
|
|
|
376 |
|
|
|
1,782 |
|
|
|
1,046 |
|
Other
(Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)
loss on commodity derivative instruments
|
|
|
(875 |
) |
|
|
2 |
|
|
|
190 |
|
|
|
(1 |
) |
Interest,
net of amount capitalized
|
|
|
18 |
|
|
|
29 |
|
|
|
52 |
|
|
|
87 |
|
Other
(income) expense, net
|
|
|
(51 |
) |
|
|
2 |
|
|
|
(33 |
) |
|
|
20 |
|
Total
|
|
|
(908 |
) |
|
|
33 |
|
|
|
209 |
|
|
|
106 |
|
Income
Before Income Taxes
|
|
|
1,454 |
|
|
|
343 |
|
|
|
1,573 |
|
|
|
940 |
|
Income
Tax Provision
|
|
|
480 |
|
|
|
120 |
|
|
|
528 |
|
|
|
296 |
|
Net
Income
|
|
$ |
974 |
|
|
$ |
223 |
|
|
$ |
1,045 |
|
|
$ |
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
5.64 |
|
|
$ |
1.30 |
|
|
$ |
6.06 |
|
|
$ |
3.76 |
|
Diluted
|
|
$ |
5.37 |
|
|
$ |
1.28 |
|
|
$ |
5.86 |
|
|
$ |
3.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
173 |
|
|
|
171 |
|
|
|
172 |
|
|
|
171 |
|
Diluted
|
|
|
176 |
|
|
|
173 |
|
|
|
176 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noble
Energy, Inc. and Subsidiaries
|
|
Consolidated
Balance Sheets
|
|
(in
millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
992 |
|
|
$ |
660 |
|
Accounts
receivable - trade, net
|
|
|
641 |
|
|
|
594 |
|
Other
current assets
|
|
|
236 |
|
|
|
315 |
|
Total
current assets
|
|
|
1,869 |
|
|
|
1,569 |
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
Oil
and gas properties (successful efforts method of
accounting)
|
|
|
11,769 |
|
|
|
10,217 |
|
Other
property, plant and equipment
|
|
|
158 |
|
|
|
112 |
|
Total
property, plant and equipment
|
|
|
11,927 |
|
|
|
10,329 |
|
Accumulated
depreciation, depletion and amortization
|
|
|
(2,946 |
) |
|
|
(2,384 |
) |
Total
property, plant and equipment, net
|
|
|
8,981 |
|
|
|
7,945 |
|
Goodwill
|
|
|
759 |
|
|
|
761 |
|
Other
noncurrent assets
|
|
|
507 |
|
|
|
556 |
|
Total
Assets
|
|
$ |
12,116 |
|
|
$ |
10,831 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable - trade
|
|
$ |
646 |
|
|
$ |
781 |
|
Commodity
derivative instruments
|
|
|
189 |
|
|
|
540 |
|
Other
current liabilities
|
|
|
541 |
|
|
|
315 |
|
Total
current liabilities
|
|
|
1,376 |
|
|
|
1,636 |
|
Deferred
income taxes
|
|
|
2,169 |
|
|
|
1,984 |
|
Asset
retirement obligations
|
|
|
147 |
|
|
|
131 |
|
Commodity
derivative instruments
|
|
|
69 |
|
|
|
83 |
|
Other
noncurrent liabilities
|
|
|
299 |
|
|
|
337 |
|
Long-term
debt
|
|
|
2,051 |
|
|
|
1,851 |
|
Total
Liabilities
|
|
|
6,111 |
|
|
|
6,022 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock - par value $1.00; 4 million shares authorized, none
issued
|
|
|
- |
|
|
|
- |
|
Common
stock - par value $3.33 1/3; 250 million shares authorized; 192
million and 191 million shares issued, respectively
|
|
|
641 |
|
|
|
636 |
|
Capital
in excess of par value
|
|
|
2,182 |
|
|
|
2,106 |
|
Accumulated
other comprehensive loss
|
|
|
(129 |
) |
|
|
(284 |
) |
Treasury
stock, at cost; 19 million shares
|
|
|
(614 |
) |
|
|
(613 |
) |
Retained
earnings
|
|
|
3,925 |
|
|
|
2,964 |
|
Total
Shareholders’ Equity
|
|
|
6,005 |
|
|
|
4,809 |
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
12,116 |
|
|
$ |
10,831 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
Noble
Energy, Inc. and Subsidiaries
|
|
Consolidated
Statements of Cash Flows
|
|
(in
millions)
|
|
(unaudited)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,045 |
|
|
$ |
644 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
593 |
|
|
|
547 |
|
Dry
hole expense
|
|
|
78 |
|
|
|
48 |
|
Deferred
income taxes
|
|
|
173 |
|
|
|
192 |
|
Income
from equity method investees
|
|
|
(158 |
) |
|
|
(140 |
) |
Dividends
received from equity method investees
|
|
|
192 |
|
|
|
153 |
|
Unrealized
(gain) on commodity derivative instruments
|
|
|
(9 |
) |
|
|
(1 |
) |
Settlement
of previously recognized hedge losses
|
|
|
(144 |
) |
|
|
(133 |
) |
Loss
on involuntary conversion
|
|
|
9 |
|
|
|
51 |
|
Impairment
of operating assets
|
|
|
38 |
|
|
|
4 |
|
Allowance
for doubtful accounts
|
|
|
47 |
|
|
|
11 |
|
Other
|
|
|
12 |
|
|
|
69 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable, trade
|
|
|
(94 |
) |
|
|
21 |
|
(Increase)
decrease in other current assets
|
|
|
(19 |
) |
|
|
92 |
|
(Decrease)
in accounts payable
|
|
|
(135 |
) |
|
|
(12 |
) |
Increase
(decrease) in other current liabilities
|
|
|
239 |
|
|
|
(225 |
) |
Net
Cash Provided by Operating Activities
|
|
|
1,867 |
|
|
|
1,321 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(1,852 |
) |
|
|
(1,017 |
) |
Proceeds
from property sales
|
|
|
131 |
|
|
|
- |
|
Distributions
from equity method investees
|
|
|
- |
|
|
|
2 |
|
Net
Cash Used in Investing Activities
|
|
|
(1,721 |
) |
|
|
(1,015 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
26 |
|
|
|
19 |
|
Excess
tax benefits from stock-based awards
|
|
|
23 |
|
|
|
14 |
|
Cash
dividends paid
|
|
|
(84 |
) |
|
|
(54 |
) |
Purchases
of treasury stock
|
|
|
(2 |
) |
|
|
(102 |
) |
Proceeds
from credit facility
|
|
|
650 |
|
|
|
280 |
|
Repayment
of credit facility
|
|
|
(425 |
) |
|
|
(165 |
) |
Repayment
of installment notes
|
|
|
(25 |
) |
|
|
- |
|
Proceeds
from short term borrowings
|
|
|
23 |
|
|
|
- |
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
186 |
|
|
|
(8 |
) |
Increase
in Cash and Cash Equivalents
|
|
|
332 |
|
|
|
298 |
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
660 |
|
|
|
153 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
992 |
|
|
$ |
451 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
Noble
Energy, Inc. and Subsidiaries
|
|
Consolidated
Statements of Shareholders' Equity
|
|
(in
millions)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Shares
of Stock |
|
|
|
Capital
in
|
|
Other
|
|
Treasury
|
|
|
|
Total
|
|
|
|
Common
|
|
Treasury
|
|
Common
|
|
Excess
of
|
|
Comprehensive
|
|
Stock
|
|
Retained
|
|
Shareholders'
|
|
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Par
Value
|
|
Loss
|
|
at
Cost
|
|
Earnings
|
|
Equity
|
|
December
31, 2007
|
|
|
191 |
|
|
19 |
|
$ |
636 |
|
$ |
2,106 |
|
$ |
(284 |
) |
$ |
(613 |
) |
$ |
2,964 |
|
$ |
4,809 |
|
Net
income
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,045 |
|
|
1,045 |
|
Stock-based
compensation expense
|
|
|
- |
|
|
- |
|
|
- |
|
|
30 |
|
|
- |
|
|
- |
|
|
- |
|
|
30 |
|
Exercise
of stock options
|
|
|
1 |
|
|
- |
|
|
4 |
|
|
22 |
|
|
- |
|
|
- |
|
|
- |
|
|
26 |
|
Tax
benefits related to exercise of stock options
|
|
|
- |
|
|
- |
|
|
- |
|
|
23 |
|
|
- |
|
|
- |
|
|
- |
|
|
23 |
|
Restricted
stock awards, net
|
|
|
- |
|
|
- |
|
|
1 |
|
|
(1 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Dividends
($0.48 per share)
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(84 |
) |
|
(84 |
) |
Changes
in treasury stock, net
|
|
|
- |
|
|
- |
|
|
- |
|
|
2 |
|
|
- |
|
|
(1 |
) |
|
- |
|
|
1 |
|
Oil
and gas cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
amounts reclassified into earnings
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
155 |
|
|
- |
|
|
- |
|
|
155 |
|
Interest
rate cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
change in fair value
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1 |
|
|
- |
|
|
- |
|
|
1 |
|
Net
change in other
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(1 |
) |
|
- |
|
|
- |
|
|
(1 |
) |
September
30, 2008
|
|
|
192 |
|
|
19 |
|
$ |
641 |
|
$ |
2,182 |
|
$ |
(129 |
) |
$ |
(614 |
) |
$ |
3,925 |
|
$ |
6,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
188 |
|
|
17 |
|
$ |
629 |
|
$ |
2,041 |
|
$ |
(140 |
) |
$ |
(511 |
) |
$ |
2,095 |
|
$ |
4,114 |
|
Net
income
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
644 |
|
|
644 |
|
Stock-based
compensation expense
|
|
|
- |
|
|
- |
|
|
- |
|
|
20 |
|
|
- |
|
|
- |
|
|
- |
|
|
20 |
|
Exercise
of stock options
|
|
|
1 |
|
|
- |
|
|
4 |
|
|
15 |
|
|
- |
|
|
- |
|
|
- |
|
|
19 |
|
Tax
benefits related to exercise of stock options
|
|
|
- |
|
|
- |
|
|
- |
|
|
14 |
|
|
- |
|
|
- |
|
|
- |
|
|
14 |
|
Restricted
stock awards, net
|
|
|
1 |
|
|
- |
|
|
2 |
|
|
(2 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Dividends
($0.315 per share)
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(54 |
) |
|
(54 |
) |
Purchases
of treasury stock
|
|
|
- |
|
|
2 |
|
|
- |
|
|
- |
|
|
- |
|
|
(102 |
) |
|
- |
|
|
(102 |
) |
Oil
and gas cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
amounts reclassified into earnings
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
5 |
|
|
- |
|
|
- |
|
|
5 |
|
Unrealized
change in fair value
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(44 |
) |
|
- |
|
|
- |
|
|
(44 |
) |
Net
change in other
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2 |
|
|
- |
|
|
- |
|
|
2 |
|
September
30, 2007
|
|
|
190 |
|
|
19 |
|
$ |
635 |
|
$ |
2,088 |
|
$ |
(177 |
) |
$ |
(613 |
) |
$ |
2,685 |
|
$ |
4,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Organization and
Nature of Operations
Noble
Energy, Inc. (Noble Energy, we or us) is an independent energy company engaged
in the acquisition, exploration, development, production and marketing of crude
oil, natural gas and natural gas liquids (NGLs). We have exploration,
exploitation and production operations in the US and internationally. We operate
throughout major basins in the US including Colorado’s Wattenberg field and
Piceance basin, the Mid-continent region of western Oklahoma and the Texas
Panhandle, the San Juan Basin in New Mexico, the Gulf Coast and the Gulf of
Mexico. In addition, we conduct business internationally in China, Ecuador, the
Mediterranean Sea, the North Sea, West Africa (Equatorial Guinea and Cameroon)
and in other areas.
Note 2 – Basis of
Presentation
Presentation – The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the US for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by US generally accepted accounting principles (GAAP) for
complete financial statements. The accompanying consolidated financial
statements at September 30, 2008 (unaudited) and December 31, 2007 and
for the three months and nine months ended September 30, 2008 and 2007 contain
all normally recurring adjustments considered necessary for a fair presentation
of our financial position, results of operations and cash flows for such
periods. Operating results for the nine-month period ended September 30, 2008
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2008. Certain reclassifications of amounts previously
reported have been made to conform to current year
presentations. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and accompanying notes
included in our annual report on Form 10-K for the year ended
December 31, 2007, as amended.
Estimates – The preparation
of consolidated financial statements in conformity with GAAP requires us to make
a number of estimates and assumptions relating to the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
significantly from those estimates.
Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $292
million in cash. Properties acquired cover approximately 15,500 net acres and
are currently producing 25 MMcfepd. The total purchase price has been
preliminarily allocated to the proved and unproved properties acquired based on
fair values at the acquisition date. Approximately $254 million was allocated to
proved properties and $38 million to unproved properties.
Sale of Main Pass Assets – We
expect to sell essentially all of our remaining non-core Gulf of Mexico shelf assets in the
near future. These assets, located at Main Pass, suffered significant
hurricane damage in 2004 and 2005 and have undergone cleanup activities that
were completed in the third quarter of 2007. During third quarter 2008, in
anticipation of the sale, we recorded an impairment loss of $38 million (based
on anticipated sales proceeds less costs to sell) related to the Main Pass
assets and reclassified their remaining net book value of $11 million to assets
held for sale. We also recorded a loss on involuntary conversion of $9 million
upon resolution of our insurance claims related to the hurricane damage
sustained in 2005.
Statements of Operations Information
– Other statements of operations information is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Other
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
sales
|
|
$ |
14 |
|
|
$ |
17 |
|
|
$ |
42 |
|
|
$ |
54 |
|
Gathering,
marketing and processing revenues
|
|
|
4 |
|
|
|
5 |
|
|
|
13 |
|
|
|
16 |
|
Total
|
|
$ |
18 |
|
|
$ |
22 |
|
|
$ |
55 |
|
|
$ |
70 |
|
Other
Operating Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
generation (1)
|
|
$ |
13 |
|
|
$ |
14 |
|
|
$ |
41 |
|
|
$ |
42 |
|
Gathering,
marketing and processing
|
|
|
5 |
|
|
|
4 |
|
|
|
14 |
|
|
|
13 |
|
Loss
on involuntary conversion
|
|
|
9 |
|
|
|
- |
|
|
|
9 |
|
|
|
51 |
|
Impairment
of operating assets (2)
|
|
|
38 |
|
|
|
4 |
|
|
|
38 |
|
|
|
4 |
|
Other
operating (income) expense, net (3)
|
|
|
32 |
|
|
|
2 |
|
|
|
34 |
|
|
|
(4 |
) |
Total
|
|
$ |
97 |
|
|
$ |
24 |
|
|
$ |
136 |
|
|
$ |
106 |
|
Other
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation (4)
|
|
$ |
(47 |
) |
|
$ |
8 |
|
|
$ |
(25 |
) |
|
$ |
23 |
|
Interest
income
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
(18 |
) |
|
|
(8 |
) |
Other
(income) expense, net
|
|
|
2 |
|
|
|
(4 |
) |
|
|
10 |
|
|
|
5 |
|
Total
|
|
$ |
(51 |
) |
|
$ |
2 |
|
|
$ |
(33 |
) |
|
$ |
20 |
|
(1)
|
Includes
increases in the allowance for doubtful accounts of $3 million each in
third quarter 2008 and 2007 and $9 million and $11 million for the first
nine months of 2008 and 2007,
respectively.
|
(2)
|
Includes
third quarter 2008 impairment loss on Gulf of Mexico Main Pass
assets.
|
(3)
|
Includes
$38 million write-down of SemCrude L.P. receivable in third quarter 2008.
See Note 13 – Commitments and
Contingencies.
|
(4)
|
Amount
represents increases or (decreases) in the fair value of Noble Energy
common stock held in a rabbi trust.
|
Balance Sheet Information –
Other balance sheet information is as follows:
|
September
30,
|
|
December
31,
|
|
|
2008
|
|
2007
|
|
|
(in
millions)
|
|
Other
Current Assets
|
|
|
|
|
Inventories
|
$ |
91 |
|
$ |
60 |
|
Commodity
derivative instruments
|
|
40 |
|
|
15 |
|
Prepaid
expenses and other current assets
|
|
28 |
|
|
25 |
|
Deferred
income taxes
|
|
49 |
|
|
131 |
|
Assets
held for sale
|
|
11 |
|
|
82 |
|
Probable
insurance claims
|
|
17 |
|
|
2 |
|
Total
|
$ |
236 |
|
$ |
315 |
|
Other
Noncurrent Assets
|
|
|
|
|
|
|
Equity
method investments
|
$ |
324 |
|
$ |
357 |
|
Mutual
fund investments
|
|
101 |
|
|
124 |
|
Probable
insurance claims
|
|
8 |
|
|
37 |
|
Commodity
derivative instruments
|
|
18 |
|
|
5 |
|
Other
noncurrent assets
|
|
56 |
|
|
33 |
|
Total
|
$ |
507 |
|
$ |
556 |
|
Other
Current Liabilities
|
|
|
|
|
|
|
Accrued
and other current liabilities
|
$ |
258 |
|
$ |
207 |
|
Current
income taxes payable
|
|
181 |
|
|
52 |
|
Short-term
borrowings
|
|
48 |
|
|
25 |
|
Asset
retirement obligations
|
|
13 |
|
|
13 |
|
Interest
payable
|
|
17 |
|
|
18 |
|
Deferred
gain on sale of assets
|
|
24 |
|
|
- |
|
Total
|
$ |
541 |
|
$ |
315 |
|
Other
Noncurrent Liabilities
|
|
|
|
|
|
|
Deferred
compensation liability
|
$ |
185 |
|
$ |
225 |
|
Accrued
benefit costs
|
|
53 |
|
|
51 |
|
Other
noncurrent liabilities
|
|
61 |
|
|
61 |
|
Total
|
$ |
299 |
|
$ |
337 |
|
Adoption of SFAS 157 – We
adopted Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (SFAS 157), as of January 1, 2008 as related to our financial
assets and liabilities. SFAS 157 establishes a single authoritative definition
of fair value based upon the assumptions market participants would use when
pricing an asset or liability and creates a fair value hierarchy that
prioritizes the information used to develop those assumptions. Under the
standard, additional disclosures are required, including disclosures of fair
value measurements by level within the fair value hierarchy. As a result of
adoption, we began incorporating a credit risk assumption into the measurement
of certain assets and liabilities. Adoption of SFAS 157 did not have a
significant impact on our consolidated financial statements. See Note 3 – Fair
Value Measurements. On January 1, 2009, we will adopt SFAS 157 as it relates to
nonfinancial assets and liabilities, including nonfinancial assets and
liabilities measured at fair value in a business combination; impaired property,
plant and equipment; goodwill; and initial recognition of asset retirement
obligations. We do not expect any significant impact to our consolidated
financial statements when we implement SFAS 157 for our existing nonfinancial
assets and liabilities.
Adoption of FSP FIN 39-1 – We
adopted FASB Staff Position FIN 39-1, “An Amendment of FASB Interpretation No.
39” (FSP FIN 39-1), as of January 1, 2008. FSP FIN 39-1 addresses certain
modifications to FIN 39, “Offsetting of Amounts Related to Certain Contracts.”
FIN 39-1 allows companies to offset fair value amounts recognized for derivative
instruments and the fair value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral. The cash collateral
(commonly referred to as a “margin”) must arise from derivative instruments
recognized at fair value that are executed with the same counterparty under a
master netting arrangement. Upon adoption, we elected to offset the right to
reclaim cash collateral or the obligation to return cash collateral against our
net derivative positions for which master netting agreements
exist. As of September 30, 2008 and December 31, 2007, we had no significant
cash collateral obligations.
Note 3 – Fair Value
Measurements
Measurement
information for financial assets and liabilities reported at fair value at
September 30, 2008, includes the following:
|
Fair
Value Measurements Using |
|
|
|
|
|
|
|
Quoted
Prices in Active Markets
(Level
1)
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
Netting
Adjustment (1)
|
|
Fair
Value Measurement |
|
|
(in
millions)
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual
fund investments
|
$ |
101
|
|
$ |
-
|
|
$ |
-
|
|
$
|
-
|
|
$ |
101
|
Commodity
derivative instruments
|
|
-
|
|
|
149
|
|
|
-
|
|
|
(91)
|
|
|
58
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
derivative instruments
|
|
-
|
|
|
(349)
|
|
|
-
|
|
|
91
|
|
|
(258)
|
(1)
|
Amount
represents the impact of master netting agreements that allow us to settle
asset and liability positions with the same
counterparty.
|
SFAS 157,
which we adopted as of January 1, 2008, establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into
three levels. The fair value hierarchy gives the highest priority to quoted
market prices (unadjusted) in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2
inputs are inputs, other than quoted prices included within Level 1, which
are observable for the asset or liability, either directly or indirectly. We use
Level 1 inputs when available as Level 1 inputs generally provide the most
reliable evidence of fair value. We use the following methods and assumptions to
estimate the fair values of the assets and liabilities in the table
above:
Mutual Fund Investments – Our mutual fund
investments, which primarily include assets held in a rabbi trust, consist of
various publicly-traded mutual funds that include investments ranging from
equities to money market instruments. The fair values are based on quoted market
prices.
Commodity Derivative Instruments –
Our commodity derivative instruments consist of variable to fixed price commodity
swaps, costless collars and basis swaps. We estimate the fair values of these
instruments based on published forward commodity price curves for the underlying
commodities as of the date of the estimate. The discount rate used in the
discounted cash flow projections is based on published LIBOR rates, Eurodollar
futures rates and interest swap rates. The fair values also include a measure of
counterparty credit risk or our own nonperformance risk based on the current
published credit default swap rates. In addition, for costless collars, we
estimate the option value of the contract floors and ceilings using an option
pricing model which takes into account market volatility, market prices and
contract parameters. See Note 4 – Derivative Instruments and Hedging
Activities.
Note 4 – Derivative
Instruments and Hedging Activities
Commodity Derivative Instruments
– We use various derivative instruments in connection with forecasted
crude oil and natural gas sales to minimize the impact of commodity price
fluctuations on cash flows. Such instruments include variable to fixed price
commodity swaps, costless collars and basis swaps. Although these derivative
instruments expose us to credit risk, we monitor the creditworthiness of our
counterparties, and we are not currently aware of any inability on the part of
our counterparties to perform under the contracts. However, we are not able to
predict sudden changes in the creditworthiness of our
counterparties.
We
account for derivative instruments and hedging activities in accordance with
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended (SFAS 133), and all derivative instruments are reflected at fair value
on our consolidated balance sheets. We elected to designate certain of our
commodity derivative instruments as cash flow hedges through December 31, 2007.
However, effective January 1, 2008, we voluntarily discontinued cash flow
hedge accounting on all existing commodity derivative instruments. We made this
change to provide greater flexibility in our use of derivative instruments. From
January 1, 2008 forward, we recognize all gains and losses on such instruments
in earnings during the period in which they occur. Net derivative losses that
were deferred in accumulated other comprehensive income (loss) (AOCL) as of
December 31, 2007, as a result of previous cash flow hedge accounting, will be
reclassified to earnings in future periods as the original hedged transactions occur. Our
discontinuation of cash flow hedge accounting for commodity derivative
instruments did not affect our net assets or cash flows at December 31, 2007 and
does not require adjustments to our previously reported financial
statements.
The
components of (gain) loss on commodity derivative instruments included in the
consolidated statements of operations are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Unrealized
(gain) on commodity derivative instruments
|
|
$ |
(943 |
) |
|
$ |
- |
|
|
$ |
(9 |
) |
|
$ |
- |
|
Realized
loss on commodity derivative instruments
|
|
|
68 |
|
|
|
- |
|
|
|
199 |
|
|
|
- |
|
Ineffectiveness
loss (gain)
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
(1 |
) |
(Gain)
loss on commodity derivative instruments
|
|
$ |
(875 |
) |
|
$ |
2 |
|
|
$ |
190 |
|
|
$ |
(1 |
) |
Crude oil
and natural gas sales include amounts reclassified from AOCL as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
(Decrease)
in crude oil sales
|
|
$ |
(89 |
) |
|
$ |
(60 |
) |
|
$ |
(279 |
) |
|
$ |
(128 |
) |
(Decrease)
increase in natural gas sales
|
|
|
(4 |
) |
|
|
48 |
|
|
|
31 |
|
|
|
120 |
|
Total
(decrease) in oil and gas sales
|
|
$ |
(93 |
) |
|
$ |
(12 |
) |
|
$ |
(248 |
) |
|
$ |
(8 |
) |
Approximately
$80 million of deferred losses (net of tax) related to the fair values of the
commodity derivative instruments previously designated as cash flow hedges and
remaining in AOCL at September 30, 2008 will be reclassified to earnings during
the next 12 months as the forecasted transactions occur, and will be recorded as
a reduction in oil and gas sales. Of the $80 million deferred losses (net of
tax) approximately $52 million is expected to be reclassified to earnings during
the fourth quarter of 2008.
As of October 23, 2008, we
had entered into the following crude oil derivative
instruments:
|
|
Variable
to Fixed Price Swaps
|
|
|
Costless
Collars
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
Production
|
|
|
|
Bbls
|
|
Average
|
|
|
|
|
Bbls
|
|
|
Average
|
|
Average
|
|
Period
|
|
Index
|
|
Per
Day
|
|
Fixed
Price
|
|
|
Index
|
|
Per
Day
|
|
|
Floor
Price
|
|
Ceiling
Price
|
|
4th
Qtr 2008
|
|
NYMEX
WTI
|
|
|
16,500 |
|
$ |
37.92 |
|
|
NYMEX
WTI
|
|
|
3,100 |
|
|
$ |
60.00 |
|
$ |
72.40 |
|
4th
Qtr 2008
|
|
Dated
Brent
|
|
|
2,000 |
|
|
88.18 |
|
|
Dated
Brent
|
|
|
3,587 |
|
|
|
45.00 |
|
|
65.90 |
|
4th
Qtr 2008 Average
|
|
|
18,500 |
|
|
43.35 |
|
|
|
|
|
6,687 |
|
|
|
51.95 |
|
|
68.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
NYMEX
WTI
|
|
|
9,000 |
|
|
88.43 |
|
|
NYMEX
WTI
|
|
|
6,700 |
|
|
|
79.70 |
|
|
90.60 |
|
2009
|
|
Dated
Brent
|
|
|
2,000 |
|
|
87.98 |
|
|
Dated
Brent
|
|
|
5,074 |
|
|
|
70.62 |
|
|
87.93 |
|
2009
Average
|
|
|
|
|
11,000 |
|
|
88.35 |
|
|
|
|
|
11,774 |
|
|
|
75.79 |
|
|
89.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
-
|
|
|
- |
|
|
- |
|
|
NYMEX
WTI
|
|
|
5,500 |
|
|
|
69.00 |
|
|
85.65 |
|
As of October 23, 2008, we
had entered into the following natural gas derivative
instruments:
|
|
Variable
to Fixed Price Swaps
|
|
|
Costless
Collars
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
Production
|
|
|
|
MMBtu
|
|
Average
|
|
|
|
|
MMBtu
|
|
|
Average
|
|
Average
|
|
Period
|
|
Index
|
|
Per
Day
|
|
Fixed
Price
|
|
|
Index
|
|
Per
Day
|
|
|
Floor
Price
|
|
Ceiling
Price
|
|
4th
Qtr 2008
|
|
NYMEX
HH
|
|
|
170,000 |
|
$ |
5.63 |
|
|
IFERC
CIG
|
|
|
14,000 |
|
|
$ |
6.75 |
|
$ |
8.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
- |
|
|
- |
|
|
- |
|
|
NYMEX
HH
|
|
|
170,000 |
|
|
|
9.15 |
|
|
10.81 |
|
2009
|
|
|
- |
|
|
- |
|
|
- |
|
|
IFERC
CIG
|
|
|
15,000 |
|
|
|
6.00 |
|
|
9.90 |
|
2009
Average
|
|
|
|
|
|
- |
|
|
- |
|
|
|
|
|
185,000 |
|
|
|
8.90 |
|
|
10.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
- |
|
|
- |
|
|
- |
|
|
IFERC
CIG
|
|
|
15,000 |
|
|
|
6.25 |
|
|
8.10 |
|
As of October
23, 2008, we had entered into the following natural gas basis
swaps:
|
|
Basis
Swaps
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Production
|
|
|
|
Index
Less
|
|
MMBtu
|
|
|
Average
|
|
Period
|
|
Index
|
|
Differential
|
|
Per
Day
|
|
|
Differential
|
|
4th
Qtr 2008
|
|
IFERC
CIG
|
|
NYMEX
HH
|
|
|
100,000 |
|
|
$ |
1.66 |
|
4th
Qtr 2008
|
|
IFERC
ANR-OK
|
|
NYMEX
HH
|
|
|
40,000 |
|
|
|
1.01 |
|
4th
Qtr 2008
|
|
IFERC
PEPL
|
|
NYMEX
HH
|
|
|
10,000 |
|
|
|
0.98 |
|
4th
Qtr 2008 Average
|
|
|
|
|
150,000 |
|
|
|
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
IFERC
CIG
|
|
NYMEX
HH
|
|
|
140,000 |
|
|
|
2.49 |
|
Interest Rate Lock Derivative Instruments
–
We entered into two interest rate swaps, or interest rate “locks”, each
in the notional amount of $500 million. The locks were based on five and ten
year US Treasury rates of 3.55% and 4.15%, respectively, and were scheduled to
expire in September 2008. We settled the locks in July 2008 at a total cost of
$0.2 million.
Note 5 – Capitalized
Exploratory Well Costs
Changes
in capitalized exploratory well costs during the period were as
follows:
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008 (1)
|
|
|
|
(in
millions)
|
|
|
|
|
|
Capitalized
exploratory well costs at beginning of period
|
|
$ |
249 |
|
Additions
to capitalized exploratory well costs pending determination of
proved reserves
|
|
|
267 |
|
Reclassified
to proved oil and gas properties based on determination of
proved reserves
|
|
|
- |
|
Capitalized
exploratory well costs charged to expense
|
|
|
(1 |
) |
Capitalized
exploratory well costs at end of period
|
|
$ |
515 |
|
(1)
|
Changes
in capitalized exploratory well costs exclude amounts that were
capitalized and subsequently expensed in the same
period.
|
The
following table provides an aging of capitalized exploratory well costs
(suspended well costs) based on the date the drilling was completed and the
number of projects for which exploratory well costs have been capitalized for a
period greater than one year since the completion of drilling:
|
|
September
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in
millions, except
number
of projects)
|
|
Exploratory
well costs capitalized for a period of one year or less
|
|
$ |
364 |
|
$ |
187 |
|
Exploratory
well costs capitalized for a period greater than one year after completion
of drilling
|
|
|
151 |
|
|
62 |
|
Balance
at end of period
|
|
$ |
515 |
|
$ |
249 |
|
Number
of projects with exploratory well costs that have been capitalized
for a period greater than one year after completion of
drilling
|
|
|
5 |
|
|
5 |
|
|
|
|
|
|
|
|
|
The
following table provides a further aging of those exploratory well costs that
have been capitalized for a period greater than one year since the completion of
drilling as of September 30, 2008:
|
|
|
|
|
Suspended
Since
|
|
|
|
Total
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(in
millions)
|
|
Project
|
|
|
|
|
|
|
|
|
|
|
|
|
Raton
South (deepwater Gulf of Mexico)
|
|
$ |
28 |
|
|
$ |
5 |
|
|
$ |
23 |
|
|
$ |
- |
|
Redrock
(deepwater Gulf of Mexico)
|
|
|
17 |
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
Blocks
O and I (West Africa)
|
|
|
88 |
|
|
|
68 |
|
|
|
1 |
|
|
|
19 |
|
Flyndre
(North Sea)
|
|
|
15 |
|
|
|
12 |
|
|
|
3 |
|
|
|
- |
|
Other
|
|
|
3 |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
Total
capitalized exploratory well costs that have been
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized for a
period greater than one year since completion of
drilling
|
|
$ |
151 |
|
|
$ |
85 |
|
|
$ |
47 |
|
|
$ |
19 |
|
Exploratory
well costs capitalized for more than one year at September 30, 2008 include five
projects, two of which include activity in the deepwater Gulf of
Mexico. One project relates to Raton South (Mississippi Canyon Block
292) and includes $28 million of suspended exploratory well costs. A successful
sidetrack well was recently completed on this prospect and tie back to a host
facility is anticipated in late 2009. The other project relates to Redrock
(Mississippi Canyon Block 204) and includes $17 million of suspended exploratory
well costs. Redrock is currently considered a co-development candidate to the
completed sidetrack well at Raton South.
We also
incurred exploratory well costs of $88 million for the Blocks O and I project in
West Africa. Since drilling the initial well for the project, additional seismic
work has been completed and exploration and appraisal wells have been drilled to
further evaluate our discoveries. The West Africa development team is proceeding
with a program to further define the resources in this area such that an optimal
development program may be designed. In addition to the amount of exploratory
well costs that have been capitalized for a period greater than one year for the
Blocks O and I project, we have incurred $175 million in suspended costs related
to additional drilling activity in West Africa through September 30,
2008.
Another
project, Flyndre, is located in the UK sector of the North Sea and incurred
exploratory well costs of $15 million. We successfully completed an
exploratory appraisal well in 2007 and are working with the operator to
formulate a development plan.
The
remaining project, which totals $3 million in suspended exploratory well costs,
continues to be evaluated by various means including additional seismic work,
drilling additional wells and evaluating the potential of the exploration
well.
Note 6 – Asset Retirement
Obligations
Asset
retirement obligations consist primarily of estimated costs of dismantlement,
removal, site reclamation and similar activities associated with our oil and gas
properties. Changes in asset retirement obligations were as
follows:
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
|
(in
millions)
|
|
Asset
retirement obligations at January 1, 2008
|
|
$ |
144 |
|
Liabilities
incurred in current period
|
|
|
15 |
|
Liabilities
settled in current period
|
|
|
(16 |
) |
Revisions
|
|
|
10 |
|
Accretion
expense
|
|
|
7 |
|
Asset
retirement obligations at September 30, 2008
|
|
$ |
160 |
|
Accretion
expense is included in depreciation, depletion and amortization expense in the
consolidated statements of operations.
Note
7 – Employee Benefit Plans
We have a
noncontributory, tax-qualified defined benefit pension plan covering employees
who were hired prior to May 1, 2006. We also have an unfunded, nonqualified
restoration plan that provides the pension plan formula benefits that cannot be
provided by the tax-qualified pension plan because of pay deferrals and the
compensation and benefit limitations imposed on the pension plan by the Internal
Revenue Code of 1986, as amended. Net periodic benefit cost related to the
pension and restoration plans is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Service
cost
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
$ |
9 |
|
Interest
cost
|
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
|
|
7 |
|
Expected
return on plan assets
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(9 |
) |
|
|
(8 |
) |
Other
|
|
|
1 |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
Net
periodic benefit cost
|
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
11 |
|
|
$ |
10 |
|
Cash
contributions to the pension plan totaled $32 million and $10 million during the
first nine months of 2008 and 2007, respectively.
Note 8 – Stock-Based
Compensation
We
recognized stock-based compensation expense as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Stock-based
compensation expense
|
|
$ |
10 |
|
|
$ |
8 |
|
|
$ |
30 |
|
|
$ |
20 |
|
Tax
benefit recognized
|
|
$ |
(4 |
) |
|
$ |
(3 |
) |
|
$ |
(11 |
) |
|
$ |
(8 |
) |
During
the nine months
ended September 30, 2008, we granted 1.1 million stock options with a
weighted-average grant-date fair value of $20.42 per share and awarded 0.5
million shares of restricted stock subject to time vesting with a
weighted-average grant-date fair value of $74.04 per share.
Note 9 – Basic and Diluted
Earnings Per Share
Basic
earnings per share of common stock is computed using the weighted average number
of shares of common stock outstanding during each period. The diluted earnings
per share of common stock may include the effect of Noble Energy shares held in
a rabbi trust, outstanding stock options or shares of restricted stock,
except in periods in which there is a net loss. The following table summarizes
the calculation of basic and diluted earnings per share:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Net
|
|
|
Average
|
|
|
Net
|
|
|
Average
|
|
|
|
Income
|
|
|
Shares
|
|
|
Income
|
|
|
Shares
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions, except per share amounts)
|
|
Three
Months Ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
974 |
|
|
|
173 |
|
|
$ |
223 |
|
|
|
171 |
|
Basic
Earnings Per Share
|
|
$ |
5.64 |
|
|
|
|
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
974 |
|
|
|
173 |
|
|
$ |
223 |
|
|
|
171 |
|
Effect
of dilutive stock options and restricted stock
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
Effect
of shares of Noble Energy stock in rabbi trust (1)
|
|
|
(29 |
) |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Net
income available to common shareholders
|
|
$ |
945 |
|
|
|
176 |
|
|
$ |
223 |
|
|
|
173 |
|
Diluted
Earnings Per Share
|
|
$ |
5.37 |
|
|
|
|
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,045 |
|
|
|
172 |
|
|
$ |
644 |
|
|
|
171 |
|
Basic
Earnings Per Share
|
|
$ |
6.06 |
|
|
|
|
|
|
$ |
3.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,045 |
|
|
|
172 |
|
|
$ |
644 |
|
|
|
171 |
|
Effect
of dilutive stock options and restricted stock
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
2 |
|
Effect
of shares of Noble Energy stock in rabbi trust (1)
|
|
|
(16 |
) |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Net
income available to common shareholders
|
|
$ |
1,029 |
|
|
|
176 |
|
|
$ |
644 |
|
|
|
173 |
|
Diluted
Earnings Per Share
|
|
$ |
5.86 |
|
|
|
|
|
|
$ |
3.72 |
|
|
|
|
|
(1)
|
The
diluted earnings per share calculation for the three and nine months ended
September 30, 2008 includes decreases to net income of $29 million and $16
million (net of tax) respectively, related to a deferred compensation gain
from Noble Energy shares held in a rabbi trust. When dilutive, the
deferred compensation gain or loss (net of tax) is excluded from net
income while the Noble Energy shares held in the rabbi trust are included
in the diluted share count.
|
Approximately
1 million weighted average stock options and shares of restricted stock were
antidilutive for each of the third quarter and the first nine months of 2008 and
were excluded from the calculation of diluted earnings per share. Approximately
2 million weighted average shares of Noble Energy common stock held in a rabbi
trust, stock options and shares of restricted stock were antidilutive for each
of the third quarter and the first nine months of 2007 and were excluded from
the calculation of diluted earnings per share.
Note 10
– Income
Taxes
The
income tax provision consists of the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Current
|
|
$ |
316 |
|
|
$ |
32 |
|
|
$ |
355 |
|
|
$ |
104 |
|
Deferred
|
|
|
164 |
|
|
|
88 |
|
|
|
173 |
|
|
|
192 |
|
Total
income tax provision
|
|
$ |
480 |
|
|
$ |
120 |
|
|
$ |
528 |
|
|
$ |
296 |
|
The
deferred tax assets associated with the foreign loss carryforwards of
certain controlled foreign corporations, primarily Suriname, have increased
during 2008. In addition, because management currently does not
believe it is more likely than not that the deferred tax assets related to these
foreign loss carryforwards will be realized, the valuation
allowance has been increased.
The Suriname valuation allowance is expected to increase by $36 million during
2008 to a balance of $51 million at year end.
In 2007,
China’s legislature, the National People’s Congress, enacted the China Corporate
Income Tax Law. This new legislation decreased our tax rate in China
from 33% to 25% starting in 2008.
Unrecognized Tax Positions
– We do not have
significant unrecognized tax benefits resulting from differences between
positions taken in tax returns and amounts recognized in the financial
statements as of September 30, 2008. Our policy is to recognize any interest and
penalties related to unrecognized tax benefits in income tax expense. We did not
accrue interest or penalties at September 30, 2008, because the jurisdiction in
which we have unrecognized tax benefits does not currently impose interest on
underpayments of tax and we believe that we are below the minimum statutory
threshold for imposition of penalties.
In our
major tax jurisdictions, the earliest years remaining open to examination are as
follows: US – 2005, Equatorial Guinea – 2006, China – 2006, Israel – 2000, UK –
2006 and the Netherlands – 2005.
Note 11 – Comprehensive
Income
Comprehensive
income includes net income and certain items recorded directly to shareholders’
equity and classified as AOCL. Comprehensive income was calculated as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Net
income
|
|
$ |
974 |
|
|
$ |
223 |
|
|
$ |
1,045 |
|
|
$ |
644 |
|
Other
items of comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
amounts reclassified into earnings
|
|
|
93 |
|
|
|
12 |
|
|
|
248 |
|
|
|
8 |
|
Less
tax provision
|
|
|
(35 |
) |
|
|
(5 |
) |
|
|
(93 |
) |
|
|
(3 |
) |
Unrealized
change in fair value
|
|
|
- |
|
|
|
12 |
|
|
|
- |
|
|
|
(71 |
) |
Less
tax provision
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
27 |
|
Interest
rate cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
change in fair value
|
|
|
12 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
Less
tax provision
|
|
|
(5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
change in other
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
2 |
|
Other
comprehensive income (loss)
|
|
|
65 |
|
|
|
15 |
|
|
|
155 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
1,039 |
|
|
$ |
238 |
|
|
$ |
1,200 |
|
|
$ |
607 |
|
Note 12 – Segment
Information
We have
operations throughout the world and manage our operations by country. The
following information is grouped into five components that are all primarily in
the business of natural gas and crude oil acquisition, exploration, development,
production and marketing: the US, West Africa, the North Sea, Israel,
and Other International, Corporate and Marketing. Other International
includes primarily Argentina (through February 2008), China, Ecuador
and Suriname.
The
following data was prepared on the same basis as our consolidated financial
statements and excludes the effects of income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Int'l
|
|
|
|
|
|
|
United
|
|
|
West
|
|
|
North
|
|
|
|
|
|
Corporate
&
|
|
|
|
Consolidated
|
|
|
States
|
|
|
Africa
|
|
|
Sea
|
|
|
Israel
|
|
|
Marketing
|
|
|
|
(in
millions)
|
|
Three
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from third parties
|
|
$ |
1,151 |
|
|
$ |
646 |
|
|
$ |
156 |
|
|
$ |
136 |
|
|
$ |
51 |
|
|
$ |
162 |
|
Amount
reclassified from AOCL (1)
|
|
|
(93 |
) |
|
|
(84 |
) |
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Intersegment
revenue
|
|
|
- |
|
|
|
112 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(112 |
) |
Income
from equity method investees
|
|
|
40 |
|
|
|
- |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
Revenues
|
|
|
1,098 |
|
|
|
674 |
|
|
|
187 |
|
|
|
136 |
|
|
|
51 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DD&A
|
|
|
194 |
|
|
|
158 |
|
|
|
8 |
|
|
|
12 |
|
|
|
7 |
|
|
|
9 |
|
Loss
on involuntary conversion
|
|
|
9 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Impairment
of operating assets
|
|
|
38 |
|
|
|
38 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
(Gain)
on commodity derivative instruments
|
|
|
(875 |
) |
|
|
(749 |
) |
|
|
(126 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) before taxes
|
|
|
1,454 |
|
|
|
1,058 |
|
|
|
303 |
|
|
|
107 |
|
|
|
40 |
|
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from third parties
|
|
$ |
780 |
|
|
$ |
406 |
|
|
$ |
101 |
|
|
$ |
122 |
|
|
$ |
35 |
|
|
$ |
116 |
|
Amount
reclassified from AOCL (1)
|
|
|
(12 |
) |
|
|
(9 |
) |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Intersegment
revenue
|
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(60 |
) |
Income
from equity method investees
|
|
|
46 |
|
|
|
- |
|
|
|
46 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
Revenues
|
|
|
814 |
|
|
|
457 |
|
|
|
144 |
|
|
|
122 |
|
|
|
35 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DD&A
|
|
|
197 |
|
|
|
145 |
|
|
|
9 |
|
|
|
30 |
|
|
|
5 |
|
|
|
8 |
|
Impairment
of operating assets |
|
|
4 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
on commodity derivative instruments
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) before taxes
|
|
|
343 |
|
|
|
181 |
|
|
|
112 |
|
|
|
78 |
|
|
|
28 |
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from third parties
|
|
$ |
3,418 |
|
|
$ |
1,975 |
|
|
$ |
460 |
|
|
$ |
327 |
|
|
$ |
121 |
|
|
$ |
535 |
|
Amount
reclassified from AOCL (1)
|
|
|
(248 |
) |
|
|
(216 |
) |
|
|
(32 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Intersegment
revenue
|
|
|
- |
|
|
|
372 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(372 |
) |
Income
from equity method investees
|
|
|
158 |
|
|
|
- |
|
|
|
158 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
Revenues
|
|
|
3,328 |
|
|
|
2,131 |
|
|
|
586 |
|
|
|
327 |
|
|
|
121 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DD&A
|
|
|
593 |
|
|
|
487 |
|
|
|
26 |
|
|
|
40 |
|
|
|
18 |
|
|
|
22 |
|
Loss
on involuntary conversion
|
|
|
9 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Impairment
of operating assets
|
|
|
38 |
|
|
|
38 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss
on commodity derivative instruments
|
|
|
190 |
|
|
|
137 |
|
|
|
53 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) before taxes
|
|
|
1,573 |
|
|
|
990 |
|
|
|
491 |
|
|
|
234 |
|
|
|
94 |
|
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from third parties
|
|
$ |
2,218 |
|
|
$ |
1,214 |
|
|
$ |
286 |
|
|
$ |
239 |
|
|
$ |
85 |
|
|
$ |
394 |
|
Amount
reclassified from AOCL (1)
|
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Intersegment
revenue
|
|
|
- |
|
|
|
227 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(227 |
) |
Income
from equity method investees
|
|
|
140 |
|
|
|
- |
|
|
|
140 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
Revenues
|
|
|
2,350 |
|
|
|
1,436 |
|
|
|
423 |
|
|
|
239 |
|
|
|
85 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DD&A
|
|
|
547 |
|
|
|
433 |
|
|
|
19 |
|
|
|
58 |
|
|
|
13 |
|
|
|
24 |
|
Loss
on involuntary conversion
|
|
|
51 |
|
|
|
51 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Impairment
of operating assets |
|
|
4 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gain
on commodity derivative instruments
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
(loss) before taxes
|
|
|
940 |
|
|
|
559 |
|
|
|
338 |
|
|
|
137 |
|
|
|
65 |
|
|
|
(159 |
) |
Total
assets at September 30, 2008
(2)
|
|
$ |
12,116 |
|
|
|
8,937 |
|
|
|
1,650 |
|
|
|
759 |
|
|
|
285 |
|
|
|
485 |
|
Total
assets at December 31, 2007
(2)
|
|
|
10,831 |
|
|
|
7,918 |
|
|
|
1,355 |
|
|
|
562 |
|
|
|
268 |
|
|
|
728 |
|
(1)
|
Revenues
include decreases resulting from hedging activities. The decreases
resulted from hedge gains and losses that were deferred in AOCL, as a
result of previous cash flow hedge accounting, and subsequently
reclassified to revenues.
|
(2)
|
The
US reporting unit includes goodwill of $759 million at September 30, 2008
and $761 million at December 31,
2007.
|
Note 13 – Commitments and
Contingencies
Purchaser Bankruptcy – We have an exposure
from crude oil sales for the months of June and July 2008 to SemCrude, L.P.
(SemCrude), a subsidiary of SemGroup, L.P. (SemGroup). On July 22,
2008, SemGroup, including SemCrude, filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code under Case Number
08-11525 (BLS) in the United States Bankruptcy Court for the District of
Delaware.
As of
September 30, 2008, we had a receivable of approximately $71 million from
SemCrude. We have determined that it is probable that a portion of the
receivable is uncollectible. Therefore, during third quarter 2008, we reduced
the carrying value of the SemCrude receivable and recognized a pre-tax charge of
$38 million for the probable loss. We are pursuing various legal remedies to protect our
interests. We believe that ultimate disposition of this matter will not have a
material adverse affect on our financial position, results of operations,
or cash flows.
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. The
September 29, 2008 trial setting was continued 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 believe that the ultimate disposition of such proceedings will
not have a material adverse effect on our financial position, results of
operations or cash flows.
Note 14 – Recently Issued
Pronouncements
SFAS 141(R) and SFAS 160 – In
December 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,
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 No. 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.
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 US and
international projects.
Net
income for the third quarter of 2008 included a $943 million pre-tax,
unrealized, non-cash gain due to the change in the mark-to-market value of our
commodity contracts (or “commodity derivative instruments”) related to
production in future periods.
Unrealized mark-to-market gains or losses recognized in the current
period will be realized in the future when they are cash settled in the month
that the related production occurs. The amount of realized gain or loss may be
more or less than the amount of mark-to-market gain or loss previously
recognized.
Financial
results for third quarter 2008 also included the
following:
|
|
·
|
net
income of $974 million, as compared with $223 million for
2007;
|
|
·
|
diluted
income per share of $5.37, as compared with $1.28 for 2007;
and
|
|
·
|
cash
flow from operating activities of $713 million, as compared with $548
million for third quarter 2007.
|
Operational
results for third quarter 2008 included the
following:
|
|
·
|
significant
oil discovery at the Gunflint prospect in the deepwater Gulf of
Mexico;
|
|
·
|
successful
appraisal of the South Raton discovery in the deepwater Gulf of
Mexico;
|
|
·
|
record
quarterly natural gas production in Israel of 155
MMcfpd;
|
|
·
|
commencement
of production from the phase two development of Dumbarton in the North
Sea;
|
|
·
|
successful
oil test offshore Equatorial Guinea at the Diega discovery;
and
|
|
·
|
acquisition
of producing properties in western
Oklahoma.
|
Impact of Current Credit and
Commodity Markets – The credit markets are undergoing significant
volatility. Many financial institutions have liquidity concerns, prompting
government intervention to mitigate pressure on the credit markets. Our exposure
to the current credit market crisis includes our revolving credit facility, cash
investments and counterparty performance risks.
Our
revolving credit facility is committed in the amount of $2.1 billion until
December 2011, at which time it reduces to $1.8 billion. As of the end of the
quarter, we had $695 million available credit under the facility. If not
extended, the credit facility matures in December 2012. Should current credit market
volatility be prolonged for several years, future extensions of our credit
facility may contain terms that are less favorable than those of our current
credit facility. Bond markets have been negatively impacted,
which has resulted in more restrictive access by issuers and with higher
costs. While we currently have no plans to access the bond market,
should we decide to do so in the near term the terms, size and cost of a new
debt issue would be less favorable.
Current
market conditions also elevate the concern over our cash investments, which
total nearly $1 billion, and counterparty risks related to our commodity
derivative contracts and trade credit. With regard to our cash
investments, we invest in highly liquid investment grade securities, US
Treasuries and short term deposits with major financial
institutions. We have all of our commodity derivatives with major
financial institutions. Should one of these financial counterparties
not perform, we may not realize the benefit of some of our hedges under lower
commodity prices. We sell our crude oil, natural gas and natural gas
liquids to a variety of purchasers. Some of these parties are not as
creditworthy as we are and may experience liquidity problems. Credit
enhancements have been obtained from some parties in the way of parental
guarantees or letters of credit; however, we do not have all of our trade credit
enhanced through guarantees or credit support. Non performance by a
trade creditor could result in losses.
Crude oil
and natural gas prices are also volatile and have declined significantly since
the end of the quarter. This will reduce our cash flows from operations. To
mitigate the impact of lower commodity prices on our cash flows, we have entered
into crude oil and
natural gas commodity contracts for 2009 and, to a lesser extent, 2010
(see Note 4 – Derivative Instruments and Hedging
Activities). In the event of a global recession commodity prices may
stay depressed or reduce further thereby causing a prolonged downturn, which
would further reduce our cash flow from operations. This could cause
us to alter our business plans including reducing our exploration and
development programs.
Impact of Hurricanes Gustav and Ike
– In September, Hurricanes Gustav and Ike moved through the Gulf of
Mexico. Inspection of our facilities and equipment indicated there was no major
damage from the hurricanes, although damage to third party processing and
pipeline facilities has slowed reinstatement of production from our Gulf of
Mexico assets. Temporary shut-ins of production reduced volumes on average 7,500
Boepd during third quarter 2008. We expect our Gulf of Mexico
production to come back online depending on the restarting of pipeline and other
non-operated facilities.
Mid-continent Acquisition –
In July 2008, we acquired producing properties in western Oklahoma for $292
million in cash. Properties acquired cover approximately 15,500 net acres and
are currently producing 25 MMcfepd with approximately 70% natural gas and 30%
liquids. We operate the assets with an average working interest of
83%.
Main Pass Assets – We expect
to sell essentially all of our remaining non-core Gulf of Mexico shelf
assets in the near future. These assets, located at Main Pass, suffered
significant hurricane damage in 2004 and 2005 and have undergone cleanup
activities that were completed in the third quarter of 2007. During third
quarter 2008, in anticipation of the sale, we recorded an impairment loss of $38 million (based on anticipated
proceeds less costs to sell) related to the Main Pass assets. We also
recorded a loss on involuntary conversion of $9 million upon resolution of our
insurance claims related to the hurricane damage sustained in
2005.
OUTLOOK
We expect
crude oil, condensate, natural gas and NGL 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;
|
|
·
|
growth
in demand for natural gas in
Israel;
|
|
·
|
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:
|
·
|
hurricane-related
volume curtailments in the Gulf of Mexico and Gulf Coast areas of our US
operations as occurred with Hurricanes Gustav and
Ike;
|
|
·
|
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 and deliverability of Egyptian gas in Israel, which could
lower our sales volumes;
|
|
·
|
potential
downtime at the methanol, LPG and/or LNG facilities in Equatorial
Guinea;
|
|
·
|
timing
of workovers and turbine repairs and seasonal variations in rainfall in
Ecuador that affect our natural gas-to-power
project;
|
|
·
|
timing
and success of capital expenditures, as discussed below, which are
expected to result in near-term production;
and
|
|
·
|
timing of
significant project completion and initial
production.
|
2008 Capital Expenditures –
We have forecasted capital expenditures of approximately $2.4 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 acquisition, production, development
and other projects.
US expenditures are forecast at approximately $1.9 billion, international
expenditures are forecast at $413 million and corporate expenditures are
forecast at $43 million. We expect that our 2008 capital
forecast will be funded primarily from cash flows from operations and, if
necessary borrowings under our revolving credit facility.
Recently Issued
Pronouncements –
See Item 1. Financial Statements – Note 14 – Recently Issued
Pronouncements.
RESULTS
OF OPERATIONS
Oil,
Gas and NGL Sales
Revenues
from sales of commodities were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Crude
oil and condensate sales
|
|
$ |
629 |
|
|
$ |
450 |
|
|
$ |
1,830 |
|
|
$ |
1,205 |
|
Natural
gas sales
|
|
|
361 |
|
|
|
296 |
|
|
|
1,132 |
|
|
|
935 |
|
NGL
sales (1)
|
|
|
50 |
|
|
|
- |
|
|
|
153 |
|
|
|
- |
|
Total
|
|
$ |
1,040 |
|
|
$ |
746 |
|
|
$ |
3,115 |
|
|
$ |
2,140 |
|
(1)
|
For
2007, US NGL sales volumes were included with natural gas
volumes. Effective in 2008, we began reporting US NGLs, which
has lowered the comparative natural gas sales revenues from 2007 to
2008.
|
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 September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States (2)
|
|
|
38 |
|
|
|
384 |
|
|
|
10 |
|
|
$ |
93.47 |
|
|
$ |
8.48 |
|
|
$ |
57.06 |
|
West
Africa (3)
|
|
|
14 |
|
|
|
194 |
|
|
|
- |
|
|
|
109.90 |
|
|
|
0.27 |
|
|
|
- |
|
North
Sea
|
|
|
12 |
|
|
|
6 |
|
|
|
- |
|
|
|
117.44 |
|
|
|
11.54 |
|
|
|
- |
|
Israel
|
|
|
- |
|
|
|
155 |
|
|
|
- |
|
|
|
- |
|
|
|
3.57 |
|
|
|
- |
|
Ecuador
(4)
|
|
|
- |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
International
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
106.03 |
|
|
|
- |
|
|
|
- |
|
Total
Consolidated Operations
|
|
|
67 |
|
|
|
760 |
|
|
|
10 |
|
|
|
101.82 |
|
|
|
5.31 |
|
|
|
57.06 |
|
Equity
Investees (5)
|
|
|
2 |
|
|
|
- |
|
|
|
5 |
|
|
|
116.04 |
|
|
|
- |
|
|
|
67.56 |
|
Total
|
|
|
69 |
|
|
|
760 |
|
|
|
15 |
|
|
$ |
102.25 |
|
|
$ |
5.31 |
|
|
$ |
60.80 |
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States (2)
|
|
|
40 |
|
|
|
404 |
|
|
|
- |
|
|
$ |
55.85 |
|
|
$ |
6.77 |
|
|
$ |
- |
|
West
Africa (3)
|
|
|
14 |
|
|
|
208 |
|
|
|
- |
|
|
|
73.25 |
|
|
|
0.27 |
|
|
|
- |
|
North
Sea
|
|
|
17 |
|
|
|
5 |
|
|
|
- |
|
|
|
77.13 |
|
|
|
7.26 |
|
|
|
- |
|
Israel
|
|
|
- |
|
|
|
131 |
|
|
|
- |
|
|
|
- |
|
|
|
2.95 |
|
|
|
- |
|
Ecuador
(4)
|
|
|
- |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
International
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
55.55 |
|
|
|
- |
|
|
|
- |
|
Total
Consolidated Operations
|
|
|
77 |
|
|
|
773 |
|
|
|
- |
|
|
|
63.53 |
|
|
|
4.30 |
|
|
|
- |
|
Equity
Investees (5)
|
|
|
2 |
|
|
|
- |
|
|
|
5 |
|
|
|
77.91 |
|
|
|
- |
|
|
|
49.98 |
|
Total
|
|
|
79 |
|
|
|
773 |
|
|
|
5 |
|
|
$ |
62.98 |
|
|
$ |
4.30 |
|
|
$ |
49.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States (2)
|
|
|
41 |
|
|
|
393 |
|
|
|
10 |
|
|
$ |
87.84 |
|
|
$ |
9.10 |
|
|
$ |
57.39 |
|
West
Africa (3)
|
|
|
15 |
|
|
|
212 |
|
|
|
- |
|
|
|
103.31 |
|
|
|
0.27 |
|
|
|
- |
|
North
Sea
|
|
|
10 |
|
|
|
6 |
|
|
|
- |
|
|
|
114.42 |
|
|
|
10.62 |
|
|
|
- |
|
Israel
|
|
|
- |
|
|
|
140 |
|
|
|
- |
|
|
|
- |
|
|
|
3.15 |
|
|
|
- |
|
Ecuador
(4)
|
|
|
- |
|
|
|
22 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
International
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
73.37 |
|
|
|
- |
|
|
|
- |
|
Total
Consolidated Operations
|
|
|
70 |
|
|
|
773 |
|
|
|
10 |
|
|
|
78.89 |
|
|
|
5.50 |
|
|
|
57.39 |
|
Equity
Investees (5)
|
|
|
2 |
|
|
|
- |
|
|
|
6 |
|
|
|
110.43 |
|
|
|
- |
|
|
|
66.08 |
|
Total
|
|
|
72 |
|
|
|
773 |
|
|
|
16 |
|
|
$ |
95.47 |
|
|
$ |
5.50 |
|
|
$ |
60.80 |
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States (2)
|
|
|
43 |
|
|
|
410 |
|
|
|
- |
|
|
$ |
51.04 |
|
|
$ |
7.42 |
|
|
$ |
- |
|
West
Africa (3)
|
|
|
15 |
|
|
|
127 |
|
|
|
- |
|
|
|
66.97 |
|
|
|
0.29 |
|
|
|
- |
|
North
Sea
|
|
|
12 |
|
|
|
6 |
|
|
|
- |
|
|
|
70.41 |
|
|
|
6.05 |
|
|
|
- |
|
Israel
|
|
|
- |
|
|
|
111 |
|
|
|
- |
|
|
|
- |
|
|
|
2.81 |
|
|
|
- |
|
Ecuador
(4)
|
|
|
- |
|
|
|
25 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Other
International
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
50.30 |
|
|
|
- |
|
|
|
- |
|
Total
Consolidated Operations
|
|
|
77 |
|
|
|
679 |
|
|
|
- |
|
|
|
57.03 |
|
|
|
5.24 |
|
|
|
- |
|
Equity
Investees (5)
|
|
|
2 |
|
|
|
- |
|
|
|
6 |
|
|
|
69.63 |
|
|
|
- |
|
|
|
44.75 |
|
Total
|
|
|
79 |
|
|
|
679 |
|
|
|
6 |
|
|
$ |
56.47 |
|
|
$ |
5.24 |
|
|
$ |
44.75 |
|
(1)
|
In
2007, US NGL sales volumes were included with natural gas
volumes. Effective in 2008, we began reporting US NGLs, which
has lowered the comparative natural gas sales volumes from 2007 to
2008.
|
(2)
|
Average
realized crude oil and condensate prices reflect reductions of $22.95 per
Bbl and $15.64 per Bbl for third quarter 2008 and 2007, respectively, and
reductions of $21.69 per Bbl and $10.57 per Bbl for the first nine months
of 2008 and 2007, respectively, from hedging activities. Average realized
natural gas prices reflect a reduction of $0.12 per Mcf and an increase of
$1.29 per Mcf for third quarter 2008 and 2007, respectively, and increases
of $0.29 per Mcf and $1.07 per Mcf for the first nine months of 2008 and
2007, respectively, from hedging activities. The price
increases and reductions resulted from hedge gains and losses that had been
previously deferred
in AOCL.
|
(3)
|
Average
realized crude oil and condensate prices reflect reductions of $7.42 per
Bbl and $2.18 per Bbl for third quarter 2008 and 2007, respectively, and
reductions of $8.10 per Bbl and $0.68 per Bbl for the first nine months of
2008 and 2007, respectively, from hedging activities. The price
reductions resulted from hedge losses that had been previously deferred in
AOCL. Natural gas from the Alba field in Equatorial Guinea is
under contract for $0.25 per MMBtu to a methanol plant, an LPG plant and
an LNG facility. The methanol and LPG plants are owned by affiliated
entities accounted for under the equity method of
accounting. Natural gas volumes sold to the LNG facility
totaled 160 MMcfpd and 155 MMcfpd during third quarter 2008 and 2007,
respectively, and 169 MMcfpd and 72 MMcfpd during the first nine months of
2008 and 2007, respectively. The natural gas sold to the LNG facility and
methanol plant has a lower Btu content than the natural gas sold to the
LPG plant. As a result of the increase in natural gas volumes sold to
the LNG plant in 2008, the average price received on an Mcf basis is
lower.
|
(4)
|
The
natural gas-to-power project in Ecuador is 100% owned by our subsidiaries
and intercompany natural gas sales are eliminated for accounting purposes.
Electricity sales are included in other
revenues.
|
(5)
|
Volumes
represent sales of condensate and LPG from the Alba plant in Equatorial
Guinea. See Equity Method Investees
below.
|
Crude oil
and condensate sales volumes in the table above differ from actual production
volumes due to the timing of liquid hydrocarbon tanker liftings. Crude oil and
condensate production volumes were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(MBopd)
|
|
United
States
|
|
|
38 |
|
|
|
40 |
|
|
|
41 |
|
|
|
43 |
|
West
Africa
|
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
|
|
16 |
|
North
Sea
|
|
|
9 |
|
|
|
16 |
|
|
|
10 |
|
|
|
12 |
|
Other
International
|
|
|
3 |
|
|
|
7 |
|
|
|
4 |
|
|
|
7 |
|
Total
Consolidated Operations
|
|
|
65 |
|
|
|
78 |
|
|
|
70 |
|
|
|
78 |
|
Equity
Investees
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Total
|
|
|
67 |
|
|
|
80 |
|
|
|
72 |
|
|
|
80 |
|
If the
realized gains and losses on commodity derivative instruments had been included
in oil and gas revenues, average realized prices would have been as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2008
|
|
|
|
Crude
Oil &
|
|
|
|
Natural
|
|
|
|
Crude
Oil &
|
|
|
|
Natural
|
|
|
|
Condensate
|
|
|
|
Gas
|
|
|
|
Condensate
|
|
|
|
Gas
|
|
|
|
(Per
Bbl)
|
|
|
|
(Per
Mcf)
|
|
|
|
(Per
Bbl)
|
|
|
|
(Per
Mcf)
|
|
United
States
|
$
|
88.77
|
|
|
$ |
8.41
|
|
|
$
|
78.11
|
|
|
|
$ |
8.55
|
|
West
Africa
|
|
106.61
|
|
|
|
0.27
|
|
|
|
95.83
|
|
|
|
|
0.27
|
|
Total
Consolidated Operations
|
|
98.47
|
|
|
|
5.28
|
|
|
|
71.59
|
|
|
|
|
5.22
|
|
Total
|
|
99.00
|
|
|
|
5.28
|
|
|
|
88.37
|
|
|
|
|
5.22
|
|
Crude Oil and Condensate Sales –
During third quarter 2008, crude oil and condensate
sales increased a net $179 million, or 40%, as compared with third quarter 2007.
US sales increased by $119 million, or 58%, and international sales increased
$60 million, or 24%.
During
the first nine months of 2008, crude oil and condensate sales increased a net
$625 million, or 52%, as compared with the first nine months of 2007. US sales
increased by $392 million, or 65%, from the first nine months of 2007, and
international sales increased $233 million, or 39%.
Factors
contributing to the changes in crude oil and condensate sales
included:
|
·
|
higher
worldwide commodity prices; and
|
|
·
|
growth
in the Rocky Mountain area of our US
operations;
|
offset
by:
|
·
|
hurricane-related
production shut-ins in the Gulf of Mexico from Hurricanes Gustav and
Ike;
|
|
·
|
declining
production in the Gulf Coast onshore and Mid-continent areas of our US
operations; and
|
|
·
|
natural
field decline in the North Sea.
|
Revenues
include amounts reclassified from AOCL related to commodity derivative
instruments which were accounted for as cash flow hedges through December 31,
2007. Amounts included decreases of $89 million and $60 million for
third quarter 2008 and 2007, respectively, and decreases of $279 million and
$128 million for the first nine months of 2008 and 2007,
respectively.
Natural Gas Sales – During third quarter 2008,
natural gas sales increased a net $65 million, or 22%, as compared with third
quarter 2007. US sales increased $48 million, or 19%, and international sales
increased $17 million, or 38%.
During
the first nine months of 2008, natural gas sales increased a net $197 million,
or 21%, as compared with the first nine months of 2007. US sales increased $149
million, or 18%, and international sales increased $48 million, or
46%.
Factors
contributing to the changes in natural gas sales included:
|
·
|
higher
commodity prices;
|
|
·
|
successful
drilling program in the Piceance basin along with less severe winter
weather in the Rocky Mountain area of our US
operations;
|
|
·
|
increased
natural gas sales volumes in Israel;
and
|
|
·
|
increased
sales from the Alba field in Equatorial Guinea to an LNG
plant;
|
offset
by:
|
·
|
hurricane-related
production shut-ins in the Gulf of Mexico from Hurricanes Gustav and
Ike;
|
|
·
|
a
reduction for shrink gas associated with the natural gas liquids now being
reported separately;
|
|
·
|
declining
production in the Gulf Coast onshore and Mid-continent areas of our US
operations; and
|
|
·
|
lower
average realized prices in West
Africa.
|
Revenues
include amounts reclassified from AOCL related to commodity derivative
instruments which were accounted for as cash flow hedges through December 31,
2007. Amounts included a decrease of $4 million and an increase of
$48 million for third quarter 2008 and 2007, respectively, and increases of $31
million and $120 million for the first nine months of 2008 and 2007,
respectively.
Equity Method
Investees –- Our
share of operations of equity method investees, Atlantic Methanol Production
Company, LLC (AMPCO) and Alba Plant LLC (Alba Plant), was as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
(in
millions, except where noted)
|
|
AMPCO
and affiliates
|
|
$ |
5 |
|
|
$ |
15 |
|
|
$ |
51 |
|
|
$ |
50 |
|
Alba
Plant
|
|
$ |
35 |
|
|
$ |
31 |
|
|
$ |
107 |
|
|
$ |
90 |
|
Distributions/Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMPCO
|
|
$ |
16 |
|
|
$ |
17 |
|
|
$ |
54 |
|
|
$ |
60 |
|
Alba
Plant
|
|
$ |
55 |
|
|
$ |
41 |
|
|
$ |
138 |
|
|
$ |
95 |
|
Sales
volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Methanol
(Mgal)
|
|
|
23 |
|
|
|
44 |
|
|
|
93 |
|
|
|
117 |
|
Condensate
(MBopd)
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
LPG
(MBpd)
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
Production
volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Methanol
(Mgal)
|
|
|
21 |
|
|
|
41 |
|
|
|
83 |
|
|
|
122 |
|
Condensate
(MBopd)
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
LPG
(MBpd)
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Average
realized prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Methanol
(per gallon)
|
|
$ |
1.16 |
|
|
$ |
0.80 |
|
|
$ |
1.33 |
|
|
$ |
0.96 |
|
Condensate
(per Bbl)
|
|
$ |
116.04 |
|
|
$ |
77.91 |
|
|
$ |
110.43 |
|
|
$ |
69.63 |
|
LPG
(per Bbl)
|
|
$ |
67.56 |
|
|
$ |
49.98 |
|
|
$ |
66.08 |
|
|
$ |
44.75 |
|
Net
income from AMPCO decreased $10 million, or 67%, during third quarter 2008 as
compared with third quarter 2007 primarily due to decreases in methanol sales
volumes that resulted from down time for compressor and other equipment
maintenance. Net income from AMPCO increased $1 million, or 2%, during the first
nine months of 2008 as compared with the first nine months of 2007 primarily due
to higher average realized methanol prices, offset by decreases in methanol
sales volumes that resulted from down time for compressor and other equipment
maintenance.
Net
income from Alba Plant increased $4 million, or 13%, during third quarter 2008
as compared with third quarter 2007 and increased $17 million, or 19%, during
the first nine months of 2008 as compared with the first nine months of 2007
primarily due to higher average realized condensate and LPG prices, offset by
the expiration of the Alba Plant tax holiday. See Income Tax Provision
(Benefit) below.
Costs
and Expenses
Production Costs – Production
costs were as follows:
|
|
|
|
|
United
|
|
|
West
|
|
|
North
|
|
|
|
|
|
Other
Int'l /
|
|
|
|
Consolidated
|
|
|
States
|
|
|
Africa
|
|
|
Sea
|
|
|
Israel
|
|
|
Corp(1)
|
|
|
|
(in
millions)
|
|
Three
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating costs (2)
|
|
$ |
88 |
|
|
$ |
55 |
|
|
$ |
10 |
|
|
$ |
17 |
|
|
$ |
3 |
|
|
$ |
3 |
|
Workover
and repair expense
|
|
|
10 |
|
|
|
9 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Lease
operating expense
|
|
|
98 |
|
|
|
64 |
|
|
|
10 |
|
|
|
18 |
|
|
|
3 |
|
|
|
3 |
|
Production
and ad valorem taxes
|
|
|
47 |
|
|
|
38 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9 |
|
Transportation
expense
|
|
|
14 |
|
|
|
12 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
Total
production costs
|
|
$ |
159 |
|
|
$ |
114 |
|
|
$ |
10 |
|
|
$ |
20 |
|
|
$ |
3 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating costs (2)
|
|
$ |
77 |
|
|
$ |
50 |
|
|
$ |
7 |
|
|
$ |
11 |
|
|
$ |
3 |
|
|
$ |
6 |
|
Workover
and repair expense
|
|
|
5 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Lease
operating expense
|
|
|
82 |
|
|
|
55 |
|
|
|
7 |
|
|
|
11 |
|
|
|
3 |
|
|
|
6 |
|
Production
and ad valorem taxes
|
|
|
27 |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
Transportation
expense
|
|
|
13 |
|
|
|
10 |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
Total
production costs
|
|
$ |
122 |
|
|
$ |
86 |
|
|
$ |
7 |
|
|
$ |
14 |
|
|
$ |
3 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating costs (2)
|
|
$ |
244 |
|
|
$ |
160 |
|
|
$ |
29 |
|
|
$ |
37 |
|
|
$ |
7 |
|
|
$ |
11 |
|
Workover
and repair expense
|
|
|
24 |
|
|
|
23 |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Lease
operating expense
|
|
|
268 |
|
|
|
183 |
|
|
|
29 |
|
|
|
38 |
|
|
|
7 |
|
|
|
11 |
|
Production
and ad valorem taxes
|
|
|
141 |
|
|
|
112 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
29 |
|
Transportation
expense
|
|
|
43 |
|
|
|
36 |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
1 |
|
Total
production costs
|
|
$ |
452 |
|
|
$ |
331 |
|
|
$ |
29 |
|
|
$ |
44 |
|
|
$ |
7 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating costs (2)
|
|
$ |
229 |
|
|
$ |
156 |
|
|
$ |
25 |
|
|
$ |
24 |
|
|
$ |
7 |
|
|
$ |
17 |
|
Workover
and repair expense
|
|
|
14 |
|
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Lease
operating expense
|
|
|
243 |
|
|
|
170 |
|
|
|
25 |
|
|
|
24 |
|
|
|
7 |
|
|
|
17 |
|
Production
and ad valorem taxes
|
|
|
81 |
|
|
|
66 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
Transportation
expense
|
|
|
40 |
|
|
|
32 |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
1 |
|
Total
production costs
|
|
$ |
364 |
|
|
$ |
268 |
|
|
$ |
25 |
|
|
$ |
31 |
|
|
$ |
7 |
|
|
$ |
33 |
|
(1)
|
Other
international includes Ecuador, China, and Argentina (through February
2008).
|
(2)
|
Oil
and gas operating costs include labor, fuel, repairs, replacements,
saltwater disposal and other related lifting
costs.
|
Total
production costs increased $37 million, or 30%, during third quarter 2008 as
compared with third quarter 2007 and increased $88 million, or 24%, during the
first nine months of 2008 as compared with the first nine months of 2007. US
lease operating expense increased from 2007 primarily due to higher costs
related to the continuing active drilling program in the Northern region and
expenses relating to increased workover activity. The year-to-year increase was
partially offset by a decrease in insurance costs for our Gulf of Mexico
deepwater operations related to a change in insurance coverage made third
quarter 2007. North Sea oil and gas operating costs for the third quarter and
first nine months of 2008 increased as compared with 2007 due to expanded
operations and higher costs. The increase in production and ad valorem taxes was
driven primarily by higher commodity prices and also by an increase in volumes
subject to such taxes.
Selected
expenses on a per BOE basis were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Oil
and gas operating costs
|
|
$ |
4.71 |
|
|
$ |
4.08 |
|
|
$ |
4.27 |
|
|
$ |
4.40 |
|
Workover
and repair expense
|
|
|
0.51 |
|
|
|
0.24 |
|
|
|
0.42 |
|
|
|
0.28 |
|
Lease
operating expense
|
|
|
5.22 |
|
|
|
4.32 |
|
|
|
4.69 |
|
|
|
4.68 |
|
Production
and ad valorem taxes
|
|
|
2.50 |
|
|
|
1.41 |
|
|
|
2.47 |
|
|
|
1.55 |
|
Transportation
expense
|
|
|
0.76 |
|
|
|
0.70 |
|
|
|
0.75 |
|
|
|
0.78 |
|
Total
production costs (1) (2)
(3)
|
|
$ |
8.48 |
|
|
$ |
6.43 |
|
|
$ |
7.91 |
|
|
$ |
7.01 |
|
(1)
|
Consolidated
unit rates exclude sales volumes and costs attributable to equity method
investees.
|
(2)
|
Sales
volumes include natural gas sales to an LNG facility in Equatorial Guinea
that began late first quarter 2007. Inclusion of these volumes reduced the
unit rate by $1.28 per BOE and $0.92 per BOE for third quarter 2008 and
2007, respectively, and $1.23 per BOE and $0.47 per BOE for the first nine
months of 2008 and 2007, respectively.
|
(3)
|
Natural
gas volumes are converted to oil equivalent volumes on the basis of six
thousand cubic feet of gas per barrel of
oil.
|
Oil and Gas Exploration Expense –
Oil and gas exploration expense was as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Oil
and gas exploration expense (1)
|
|
$ |
39 |
|
|
$ |
46 |
|
|
$ |
181 |
|
|
$ |
145 |
|
(1)
|
Oil
and gas exploration expense includes dry hole expense, unproved lease
amortization, seismic expense, staff expense, lease rentals and other
miscellaneous exploration expense.
|
Oil and
gas exploration expense decreased $7 million during third quarter 2008 as
compared with third quarter 2007 and increased $36 million during the first nine
months of 2008 as compared with the first nine months of 2007. The increase for
the first nine months of 2008 was primarily the result of increased dry hole
expense. A significant portion of 2008 dry hole expense relates to the West
Tapir exploration well on Block 30 offshore Suriname and the Stones River
exploration well (Mississippi Canyon Block 285) in the deepwater Gulf of
Mexico.
Depreciation, Depletion and
Amortization – Depreciation, depletion and amortization (DD&A)
expense was as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions, except unit rate)
|
|
DD&A
expense - property, plant and equipment
|
|
$ |
191 |
|
|
$ |
195 |
|
|
$ |
586 |
|
|
$ |
541 |
|
Accretion
of discount on asset retirement obligations
|
|
|
3 |
|
|
|
2 |
|
|
|
7 |
|
|
|
6 |
|
Total
DD&A expense
|
|
$ |
194 |
|
|
$ |
197 |
|
|
$ |
593 |
|
|
$ |
547 |
|
Unit
rate per BOE (1)
(2)
|
|
$ |
10.38 |
|
|
$ |
10.41 |
|
|
$ |
10.37 |
|
|
$ |
10.47 |
|
(1)
|
Consolidated
unit rates exclude sales volumes and costs attributable to equity method
investees.
|
(2)
|
Sales
volumes include natural gas sales to an LNG facility in Equatorial Guinea
that began late first quarter 2007. Inclusion of these volumes reduced the
unit rate by $1.25 per BOE and $1.20 per BOE for third quarter 2008 and
2007, respectively, and $1.31 per BOE and $0.57 per BOE for the first nine
months of 2008 and 2007,
respectively.
|
Total
DD&A expense for the first nine months of 2008 increased as compared with
2007 primarily due to the increase in sales volumes. The decrease in the unit
rate is due to a change in the mix of production. Increased
production of lower-cost natural gas volumes from the Alba field in Equatorial
Guinea and Israel were partially offset by production from areas with higher
acquisition and/or development costs (the Wattenberg field and deepwater Gulf of
Mexico in the US).
General and Administrative
Expense – General and administrative expense (G&A) was as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
G&A
expense (in millions)
|
|
$ |
63 |
|
|
$ |
49 |
|
|
$ |
184 |
|
|
$ |
142 |
|
Unit
rate per BOE (1)
(2)
|
|
$ |
3.37 |
|
|
$ |
2.61 |
|
|
$ |
3.22 |
|
|
$ |
2.74 |
|
(1)
|
Consolidated
unit rates exclude sales volumes and costs attributable to equity method
investees.
|
(2)
|
Sales
volumes include natural gas sales to an LNG facility in Equatorial Guinea
that began late first quarter 2007. Inclusion of these volumes reduced the
unit rate by $0.51 per BOE and $0.38 per BOE for third quarter 2008 and
2007, respectively, and $0.50 per BOE and $0.18 per BOE for the first nine
months of 2008 and 2007,
respectively.
|
G&A
expense increased during the third quarter and first nine months of 2008 as
compared with 2007. Our increased activities require additional
personnel, which has resulted in higher payroll costs. In addition, we have
increased our incentive compensation accruals to align with current expectations
of achievement, and stock-based compensation increased $2 million and $10
million during the third quarter and first nine months of 2008, respectively, as
compared with 2007.
Other Operating Expense, Net –
See Item I.
Financial Statements – Note 2 – Basis of Presentation and Note 13 - Commitments
and Contingencies - Purchaser Bankruptcy
for a discussion of the SemCrude matter.
Loss (Gain) on Commodity Derivative
Instruments – Effective January 1, 2008, we discontinued cash flow
hedge accounting on all existing crude oil and natural gas commodity contracts
(or “commodity derivative instruments”). We voluntarily made this change to
provide greater flexibility in our use of commodity contracts. From January 1,
2008 forward, we recognize all mark-to-market gains and losses on such
instruments in earnings in the period in which they occur, rather than deferring
them in shareholders’ equity until the related future production occurs.
Our discontinuation of cash flow hedge accounting 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. See Item 1. Financial Statements – Note 4 – Derivative
Instruments and Hedging Activities.
Interest Expense and Capitalized
Interest – Interest expense and capitalized interest were as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Interest
expense
|
|
$ |
26 |
|
|
$ |
33 |
|
|
$ |
75 |
|
|
$ |
97 |
|
Capitalized
interest
|
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(23 |
) |
|
|
(10 |
) |
Interest
expense, net
|
|
$ |
18 |
|
|
$ |
29 |
|
|
$ |
52 |
|
|
$ |
87 |
|
Interest
expense decreased during the third quarter and first nine months of 2008, as
compared with 2007
due to declining interest
rates applicable to our credit facility from 5.77% at September 30, 2007 to
4.064% at September 30, 2008 and a slightly lower average outstanding debt
balance.
The
amount of interest capitalized increased due to long lead-time projects in West
Africa and the Gulf of Mexico.
Other Expense, Net – See Item
1. Financial Statements – Note 2 – Basis of Presentation.
Income Tax Provision – The
income tax provision was as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Income
tax provision (in millions)
|
|
$ |
480 |
|
|
$ |
120 |
|
|
$ |
528 |
|
|
$ |
296 |
|
Effective
rate
|
|
|
33.0 |
% |
|
|
35.1 |
% |
|
|
33.6 |
% |
|
|
31.5 |
% |
Our
effective tax rate increased during the first nine months of 2008 as compared
with 2007. The rate increase is caused by several factors, one of which is that
the foreign pretax income in higher taxing jurisdictions, such as the United
Kingdom and the Netherlands, increased in 2008. Another increase that
affected the rate was the recognition of losses from certain controlled foreign
corporations, primarily Suriname, for which no foreign tax benefit was
recognized. The overall rate increase was partially offset by the impact of an
increase in earnings from our equity method investees. Earnings from equity
method investees represent a favorable permanent difference in calculating
income tax expense.
LIQUIDITY AND CAPITAL
RESOURCES
Overview
Our
primary cash needs are to fund operating expenses and capital expenditures
related to the acquisition, exploration and development of crude oil and natural
gas properties, to repay outstanding borrowings and associated interest payments
and other contractual commitments and to pay dividends. Traditional sources of
our liquidity are cash on hand, cash flows from operations and available
borrowing capacity under credit facilities. Occasional sales of non-strategic
crude oil and natural gas properties may also generate cash.
The
recent disruption in the credit markets has had a significant adverse impact on
a number of financial institutions. We have reviewed the creditworthiness of the
banks and financial institutions with which we maintain our investments as well
as the securities underlying our investments. Thus far, our liquidity and
financial position have not been materially impacted. However, further
deterioration in the credit markets could adversely affect our results of
operations and cash flows. See Executive
Overview - Impact
of Current Credit and Commodity Markets.
Cash and Cash Equivalents –
We had $992 million in cash and cash equivalents at September 30, 2008, compared
with $660 million at December 31, 2007. Our cash is denominated in US dollars
and is invested in highly liquid, investment-grade securities with original
maturities of three months or less at the time of purchase. Substantially all of
this cash is attributable to our foreign subsidiaries and most would be subject
to US income taxes if repatriated. We currently intend to use our
international cash to fund international projects, including the development of
West Africa.
Commodity Derivative Instruments
– As of September 30, 2008, we had commodity derivative assets totaling
$58
million and commodity derivative liabilities totaling $258 million (after
consideration of netting agreements). Our hedging arrangements are currently
with a diversified group of 13 financial institutions, substantially all of
which are lenders under our credit facility arrangement. See Part II. Item 1A.
Risk Factors.
We estimated the fair
values of our commodity derivative instruments in accordance with SFAS 157,
which we adopted as of January 1, 2008. In order to determine the fair value at
the end of each reporting period, we compute discounted cash flows for the
duration of each commodity derivative instrument using the terms of the related
contract. Inputs consist of published forward commodity price curves for the
underlying commodities as of the date of the estimate. We compare these prices
to the price parameters contained in our hedge contracts to determine estimated
future cash inflows or outflows. We then discount the cash inflows or outflows
using a combination of published LIBOR rates, Eurodollar futures rates and
interest swap rates. The fair values of our commodity derivative assets and
liabilities include a measure of credit risk based on current published credit
default swap rates. In addition, for costless collars, we estimate the option
value of the contract floors and ceilings using an option pricing model which
takes into account market volatility, market prices and contract
parameters. We compare our estimates of fair value with those
provided by our counterparties. There have been no significant
differences.
Beginning
January 1, 2008, we use mark-to-market accounting for our commodity derivative
instruments and recognize all changes in fair value in earnings in the period
they occur. This can have a significant impact on our results of operations due
to the volatility of the underlying commodity prices. Our liquidity is impacted
by current period settlements since we are either paying cash to, or receiving
cash from, our counterparties. If actual commodity prices are higher than the
fixed or ceiling prices in our derivative instruments, our cash flows provided
by operating activities will be lower than if we had no derivative instruments.
As of September 30, 2008, the current portion of our commodity derivative
liability totaled $189 million. Except for certain minor derivative contracts
that are entered into from time to time by our marketing subsidiary, none of our
counterparty agreements contain margin requirements. We expect that future
settlements of these liabilities would be funded from cash flows from
operations, and would be substantially offset by related increases in crude oil
and natural gas revenues. See additional information included in Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Certain
of our commodity contracts were executed in connection with our merger with
Patina Oil & Gas Corporation, prior to the global crude oil and natural gas
price escalations which began in early 2005. The settlements of these
contracts have reduced our cash flows. However, these contracts will expire in
December 2008. Our remaining commodity contracts were executed in
more favorable price environments. Although we cannot predict market
prices, our remaining commodity contract positions should result in more
favorable cash flows as compared to our commodity contract positions in prior
periods. See Note 4 – Derivative Instruments and Hedging Activities
for our current hedge positions.
Contractual Obligations –
During the first nine months of 2008, we entered into drilling and equipment
contracts for our domestic operations totaling $484 million and for our
international operations totaling $278 million. Had these contracts
been included in our contractual obligations table in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
annual report on Form 10-K for the year ended December 31, 2007,
as amended, our domestic drilling and equipment obligations would have been $181
million in 2008, $105 million in 2009, $315 million in 2010, $301 million in
2011 and $45 million in 2012 for a total of $947 million and our international
drilling and equipment obligations would have been $115 million in 2008, $75
million in 2009, $90 million in 2010 and $66 million in 2011 for a total of $346
million.
Cash
Flows
Cash flow
information is as follows:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Total
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
1,867 |
|
|
$ |
1,321 |
|
Investing
activities
|
|
|
(1,721 |
) |
|
|
(1,015 |
) |
Financing
activities
|
|
|
186 |
|
|
|
(8 |
) |
Increase
in cash and cash equivalents
|
|
$ |
332 |
|
|
$ |
298 |
|
Operating Activities – Net
cash provided by operating activities was $1.9 billion for the first nine months
of 2008, as compared with $1.3 billion for the first nine months of
2007. The increase was primarily due to higher commodity
prices.
Investing Activities – Net
cash used in investing activities was $1.7 billion for the first nine months of
2008, as compared with $1.0 billion for the first nine months of
2007. Investing activities in 2008 consisted of $1.9 billion in
capital expenditures offset by $131 million in proceeds from asset sales.
Investing activities in 2007 consisted primarily of capital expenditures. See
Acquisition, Capital and Other
Exploration Expenditures below.
Financing Activities – Net
cash provided by financing activities was $186 million for the first nine months
of 2008, as compared with $8 million used in financing activities for the first
nine months of 2007. During 2008 and 2007, financing cash flows were
provided by the exercise of stock options and related excess tax benefits.
Financing cash flows were used to pay dividends on common stock. In addition,
there were net proceeds from borrowings of $223 million in 2008 and $115 million
in 2007. In 2008, $2 million was used to repurchase common stock as compared
with $102 million used in 2007.
Investing
Activities
Acquisition, Capital and Other
Exploration Expenditures – Expenditure information (on an accrual basis)
is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
millions)
|
|
Acquisition,
Capital and Other Exploration Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Unproved
property acquisition (1)
|
|
$ |
36 |
|
|
$ |
2 |
|
|
$ |
299 |
|
|
$ |
93 |
|
Proved
property acquisition
(2)
|
|
|
255 |
|
|
|
- |
|
|
|
255 |
|
|
|
6 |
|
Exploration
expenditures
|
|
|
142 |
|
|
|
97 |
|
|
|
385 |
|
|
|
250 |
|
Development
expenditures
|
|
|
334 |
|
|
|
345 |
|
|
|
840 |
|
|
|
842 |
|
Corporate
and other expenditures
|
|
|
19 |
|
|
|
5 |
|
|
|
53 |
|
|
|
24 |
|
Total
capital expenditures
|
|
$ |
786 |
|
|
$ |
449 |
|
|
$ |
1,832 |
|
|
$ |
1,215 |
|
(1)
|
Unproved
property acquisition cost for the first nine months of 2008 includes
deepwater lease blocks acquired in the March 2008 Gulf of Mexico lease
sale and the Mid-continent acquisition completed in July
2008.
|
(2)
|
Proved
property acquisition cost for the first nine months of 2008 includes the
Mid-continent acquisition.
|
Financing
Activities
Long-Term Debt – Our
long-term debt totaled $2.1 billion (net of unamortized discount) at September
30, 2008. Maturities range from 2011 to 2097. Our ratio of debt-to-book
capital was 26% at September 30, 2008 as compared with 28% at December 31, 2007.
We define our ratio of debt-to-book capital as total debt (which includes both
long-term debt, excluding unamortized discount, and short-term borrowings)
divided by the sum of total debt plus shareholders’ equity.
Our
principal source of liquidity is an unsecured revolving credit facility due
December 9, 2012. The commitment is $2.1
billion until December 9, 2011 at which time the commitment reduces to $1.8
billion. The credit facility (i) provides for credit facility fee rates
that range from 5 basis points to 15 basis points per year depending upon our
credit rating, (ii) makes available short-term loans up to an aggregate amount
of $300 million and (iii) provides for interest rates that are based upon the
Eurodollar rate plus a margin that ranges from 20 basis points to 70 basis
points depending upon our credit rating and utilization of the credit
facility. At September 30, 2008, $1.405 billion in borrowings
were outstanding under the credit facility, leaving $695 million
available for use. The weighted average interest rate applicable to
borrowings under the credit facility at September 30, 2008 was 4.064%. October
borrowing requests have been funded.
Our bank
group is comprised of 24 commercial lending institutions, each holding between
1.0% and 7.0% of the total facility. Due to recent consolidation in
the banking sector resulting from heightened stress in the credit markets, the
number of lenders and their effective commitment levels within our credit
facility may be reallocated over time.
Short-term Borrowings – We
owe $25 million in the form of an installment payment to the seller of
properties we purchased in 2007. The amount is due May 11, 2009 and is included
in short-term borrowings in the consolidated balance sheets. Interest on the
unpaid amount is due quarterly and accrues at a LIBOR rate plus
..30%. The interest rate was 3.1% at September 30, 2008.
Our
committed credit facility has been supplemented by short-term borrowings under
various uncommitted credit lines used for working capital purposes. Uncommitted
credit lines may be offered by certain banks from time to time at rates
negotiated at the time of borrowing. Amounts outstanding under
uncommitted credit lines totaled $23 million with a weighted average interest
rate of 4.92% at September 30, 2008. These amounts are included in short-term
borrowings in the consolidated balance sheets. Depending upon future credit
market conditions, these sources may or may not be available. However, we are
not dependent on them to fund our day-to-day operations.
Dividends – We paid cash
dividends of 48 cents per share of common stock during the first nine months of
2008 and 31.5 cents per share of common stock during the first nine months of
2007. On October 21, 2008, our Board of Directors declared a quarterly cash
dividend of 18 cents per common share, payable November 17, 2008 to shareholders
of record on November 3, 2008. The amount of future dividends will be determined
on a quarterly basis at the discretion of our Board of Directors and will depend
on earnings, financial condition, capital requirements and other
factors.
Exercise of Stock Options –
We received $26 million from the exercise of stock options during the
first nine months of 2008 as compared to $19 million during the first nine
months of 2007.
Common Stock Repurchases –
During the first nine months of 2008, we received from employees 33,000
shares of common stock with a total value of $2 million for the payment of
withholding taxes due on the vesting of restricted shares issued under
stock-based compensation plans. During the first nine months of 2007,
we repurchased 2 million shares of our common stock at an aggregate cost of $102
million, pursuant to a common stock repurchase program. The repurchase program
was completed in 2007.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT
MARKET RISK
Commodity
Price Risk
Derivative Instruments Held for
Non-Trading Purposes – We are exposed to market risk in the normal course
of business operations. However, the uncertainty of crude oil and natural gas
prices continues to impact the oil and gas industry. Due to the volatility of
crude oil and natural gas prices, we continue to use derivative instruments as a
means of managing our exposure to price changes.
At
September 30, 2008, we had entered into variable to fixed price commodity
swaps, costless collars and basis swaps related to crude oil and natural
gas sales. Our open commodity derivative instruments were in a net
liability position with a fair value of $200 million. Based on the September 30,
2008 published forward commodity price curves for the underlying commodities, a
price increase of $1.00 per Bbl for crude oil would increase the fair value of
our net commodity derivative liability by approximately $12 million. A price
increase of $0.10 per MMBtu for natural gas would increase the fair value of our
net commodity derivative liability by approximately $7 million. Based on
the October 24, 2008 published forward commodity price curves for the underlying
commodities, our open commodity derivative
instruments had changed to a net asset position of $245
million. Our derivative instruments are executed under master
agreements which allow us, in the event of default, to elect early termination
of all contracts with the defaulting counterparty. If we choose to elect early
termination, all asset and liability positions with the defaulting counterparty
would be net settled at the time of election. See Item 1. Financial Statements –
Note 4 – Derivative Instruments and Hedging Activities.
Interest
Rate Risk
We are
exposed to interest rate risk related to our variable and fixed interest rate
debt. At September 30, 2008, we had $2.1 billion (excluding unamortized
discount) of long-term debt outstanding, of which $650 million was fixed-rate
debt with a weighted average interest rate of 6.92%. We believe that anticipated
near term changes in interest rates would not have a material effect on the fair
value of our fixed-rate debt and would not expose us to the risk of material
earnings or cash flow loss.
The
remainder of our long-term debt, $1.405 billion at September 30, 2008, was
variable-rate debt. We also had $48 million in short-term debt at September 30,
2008. Variable rate debt exposes us to the risk of earnings or cash flow loss
due to changes in market interest rates. We estimate that a hypothetical 25
basis point change in the floating interest rates applicable to our September
30, 2008 balance of variable-rate debt would result in a change in annual
interest expense of approximately $4 million.
We
occasionally enter into forward contracts or swap agreements to hedge exposure
to interest rate risk. Changes in fair value of interest rate swaps or interest
rate “locks” used 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. At September 30, 2008,
AOCL included $3 million (net of tax) related to interest rate locks. This
amount is currently being reclassified into earnings as adjustments to interest
expense over the term of our 5¼% Senior Notes due April 2014.
We are
also exposed to interest rate risk related to our short-term investments. As of
September 30, 2008, substantially all of our cash was invested in highly liquid,
short-term investment grade securities with original maturities of three months
or less at the time of purchase. A hypothetical 25 basis point change in the
floating interest rates applicable to the September 30, 2008 balance would
result in a change in annual interest income of approximately $2 million.
Foreign
Currency Risk
We have not entered into
foreign currency derivatives. The US dollar is considered the functional
currency for each of our international operations. Transactions that are
completed in a foreign currency are remeasured into US dollars and recorded in
the financial statements at prevailing currency exchange rates. We do not have
any significant monetary assets or liabilities denominated in a foreign currency
other than our foreign deferred tax liabilities in certain foreign tax
jurisdictions. An increase in exchange rates between the US dollar and the
currency of the foreign tax jurisdiction in which these liabilities are located
could result in the use of additional cash to settle these liabilities. However,
transaction gains or losses were not material
in any of the periods presented and we do not believe we are currently exposed
to any material risk of loss on this basis. Such gains or losses are included in
other expense, net in the consolidated statements of
operations.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements give our
current expectations or forecasts of future events. These forward-looking
statements include, among others, the following:
|
·
|
our
ability to successfully and economically explore for and develop crude oil
and natural gas resources;
|
|
·
|
anticipated
trends in our business;
|
|
·
|
our
future results of operations;
|
|
·
|
effect
of current volatility in the credit
markets;
|
|
·
|
our
liquidity and ability to finance our exploration and development
activities;
|
|
·
|
market
conditions in the oil and gas
industry;
|
|
·
|
our
ability to make and integrate acquisitions;
and
|
|
·
|
the
impact of governmental regulation.
|
Forward-looking
statements are typically identified by use of terms such as “may,” “will,”
“expect,” “anticipate,” “estimate” and similar words, although some
forward-looking statements may be expressed differently. These forward-looking
statements are made based upon our current plans, expectations, estimates,
assumptions and beliefs concerning future events impacting us and therefore
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and that actual results could differ materially
from those expressed or implied in the forward-looking statements. You should
consider carefully the statements under Item 1A. Risk Factors included herein,
if any, and included in our 2007 annual report on Form 10-K, as amended, which
describe factors that could cause our actual results to differ from those set
forth in the forward-looking statements. Our 2007 annual report on
Form 10-K, as amended, is available on our website at www.nobleenergyinc.com.
ITEM
4. CONTROLS AND PROCEDURES
Based on
the evaluation of our disclosure controls and procedures by Charles D. Davidson,
our principal executive officer, and Chris Tong, our principal financial
officer, as of the end of the period covered by this quarterly report, each of
them has concluded that our disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are
effective.
We are in
the process of implementing a new Enterprise Resource Planning (ERP) software
system to replace our various legacy systems. During the third
quarter of 2008 we implemented another phase of the system. As appropriate, we
modified the design and documentation of internal control processes and
procedures relating to the implementation of the newest phase. We
believe that the new ERP system has strengthened and will continue to enhance
our internal controls over financial reporting as additional phases are put to
use; however, there are inherent risks in implementing any new system that could
impact our financial reporting.
In the
event that issues arise, we have manual procedures in place which would
facilitate our continued recording and reporting of results from the new ERP
system. However, because of its inherent limitations, internal control over
financial reporting may not detect or prevent misstatements. Projections of any
evaluation of the effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
We will
continue to monitor, test, and appraise the impact and effect of the new ERP
system on our internal controls and procedures as additional phases and features
of the system are implemented. There were no changes in internal controls over
financial
reporting that occurred during the quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting, except as described
above.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
See Item
I. Financial Statements – Note 13 – Commitments and
Contingencies.
ITEM
1A. RISK FACTORS
There
have been no material changes from the risk factors disclosed in Item 1A. Risk
Factors of our annual report on Form 10-K for the year ended December 31,
2007, as amended, other than the following:
Hedging
transactions expose us to counterparty credit risk.
Our
hedging transactions also expose us to risk of financial loss if a counterparty
fails to perform under a contract. To mitigate counterparty credit
risk we conduct our hedging activities with a diverse group of major financial
institutions. We use master agreements which allow us, in the event
of default, to elect early termination of all contracts with the defaulting
counterparty. We also monitor the creditworthiness of our
counterparties on an ongoing basis. However, the current disruptions occurring
in the financial markets could lead to sudden changes in a counterparty’s
liquidity, which could impair their ability to perform under the terms of the
hedging contract. We are unable to predict sudden changes in a counterparty’s
creditworthiness or ability to perform.
In addition, during periods
of falling commodity prices, such as has occurred recently, our hedge
receivable positions increase, which increases our exposure. If commodity prices
continue to decline and our receivable positions continue to increase, a loss
from counterparty nonperformance could be significant.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
ITEM
5. OTHER INFORMATION
|
None.
ITEM
6. EXHIBITS
The
information required by this Item 6 is set forth in the Index to Exhibits
accompanying this quarterly report on Form 10-Q.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934 as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
NOBLE
ENERGY, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: October
29, 2008
|
|
/s/
CHRIS TONG
|
|
|
CHRIS
TONG
|
|
|
Senior
Vice President and Chief Financial
Officer
|
INDEX TO
EXHIBITS
Exhibit
Number Exhibit
10.1
|
Amendment
to the 2005 Stock Plan for Non-Employee Directors of Noble Energy,
Inc. (effective September
1, 2008), filed herewith.
|
31.1
|
Certification
of the Company’s Chief Executive Officer Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
7241).
|
31.2
|
Certification
of the Company’s Chief Financial Officer Pursuant To Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
7241).
|
32.1
|
Certification
of the Company’s Chief Executive Officer Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350).
|
32.2
|
Certification
of the Company’s Chief Financial Officer Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350).
|