10-Q 1 nbl-2012630x10q.htm NOBLE ENERGY INC 10-Q 6-30-2012 NBL-2012.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission file number: 001-07964
  
NOBLE ENERGY, INC.
(Exact name of registrant as specified in its charter)
           Delaware
 
73-0785597
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
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 ý    No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No ý
 
As of July 11, 2012, there were 177,827,784 shares of the registrant’s common stock,
par value $0.01 per share, outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. Other Information  
 
 
Item 1.  Legal Proceedings 
 
 
Item 1A.  Risk Factors 
 
 
 
 
 
 
 
 
 
 
Item 6.  Exhibits 
 
 
 
 


2


Part I. Financial Information
Item 1. Financial Statements
Noble Energy, Inc.
Consolidated Statements of Operations
(millions, except per share amounts)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Oil, Gas and NGL Sales
$
934

 
$
783

 
$
1,970

 
$
1,500

Income from Equity Method Investees
32

 
48

 
86

 
96

Other Revenues

 
11

 

 
33

Total
966

 
842

 
2,056

 
1,629

Costs and Expenses
 

 
 

 
 
 
 
Production Expense
169

 
137

 
334

 
264

Exploration Expense
167

 
67

 
227

 
137

Depreciation, Depletion and Amortization
325

 
211

 
619

 
404

General and Administrative
96

 
82

 
193

 
164

Asset Impairments
73

 
131

 
73

 
137

Other Operating (Income) Expense, Net
(2
)
 
(11
)
 
10

 
18

Total
828

 
617

 
1,456

 
1,124

Operating Income
138

 
225

 
600

 
505

Other (Income) Expense
 

 
 

 
 
 
 
(Gain) Loss on Commodity Derivative Instruments
(276
)
 
(143
)
 
(180
)
 
143

Interest, Net of Amount Capitalized
27

 
21

 
59

 
37

Other Non-Operating (Income) Expense, Net
(3
)
 
(9
)
 
(3
)
 

Total
(252
)
 
(131
)
 
(124
)
 
180

Income from Continuing Operations Before Income Taxes
390

 
356

 
724

 
325

Income Tax Provision
115

 
87

 
200

 
90

Income from Continuing Operations
275

 
269

 
524

 
235

Discontinued Operations, Net of Tax
17

 
25

 
32

 
73

Net Income
$
292

 
$
294

 
$
556

 
$
308

 
 
 
 
 
 
 
 
Earnings Per Share, Basic


 


 


 


Income from Continuing Operations
$
1.55

 
$
1.51

 
$
2.95

 
$
1.33

Discontinued Operations, Net of Tax
0.09

 
0.15

 
0.18

 
0.42

Net Income
$
1.64

 
$
1.66

 
$
3.13

 
$
1.75

Earnings Per Share, Diluted
 
 
 
 
 
 
 
Income from Continuing Operations
$
1.49

 
$
1.47

 
$
2.88

 
$
1.31

Discontinued Operations, Net of Tax
0.09

 
0.14

 
0.18

 
0.42

Net Income
$
1.58

 
$
1.61

 
$
3.06

 
$
1.73

 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding
 
 
 
 
 
 
 
   Basic
178

 
176

 
178

 
176

   Diluted
180

 
179

 
180

 
178


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

3


Noble Energy, Inc.
Consolidated Statements of Comprehensive Income
(millions)
(unaudited)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net Income
$
292

 
$
294

 
$
556

 
$
308

Other Items of Comprehensive Income (Loss)
 
 
 
 
 
 
 
Interest Rate Cash Flow Hedges
 
 
 
 
 
 
 
Unrealized Change in Fair Value

 

 

 
23

Less Tax Provision

 

 

 
(8
)
Net Change in Other
1

 
1

 
3

 
3

Other Comprehensive Income
1

 
1

 
3

 
18

Comprehensive Income
$
293

 
$
295

 
$
559

 
$
326


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


4


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

 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents
$
702

 
$
1,455

Accounts Receivable, Net
824

 
783

Other Current Assets
368

 
180

Assets Held for Sale
324

 

Total Current Assets
2,218

 
2,418

Property, Plant and Equipment
 

 
 

Oil and Gas Properties (Successful Efforts Method of Accounting)
18,440

 
17,703

Property, Plant and Equipment, Other
322

 
294

Total Property, Plant and Equipment, Gross
18,762

 
17,997

Accumulated Depreciation, Depletion and Amortization
(5,337
)
 
(5,215
)
Total Property, Plant and Equipment, Net
13,425

 
12,782

Goodwill
696

 
696

Other Noncurrent Assets
642

 
548

Total Assets
$
16,981

 
$
16,444

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 

 
 

Accounts Payable - Trade
$
1,279

 
$
1,343

Other Current Liabilities
1,060

 
925

Total Current Liabilities
2,339

 
2,268

Long-Term Debt
4,074

 
4,100

Deferred Income Taxes, Noncurrent
2,080

 
2,059

Other Noncurrent Liabilities
683

 
752

Total Liabilities
9,176

 
9,179

Commitments and Contingencies

 


Shareholders’ Equity
 

 
 

Preferred Stock - Par Value $1.00 per share; 4 Million Shares Authorized, None Issued

 

Common Stock - Par Value $0.01 and $3.33 1/3 per share; 500 Million and 250 Million Shares Authorized; 198 Million and 197 Million Shares Issued, Respectively
2

 
656

Additional Paid in Capital
3,224

 
2,497

Accumulated Other Comprehensive Loss
(97
)
 
(100
)
Treasury Stock, at Cost; 19 Million Shares
(651
)
 
(638
)
Retained Earnings
5,327

 
4,850

Total Shareholders’ Equity
7,805

 
7,265

Total Liabilities and Shareholders’ Equity
$
16,981

 
$
16,444


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


5


Noble Energy, Inc.
Consolidated Statements of Cash Flows
(millions)
(unaudited)

 
Six Months Ended
June 30,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net Income
$
556

 
$
308

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

 
 

Depreciation, Depletion and Amortization
651

 
456

Asset Impairments
73

 
139

Dry Hole Cost
118

 
45

Deferred Income Taxes
92

 
44

Dividends (Income) from Equity Method Investees, Net
(7
)
 
(5
)
Unrealized (Gain) Loss on Commodity Derivative Instruments
(204
)
 
160

Gain on Divestitures
(9
)
 
(26
)
Other Adjustments for Noncash Items Included in Income
41

 
45

Changes in Operating Assets and Liabilities
 
 
 

Increase in Accounts Receivable
(58
)
 
(32
)
Increase in Other Current Assets
(49
)
 
(17
)
Increase in Accounts Payable
84

 
188

Decrease in Current Income Taxes Payable
(13
)
 
(62
)
Increase in Other Current Liabilities
14

 
1

Other Operating Assets and Liabilities, Net
(42
)
 
(15
)
Net Cash Provided by Operating Activities
1,247

 
1,229

Cash Flows From Investing Activities
 

 
 

Additions to Property, Plant and Equipment
(1,900
)
 
(1,261
)
Additions to Equity Method Investments
(35
)
 

Proceeds from Divestitures
10

 
77

Net Cash Used in Investing Activities
(1,925
)
 
(1,184
)
Cash Flows From Financing Activities
 

 
 

Exercise of Stock Options
26

 
26

Excess Tax Benefits from Stock-Based Awards
13

 
9

Dividends Paid, Common Stock
(79
)
 
(64
)
Purchase of Treasury Stock
(13
)
 
(16
)
Proceeds from Credit Facilities

 
120

Repayment of Credit Facilities

 
(470
)
Proceeds from Issuance of Senior Long-Term Debt, Net

 
836

Settlement of Interest Rate Derivative Instrument

 
(40
)
Repayment of Capital Lease Obligation
(22
)
 

Net Cash Provided By (Used In) Financing Activities
(75
)
 
401

Increase (Decrease) in Cash and Cash Equivalents
(753
)
 
446

Cash and Cash Equivalents at Beginning of Period
1,455

 
1,081

Cash and Cash Equivalents at End of Period
$
702

 
$
1,527

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


6


Noble Energy, Inc.
Consolidated Statements of Shareholders' Equity
(millions)
(unaudited)

 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated Other
Comprehensive
Loss
 
Treasury
Stock at
Cost
 
Retained
Earnings
 
Total
Shareholders'
Equity
December 31, 2011
$
656

 
$
2,497

 
$
(100
)
 
$
(638
)
 
$
4,850

 
$
7,265

Net Income

 

 

 

 
556

 
556

Stock-based Compensation

 
34

 

 

 

 
34

Exercise of Stock Options

 
26

 

 

 

 
26

Tax Benefits Related to Exercise of Stock Options

 
13

 

 

 

 
13

Dividends (44 cents per share)

 

 

 

 
(79
)
 
(79
)
Changes in Treasury Stock, Net

 

 

 
(13
)
 

 
(13
)
Change in Par Value
(654
)
 
654

 


 

 

 

Net Change in Other

 

 
3

 

 

 
3

June 30, 2012
$
2

 
$
3,224

 
$
(97
)
 
$
(651
)
 
$
5,327

 
$
7,805

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
$
651

 
$
2,385

 
$
(104
)
 
$
(624
)
 
$
4,540

 
$
6,848

Net Income

 

 

 

 
308

 
308

Stock-based Compensation

 
29

 

 

 

 
29

Exercise of Stock Options
2

 
24

 

 

 

 
26

Tax Benefits Related to Exercise of Stock Options

 
9

 

 

 

 
9

Dividends (36 cents per share)

 

 

 

 
(64
)
 
(64
)
Changes in Treasury Stock, Net

 

 

 
(16
)
 

 
(16
)
Interest Rate Cash Flow Hedges
 

 
 

 
 

 
 

 
 

 
 

Unrealized Change in Fair Value

 

 
15

 

 

 
15

Net Change in Other
1

 
(1
)
 
3

 

 

 
3

June 30, 2011
$
654

 
$
2,446

 
$
(86
)
 
$
(640
)
 
$
4,784

 
$
7,158


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


7

Noble Energy, Inc.
Notes to Consolidated Financial Statements


Note 1.  Organization and Nature of Operations

Noble Energy, Inc. (Noble Energy, we or us) is a leading independent energy company engaged in worldwide crude oil and natural gas exploration and production. Our core operating areas are onshore US, primarily in the DJ Basin and Marcellus Shale, in the deepwater Gulf of Mexico, offshore Eastern Mediterranean, and offshore West Africa.
 
Note 2.  Basis of Presentation

Presentation   The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US (US GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. The accompanying consolidated financial statements at June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011 contain all normally recurring adjustments considered necessary for a fair presentation of our financial position, results of operations, cash flows and shareholders’ equity for such periods. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Certain reclassifications of amounts previously reported have been made to reflect the operations of our North Sea geographical segment as discontinued, as well as to conform to current year presentations. See Note 3. Acquisitions and Divestitures.

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, 2011.
 
Consolidation   Our consolidated accounts include our accounts and the accounts of our wholly-owned subsidiaries.  In addition, we use the equity method of accounting for investments in entities that we do not control but over which we exert significant influence. All significant intercompany balances and transactions have been eliminated upon consolidation.
 
Estimates   The preparation of consolidated financial statements in conformity with US GAAP requires us to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. The volatility of commodity prices, including the declines in US crude oil and natural gas prices occurring in the second quarter of 2012, results in increased uncertainty inherent in such estimates and assumptions. Further declines in commodity prices could result in a reduction in our fair value estimates and cause us to perform analysis to determine if our oil and gas properties and/or goodwill are impaired.
 

8

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Statements of Operations Information   Other statements of operations information is as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Other Revenues (1)
$

 
$
11

 
$

 
$
33

Production Expense
 

 
 

 
 
 
 
Lease Operating Expense
$
100

 
$
83

 
$
205

 
$
163

Production and Ad Valorem Taxes
44

 
39

 
81

 
70

Transportation and Gathering Expense
25

 
15

 
48

 
31

Total
$
169

 
$
137

 
$
334

 
$
264

Other Operating (Income) Expense, Net
 

 
 

 
 
 
 
Deepwater Gulf of Mexico Moratorium Expense (2)
$

 
$
1

 
$

 
$
19

Electricity Generation Expense (1)

 
9

 

 
26

Gain on Divestitures
(9
)
 
(25
)
 
(9
)
 
(26
)
Other, Net
7

 
4

 
19

 
(1
)
Total
$
(2
)
 
$
(11
)
 
$
10

 
$
18

Other Non-Operating (Income) Expense, Net
 

 
 

 
 
 
 
Deferred Compensation (Income) Expense (3)
$
(11
)
 
$
(7
)
 
$
(8
)
 
$
3

Interest Income

 
(2
)
 

 
(5
)
Other (Income) Expense, Net
8

 

 
5

 
2

Total
$
(3
)
 
$
(9
)
 
$
(3
)
 
$

 
(1) 
Other revenues consist of electricity sales from the Machala power plant, located in Machala, Ecuador, through May 2011. Electricity generation expense includes all operating and non-operating expenses associated with the plant, including depreciation and changes in the allowance for doubtful accounts. In May 2011, we transferred our assets in Ecuador to the Ecuadorian government.
(2) 
Amount relates to rig stand-by expense incurred prior to receiving a permit to resume drilling activities in the deepwater Gulf of Mexico. 
(3) 
Amounts represent increases (decreases) in the fair value of shares of our common stock held in a rabbi trust.
 

9

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Balance Sheet Information   Other balance sheet information is as follows:
 
June 30,
2012
 
December 31,
2011
(millions)
 
 
 
Accounts Receivable, Net
 
 
 
Commodity Sales
$
319

 
$
356

Joint Interest Billings
394

 
313

Other
120

 
123

Allowance for Doubtful Accounts
(9
)
 
(9
)
Total
$
824

 
$
783

Other Current Assets
 

 
 

Inventories, Current
$
67

 
$
78

Commodity Derivative Assets
85

 
10

Deferred Income Taxes, Net (1)
100

 
41

Probable Insurance Claims (2)
31

 
15

Prepaid Expenses and Other Current Assets
85

 
36

Total
$
368

 
$
180

Other Noncurrent Assets
 

 
 

Equity Method Investments
$
373

 
$
329

Mutual Fund Investments
104

 
99

Commodity Derivative Assets
85

 
37

Other Assets, Noncurrent
80

 
83

Total
$
642

 
$
548

Other Current Liabilities
 

 
 

Production and Ad Valorem Taxes
$
119

 
$
121

Commodity Derivative Liabilities
2

 
76

Income Taxes Payable
107

 
127

Asset Retirement Obligations
45

 
33

Interest Payable
55

 
56

CONSOL Installment Payment (3)
327

 
324

Current Portion of FPSO Lease Obligation
53

 
45

Liabilities Associated with Assets Held for Sale
234

 

Other
118

 
143

Total
$
1,060

 
$
925

Other Noncurrent Liabilities
 

 
 

Deferred Compensation Liabilities
$
224

 
$
222

Asset Retirement Obligations
298

 
344

Accrued Benefit Costs
89

 
88

Commodity Derivative Liabilities

 
7

Other
72

 
91

Total
$
683

 
$
752

 
(1) 
Increase from December 31, 2011 is due to reclassification of deferred income tax assets from long-term to short-term as certain foreign entities are estimated to begin utilizing net operating loss carryforwards in 2012 and 2013.
(2) 
Amounts represent the costs incurred to date of the Leviathan-2 appraisal well and expected well abandonment costs in excess of the insurance deductible less insurance proceeds received to date. See Note 9. Asset Retirement Obligations.
(3) 
See Note 3. Acquisitions and Dispositions and Note 5. Debt.

Changes in Shareholders’ Equity   On April 24, 2012, our shareholders voted to approve an amendment to the Company’s Certificate of Incorporation to (i) increase the number of authorized shares of our common stock from 250 million to 500 million shares and (ii) reduce the par value of the Company’s common stock from $3.33 1/3 per share to $0.01 per share. See

10

Noble Energy, Inc.
Notes to Consolidated Financial Statements

the Consolidated Statements of Shareholders' Equity.
 
Recently Issued Accounting Standards Updates   In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 clarifies application of fair value measurement and disclosure requirements and is effective for annual and interim periods beginning after December 15, 2011. As of March 31, 2012, we have adopted the provisions of ASU 2011-04, which did not impact our consolidated financial statements. The only impact was to our fair value disclosures. See Note 7. Fair Value Measurements and Disclosures.
 
In December 2011, the FASB issued Accounting Standards Update No. 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). ASU 2011-11 requires that an entity disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013. We are currently evaluating the provisions of ASU 2011-11 and assessing the impact, if any, it may have on our financial position and results of operations.
 
Note 3.   Acquisitions and Divestitures
 
Pending Sale of North Sea Properties On May 30, 2012, we announced that we have entered into an agreement for the sale of our 30% non-operated working interests in the Dumbarton and Lochranza fields, located in the UK sector of the North Sea. We expect to receive $127 million, subject to customary adjustments for net cash flows between the effective date of January 1, 2012 and the closing date, which is expected to occur by the end of the third quarter of 2012. We expect to reverse a deferred tax liability and recognize a corresponding income tax benefit of approximately $103 million when the sale closes in the third quarter of 2012.
We continue to market our remaining North Sea properties. As of June 30, 2012, all the properties in our North Sea geographical segment met the criteria for classification as held for sale in our consolidated balance sheets. Our consolidated statements of operations have been reclassified for all periods presented to reflect the operations of our North Sea geographical segment as discontinued. Upon reclassification as held for sale, depreciation, depletion, and amortization (DD&A) ceased. Our long-term debt is recorded at the consolidated level; therefore no interest expense has been allocated to discontinued operations.
North Sea assets and liabilities classified as held for sale were as follows:
 
 
June 30,
2012
(millions)
 
 
Current Assets
 
 
Accounts Receivable, Net
 
$
19

Other Current Assets
 
11

Total Current Assets
 
30

Property, Plant and Equipment, Net
 
294

Total Assets Held for Sale
 
$
324

Accounts Payable - Trade
 
$
9

Asset Retirement Obligation
 
89

Deferred Tax Liability
 
136

Total Liabilities Related to Assets Held for Sale
 
$
234







11

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Summarized results of discontinued operations are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Oil and Gas Sales
$
65

 
$
112

 
$
140

 
$
225

Income Before Income Taxes
39

 
69

 
79

 
137

Income Tax Expense
22

 
44

 
47

 
64

Discontinued Operations, Net of Tax
$
17

 
$
25

 
$
32

 
$
73

Pending Sale of Onshore US Properties In July 2012, the Board of Directors approved the sale of certain crude oil and natural gas properties in western Oklahoma, western Texas, and the Texas Panhandle for $937 millionWe subsequently signed sale agreements related to those properties with two purchasers. The combined net book values of these properties as of June 30, 2012, was approximately $765 million, excluding an allocation of US reporting unit goodwill. The transactions have effective dates of April 1, 2012 and are expected to close in the third quarter of 2012, subject to customary closing conditions and adjustments.

Marcellus Shale Joint Venture   On September 30, 2011, we closed an agreement with a subsidiary of CONSOL Energy Inc. (CONSOL) for the development of Marcellus Shale properties in southwest Pennsylvania and northwest West Virginia. Under the agreement, we acquired a 50% interest in approximately 628,000 net undeveloped acres, certain producing properties, and existing infrastructure, such as pipeline and gathering facilities, for approximately $1.3 billion, including post-closing adjustments. We and CONSOL also formed CONE Gathering LLC (CONE) to own and operate the existing and future infrastructure. We have paid a total of $610 million as of June 30, 2012, and, other than post-closing adjustments, the remainder will be paid in two annual installments. See Note 5. Debt.
 
As part of the joint venture transaction, we agreed to fund one-third of CONSOL’s 50% working interest share of future drilling and completion costs, capped at $400 million each year, up to approximately $2.1 billion (CONSOL Carried Cost Obligation), which is expected to be paid out over approximately eight years. The CONSOL Carried Cost Obligation is suspended if average Henry Hub natural gas prices fall and remain below $4.00 per MMBtu in any three consecutive month period and will remain suspended until average Henry Hub natural gas prices are above $4.00 per MMBtu for three consecutive months. The CONSOL Carried Cost Obligation is currently suspended due to low natural gas prices.
 
As a result of the transaction, we recorded the following:
 
June 30,
2012
(millions)
 
Unproved Oil and Gas Properties
$
853

Proved Oil and Gas Properties
386

Investment in CONE Gathering LLC
69

Total Assets Acquired (1)
$
1,308


(1) 
Total reflects impact of $17 million imputed interest on CONSOL installment payments.
 
We used an income approach to estimate the fair value of the proved oil and gas properties as of the acquisition date. We utilized a discounted cash flow model which took into account the following inputs to arrive at estimates of future net cash flows:
 
estimated quantities of crude oil and natural gas reserves prepared by our qualified petroleum engineers;
management’s estimates of future commodity prices based on NYMEX Henry Hub natural gas futures prices and adjusted for estimated location and quality differentials; 
estimated future production rates based on our experience with similar properties which we operate; and
estimated timing and amounts of future operating and development costs based on our experience with similar properties which we operate.

12

Noble Energy, Inc.
Notes to Consolidated Financial Statements

 
We discounted the resulting future net cash flows using a market-based weighted average cost of capital rate determined appropriate at the acquisition date. The fair value of the proved producing properties is considered a Level 3 fair value measurement.
 
Certain data necessary to complete the final purchase price allocation for proved oil and gas properties is not yet available, and includes, but is not limited to, final appraisals of assets acquired and liabilities assumed. We expect to complete the final purchase price allocation during the twelve-month period following the acquisition date, during which time the preliminary allocation may be revised.

Note 4. Asset Impairments
Pre-tax (non-cash) asset impairment charges were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
South Raton (Deepwater Gulf of Mexico)
$
34

 
$

 
$
34

 
$

Piceance (Onshore US)
39

 

 
39

 

East Texas (Onshore US)

 
116

 

 
116

Other (Onshore US)

 
15

 

 
21

Total
$
73

 
$
131

 
$
73

 
$
137

2012 Due to recent declines in near-term crude oil prices, we determined that the carrying amount of our South Raton development in the deepwater Gulf of Mexico was not recoverable from future cash flows and, therefore, was impaired. In addition, due to recent declines in realized natural gas prices, we determined that the carrying amount of our Piceance development, onshore US, was not recoverable from future cash flows and, therefore, was impaired. The assets were written down to their estimated fair values, which were determined using discounted cash flow models.
2011 Due to field performance combined with a low natural gas price environment, we determined that the carrying amounts of certain of our onshore US developments, primarily in East Texas, were not recoverable from future cash flows and, therefore, were impaired. The assets were written down to their estimated fair values, which were determined using discounted cash flow models.
See Note 7. Fair Value Measurements and Disclosures.



13

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 5. Debt
 
Our debt consists of the following:
 
June 30,
2012
 
 
December 31,
2011
 
 
Debt
 
Interest Rate
 
 
Debt
 
Interest Rate
 
(millions, except percentages)
 
 
 
 
 
 
 
 
 
Credit Facility, due October 14, 2016 (1)
$

 

 
 
$

 

 
CONSOL Installment Payments, due September 30, 2012 and 2013
656

 
1.76
%
(2) 
 
656

 
1.76
%
(2) 
FPSO Lease Obligation
333

 

 
 
355

 

 
5¼% Senior Notes, due April 15, 2014
200

 
5.25
%
 
 
200

 
5.25
%
 
8¼% Senior Notes, due March 1, 2019
1,000

 
8.25
%
 
 
1,000

 
8.25
%
 
4.15% Senior Notes, due December 15, 2021
1,000

 
4.15
%
 
 
1,000

 
4.15
%
 
7¼% Senior Notes, due October 15, 2023
100

 
7.25
%
 
 
100

 
7.25
%
 
8% Senior Notes, due April 1, 2027
250

 
8.00
%
 
 
250

 
8.00
%
 
6% Senior Notes, due March 1, 2041
850

 
6.00
%
 
 
850

 
6.00
%
 
7¼% Senior Debentures, due August 1, 2097
84

 
7.25
%
 
 
84

 
7.25
%
 
Total
4,473

 
 

 
 
4,495

 
 

 
Unamortized Discount
(19
)
 
 

 
 
(26
)
 
 

 
Total Debt, Net of Discount
4,454

 
 

 
 
4,469

 
 

 
Less Amounts Due Within One Year
 

 
 

 
 
 

 
 

 
CONSOL Installment Payment, due September 30, 2012, net of discount
(327
)
 
 

 
 
(324
)
 
 

 
FPSO Lease Obligation
(53
)
 
 

 
 
(45
)
 
 

 
Long-Term Debt Due After One Year
$
4,074

 
 

 
 
$
4,100

 
 

 

(1) 
Our Credit Agreement provides for a $3.0 billion unsecured five-year revolving credit facility. The Credit Facility is available for general corporate purposes.
(2) 
Imputed rate based on the prevailing market rates for similar debt instruments at the date of assessment.
 
See Note 7. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our debt.

Note 6.  Derivative Instruments and Hedging Activities
 
Objective and Strategies for Using Derivative Instruments   In order to mitigate the effect of commodity price volatility and enhance the predictability of cash flows relating to the marketing of our crude oil and natural gas, we enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. The derivative instruments we use include variable to fixed price commodity swaps, two-way and three-way collars and basis swaps.
 
The fixed price swap, two-way collar, and basis swap contracts entitle us (floating price payor) to receive settlement from the counterparty (fixed price payor) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. We would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or ceiling price. The amount payable by us, if the floating price is above the fixed or ceiling price, is the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price in respect of each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price in respect of each calculation period.
 
A three-way collar consists of a two-way collar contract combined with a put option contract sold by us with a strike price below the floor price of the two-way collar.  We receive price protection at the purchased put option floor price of the two-way

14

Noble Energy, Inc.
Notes to Consolidated Financial Statements

collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, we receive the cash market price plus the delta between the two put option strike prices. This type of instrument allows us to capture more value in a rising commodity price environment, but limits our benefits in a downward commodity price environment.
 
We also may enter into forward contracts to hedge anticipated exposure to interest rate risk associated with public debt financing.
 
While these instruments mitigate the cash flow risk of future reductions in commodity prices or increases in interest rates, they may also curtail benefits from future increases in commodity prices or decreases in interest rates.
 
See Note 7. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of our derivative instruments.
 
Counterparty Credit Risk   Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with a diversified group of major banks or market participants, and we monitor and manage our level of financial exposure. Our commodity derivative contracts 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.
We monitor the creditworthiness of our commodity derivatives counterparties. However, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk.
Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices or higher interest rates, and could incur a loss. 
Interest Rate Derivative Instrument   In January 2010, we entered into an interest rate forward starting swap to effectively fix the cash flows related to interest payments on our anticipated March 2011 debt issuance. During first quarter 2011, the net liability position on the swap was reduced in our mark to market calculation, and we recognized a corresponding gain of $23 million, net of tax, in AOCL. On February 15, 2011 we settled the interest rate swap, which had a net liability position of $40 million at the time of settlement. Approximately $26 million, net of tax, was recorded in accumulated other comprehensive loss (AOCL) and is being reclassified to interest expense over the term of the notes. The ineffective portion of the interest rate swap was de minimis.
 

15

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Unsettled Derivative Instruments   As of June 30, 2012, we had entered into the following crude oil derivative instruments: 
 
 
 
 
 
Swaps
 
Collars
Settlement
Period
Type of Contract
Index
 
Bbls Per
Day
Weighted
Average
Fixed
Price
 
Weighted
Average
 Short Put
 Price
Weighted
Average
Floor
Price
Weighted
Average
 Ceiling
Price
Instruments Entered Into as of June 30, 2012
 
 
 
 
 
2012
Swaps
NYMEX WTI  (1)
 
5,000
$
91.84

 
$

$

$

2012
Swaps
Dated Brent
 
8,000
89.06

 



2012
Three-Way Collars
NYMEX WTI
 
23,000

 
61.09

83.04

101.66

2012
Three-Way Collars
Dated Brent
 
3,000

 
70.00

95.83

105.00

2013
Swaps
NYMEX WTI
 
3,000
87.00

 



2013
Swaps
Dated Brent
 
3,000
98.03

 



2013
Two-Way Collars
NYMEX WTI
 
5,000

 

95.00

115.00

2013
Three-Way Collars
NYMEX WTI
 
7,000

 
63.57

83.57

109.04

2013
Three-Way Collars
Dated Brent
 
26,000

 
82.88

100.86

127.32

2014
Swaps
NYMEX WTI
 
5,000
86.50

 



2014
Swaps
Dated Brent
 
8,000
105.94

 



2014
Three-Way Collars
Dated Brent
 
10,000

 
85.00

98.50

129.24

 
(1) 
West Texas Intermediate

As of June 30, 2012, we had entered into the following natural gas derivative instruments:
 
 
 
 
Swaps
 
Collars
Settlement
Period
Type of Contract
Index
MMBtu
Per Day
Weighted
Average
Fixed
Price
 
Weighted
Average
Short Put
 Price
Weighted
Average
Floor
Price
Weighted
Average
Ceiling
Price
Instruments Entered Into as of June 30, 2012
 
 
 
 
 
 
2012
Swaps
  NYMEX HH (1)
30,000
$
5.10

 
$

$

$

2012
Two-Way Collars
NYMEX HH
40,000

 

3.25

5.14

2012
Three-Way Collars
NYMEX HH
110,000

 
4.44

5.25

6.66

2013
Swaps
NYMEX HH
30,000
5.25

 



2013
Two-Way Collars
NYMEX HH
40,000

 

3.25

5.14

2013
Three-Way Collars
NYMEX HH
100,000

 
3.88

4.75

5.63

 
(1) 
Henry Hub
 
As of June 30, 2012, we had entered into the following natural gas basis swaps: 
Settlement
Period
Index
Index Less Differential
MMBtu Per Day
Weighted Average
Differential
2012
IFERC CIG (1)
NYMEX HH
150,000
$
(0.52
)

(1) 
Colorado Interstate Gas – Northern System


16

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Fair Value Amounts and Gains and Losses on Derivative Instruments   The fair values of derivative instruments in our consolidated balance sheets were as follows: 
Fair Value of Derivative Instruments
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
June 30,
2012
 
December 31,
2011
 
June 30,
2012
 
December 31,
2011
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
 Value
 
Balance Sheet Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
Value
(millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivative Instruments
Current
Assets
 
$
85

 
Current Assets
 
$
10

 
Current Liabilities
 
$
2

 
Current Liabilities
 
$
76

 
Noncurrent Assets
 
85

 
Noncurrent Assets
 
37

 
Noncurrent Liabilities
 

 
Noncurrent Liabilities
 
7

Total
 
 
$
170

 
 
 
$
47

 
 
 
$
2

 
 
 
$
83

 
The effect of derivative instruments on our consolidated statements of operations was as follows: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Realized Mark-to-Market (Gain) Loss
$
1

 
$
(1
)
 
$
24

 
$
(17
)
Unrealized Mark-to-Market (Gain) Loss
(277
)
 
(142
)
 
(204
)
 
160

Total (Gain) Loss on Commodity Derivative Instruments
$
(276
)
 
$
(143
)
 
$
(180
)
 
$
143

 
AOCL at June 30, 2012 included deferred losses of $26 million, net of tax, related to interest rate derivative instruments. This amount will be reclassified to earnings as an adjustment to interest expense over the terms of our senior notes due April 2014 and March 2041.  Approximately $2 million of deferred losses (net of tax) will be reclassified to earnings during the next 12 months and will be recorded as an increase in interest expense.
 
Note 7.  Fair Value Measurements and Disclosures
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Certain assets and liabilities are measured at fair value on a recurring basis in our consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:
 
Cash, Cash Equivalents, Accounts Receivable and Accounts Payable   The carrying amounts approximate fair value due to the short-term nature or maturity of the instruments.
 
Mutual Fund Investments   Our mutual fund investments, which primarily include assets held in a rabbi trust, consist of various publicly-traded mutual funds that include investments ranging from equities to money market instruments. The fair values are based on quoted market prices for identical assets.
 
Commodity Derivative Instruments   Our commodity derivative instruments consist of variable to fixed price commodity swaps, two-way and three-way collars, and basis swaps. We estimate the fair values of these instruments based on published forward commodity price curves as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates, Eurodollar futures rates and interest swap rates. The fair values of commodity derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published credit default swap rates. In addition, for collars, we estimate the option values of the put options sold (for three-way collars) and the contract floors and ceilings (for two-way and three-way collars) using an option pricing model which takes into

17

Noble Energy, Inc.
Notes to Consolidated Financial Statements

account market volatility, market prices and contract terms. See Note 6. Derivative Instruments and Hedging Activities.
 
Deferred Compensation Liability   The value is dependent upon the fair values of mutual fund investments and shares of our common stock held in a rabbi trust. See Mutual Fund Investments above.
 
Measurement information for assets and liabilities that are measured at fair value on a recurring basis was as follows: 
 
Fair Value Measurements Using
 
 
 
 
 
Quoted Prices in 
Active Markets
(Level 1) (1)
 
Significant Other
Observable Inputs
(Level 2) (2)
 
Significant
Unobservable
Inputs (Level 3) (3)
 
Adjustment (4)
 
Fair Value Measurement
(millions)
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
Mutual Fund Investments
$
104

 
$

 
$

 
$

 
$
104

Commodity Derivative Instruments

 
193

 

 
(23
)
 
170

Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity Derivative Instruments

 
(25
)
 

 
23

 
(2
)
Portion of Deferred Compensation Liability Measured at Fair Value
(158
)
 

 

 

 
(158
)
December 31, 2011
 
 
 
 
 
 
 

 
 

Financial Assets
 

 
 

 
 

 
 

 
 

Mutual Fund Investments
$
99

 
$

 
$

 
$

 
$
99

Commodity Derivative Instruments

 
99

 

 
(52
)
 
47

Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity Derivative Instruments

 
(135
)
 

 
52

 
(83
)
Portion of Deferred Compensation Liability Measured at Fair Value
(162
)
 

 

 

 
(162
)
 
(1) 
Level 1 measurements are fair value measurements which use quoted market prices (unadjusted) in active markets for identical assets or liabilities. We use Level 1 inputs when available as Level 1 inputs generally provide the most reliable evidence of fair value.
(2) 
Level 2 measurements are fair value measurements which use inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.
(3) 
Level 3 measurements are fair value measurements which use unobservable inputs.
(4) 
Amount represents the impact of master netting agreements that allow us to net cash settle asset and liability positions with the same counterparty.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in our consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:
Asset Impairments We determined that the carrying amounts of certain assets were not recoverable from future cash flows and, therefore, were impaired. The assets were reduced to their estimated fair values. Information about the impaired assets is as follows:

18

Noble Energy, Inc.
Notes to Consolidated Financial Statements

 
Fair Value Measurements Using
 
 
Description
Quoted Prices in Active Markets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Net Book Value (1)
Total Pre-tax (Non-cash) Impairment Loss
millions
 
 
 
 
 
Three Months Ended June 30, 2012
 
 
 
 
Impaired Oil and Gas Properties
$

$

$
172

$
245

$
73

Three Months Ended June 30, 2011
 
 
 
 
Impaired Oil and Gas Properties


29

160

131

Six Months Ended June 30, 2012
 
 
 
 
 
Impaired Oil and Gas Properties


172

245

73

Six Months Ended June 30, 2011
 
 
 
 
 
Impaired Oil and Gas Properties


32

169

137

(1) Amount represents net book value at the date of assessment.
The fair values of the properties were determined as of the date of the assessment using discounted cash flow models. The discounted cash flows were based on management’s expectations for the future. Inputs included estimates of future oil and gas production, commodity prices based on NYMEX commodity price curves as of the date of the estimate, estimated operating and development costs, and a risk-adjusted discount rate of 10%. See Note 4. Asset Impairments.

Additional Fair Value Disclosures
 
Debt   The fair value of fixed-rate, public debt is estimated based on the published market prices for the same or similar issues. As such, we consider the fair value of our public fixed rate debt to be a Level 1 measurement on the fair value hierarchy. The carrying amounts of the CONSOL installment payments approximate fair value because they have been discounted at the prevailing market rates for similar debt instruments at the date of assessment, September 30, 2011. As such, we consider the fair value of our CONSOL installment payments to be Level 2 measurements on the fair value hierarchy. See Note 5. Debt. Fair value information regarding our debt is as follows: 
 
June 30,
2012
 
December 31,
2011
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
(millions)
 
 
 
 
 
 
 
Long-Term Debt, Net of Unamortized Discount (1)
$
4,121

 
$
4,712

 
$
4,114

 
$
4,733

 
(1) 
Excludes Aseng FPSO lease obligation. No floating rate debt was outstanding at June 30, 2012 or December 31, 2011. See Note 5. Debt.

Note 8.  Capitalized Exploratory Well Costs
 
We capitalize exploratory well costs until a determination is made that the well has found proved reserves or is deemed noncommercial. If a well is deemed to be noncommercial, the well costs are immediately charged to exploration expense as dry hole cost.
 

19

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Changes in capitalized exploratory well costs are as follows and exclude amounts that were capitalized and subsequently expensed in the same period: 
 
Six Months Ended June 30, 2012
(millions)
 
Capitalized Exploratory Well Costs, Beginning of Period
$
696

Additions to Capitalized Exploratory Well Costs Pending Determination of Proved Reserves
160

Reclassified to Proved Oil and Gas Properties Based on Determination of Proved Reserves
(9
)
Capitalized Exploratory Well Costs Charged to Expense (1)
(107
)
Other (2)
(19
)
Capitalized Exploratory Well Costs, End of Period
$
721


 (1) Amount primarily represents the Deep Blue exploratory well (deepwater Gulf of Mexico) costs capitalized prior to December 31, 2011. Although hydrocarbons were found in both the initial exploration well and subsequent sidetrack, we and our partners have decided not to proceed with additional appraisal activities at this time.
(2) Amount represents the Selkirk exploratory well (North Sea) which, along with our remaining North Sea assets, was reclassified to held for sale at June 30, 2012. See Note 3. Acquisitions and Divestitures.

The following table provides an aging of capitalized exploratory well costs based on the date that drilling commenced, and the number of projects that have been capitalized for a period greater than one year: 
 
June 30,
2012
 
December 31,
2011
(millions)
 
 
 
Exploratory Well Costs Capitalized for a Period of One Year or Less
$
330

 
$
318

Exploratory Well Costs Capitalized for a Period Greater Than One Year Since Commencement of Drilling
391

 
378

Balance at End of Period
$
721

 
$
696

Number of Projects with Exploratory Well Costs That Have Been Capitalized for a Period Greater Than One Year Since Commencement of Drilling
8

 
9

 

20

Noble Energy, Inc.
Notes to Consolidated Financial Statements

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 commencement of drilling as of June 30, 2012:
 
 
 
Suspended Since
 
Total
 
2011
 
2010
 
2009 & Prior
(millions)
 
 
 
 
 
 
 
Country/Project:
 
 
 
 
 
 
 
Offshore Equatorial Guinea
 
 
 
 
 
 
 
Blocks O and I
$
155

 
$
43

 
$
6

 
$
106

Offshore Cameroon
 

 
 

 
 

 
 

YoYo
44

 
4

 
2

 
38

Offshore Israel
 

 
 

 
 

 
 

Leviathan
62

 
21

 
41

 

Leviathan-1 Deep
27

 
27

 

 

Dalit
22

 

 
1

 
21

Deepwater Gulf of Mexico
 

 
 

 
 

 
 

Gunflint
68

 
9

 
3

 
56

Other
 

 
 

 
 

 
 

2 projects of $10 million or less each
13

 
7

 
6

 

Total
$
391

 
$
111

 
$
59

 
$
221


Blocks O and I   Blocks O and I are crude oil, natural gas and natural gas condensate discoveries.  During 2011, we drilled the successful Diega appraisal well which encountered both crude oil and natural gas. We have drilled two sidetracks, each of which encountered hydrocarbons. We are currently evaluating regional development scenarios that will include Diega, along with the successful Carla appraisal well, which was drilled in the fourth quarter of 2011.

YoYo   YoYo is a 2007 natural gas and condensate discovery. During 2011 we acquired and processed additional 3-D seismic information and are continuing evaluations for future drilling potential.
 
Leviathan   Leviathan is a 2010 natural gas discovery. We are continuing to evaluate the discovery with the successful drilling of the Leviathan-3 appraisal well and will require an additional one or two appraisal wells to further define Leviathan’s natural gas areal extent. We have project and commercial teams in place and are considering our natural gas commercialization options. Due to the scale of the discovery, economic viability depends on the ability to export via pipeline or LNG. Each of these development options would require a multi-billion dollar investment and require a number of years to complete. Engineering design and planning work are currently underway for a potential first phase of development. In addition, we are working with our existing partners to identify a potential partner who can provide technical and financial support as well as midstream and downstream expertise.

Leviathan-1 Deep In January 2012, we resumed drilling at the Leviathan-1 well in order to evaluate two deeper intervals for the existence of crude oil (Leviathan-1 Deep). In May 2012, due to high well pressure and the mechanical limits of the wellbore design, we suspended drilling operations. Although the well did not reach the planned objective, we are encouraged by the possibility of an active thermogenic (heat producing) petroleum system at greater depths within the basin. We are continuing our evaluation of Leviathan-1 Deep and will integrate the data from the Leviathan-1 Deep well into our model to update our analysis and design a drilling plan specifically to test the deep oil concept. Part of the plan will be to secure a rig with the capabilities necessary to reach the target objective.

Dalit   Dalit is a 2009 natural gas discovery. We are currently working with our partners on a cost-effective development plan.
 
Gunflint   Gunflint (Mississippi Canyon Block 948) is a 2008 crude oil discovery. In July 2012, we reached target depth on our Gunflint appraisal well and are currently evaluating the drilling results.  Additional appraisal locations are currently being evaluated. Front-end conceptual studies have been completed, and we are working toward sanctioning of a scalable development project.
 
Note 9.  Asset Retirement Obligations

21

Noble Energy, Inc.
Notes to Consolidated Financial Statements

 
Asset retirement obligations (ARO) 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: 
 
Six Months Ended
June 30,
 
2012
 
2011
(millions)
 
 
 
Asset Retirement Obligations, Beginning Balance
$
377

 
$
253

Liabilities Incurred
23

 
1

Liabilities Settled
(2
)
 
(12
)
Revision of Estimate
20

 
6

Accretion Expense
14

 
10

Other
(89
)
 

Asset Retirement Obligations, Ending Balance
$
343

 
$
258


Liabilities incurred in 2012 relate primarily to wells drilled offshore Israel and include costs to abandon the Leviathan-2 appraisal well. See Note 2. Basis of Presentation. Revisions relate primarily to changes in estimated costs for future abandonment activities in China. Other includes ARO liabilities associated with North Sea properties held for sale. North Sea ARO liabilities have been included within liabilities associated with assets held for sale. See Note 3. Acquisitions and Divestitures.

Liabilities settled in 2011 related primarily to deepwater Gulf of Mexico and Gulf of Mexico shelf properties.
 
Accretion expense is included in DD&A expense in the consolidated statements of operations.
 
Note 10.  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 include the effect of outstanding stock options, shares of restricted stock, or shares of our common stock held in a rabbi trust (when dilutive). The following table summarizes the calculation of basic and diluted earnings per share: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
(millions, except per share amounts)
 
 
 
 
 
 
 
Income from Continuing Operations
$
275

 
$
269

 
$
524

 
$
235

Earnings Adjustment from Assumed Conversion of Dilutive Shares of Common Stock in Rabbi Trust (1)
(7
)
 
(4
)
 
(5
)
 

Income from Continuing Operations Used for Diluted Earnings Per Share Calculation
$
268

 
$
265

 
$
519

 
$
235

 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding, Basic
178

 
176

 
178

 
176

Incremental Shares From Assumed Conversion of Dilutive Stock Options, Restricted Stock and Shares of Common Stock in Rabbi Trust
2

 
3

 
2

 
2

Weighted Average Number of Shares Outstanding, Diluted
180

 
179

 
180

 
178

Earnings from Continuing Operations Per Share, Basic
$
1.55

 
$
1.51

 
$
2.95

 
$
1.33

Earnings from Continuing Operations Per Share, Diluted
1.49

 
1.47

 
2.88

 
1.31

Number of antidilutive stock options, shares of restricted stock and shares of common stock in rabbi trust excluded from calculation above
3

 
2

 
3

 
3


(1) 
Consistent with GAAP, when dilutive, deferred compensation gains or losses, net of tax, are excluded from net income while our common shares held in the rabbi trust are included in the diluted share count. For this reason, the diluted earnings per share calculations for the three months ended June 30, 2012 and 2011 and for the six months ended June 30, 2012 exclude deferred compensation gains,

22


net of tax.

Note 11.  Income Taxes
 
The income tax provision relating to continuing operations consists of the following: 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
(millions)
 
 
 
 
 
 
 
Current
$
56

 
$
39

 
$
100

 
$
36

Deferred
59

 
48

 
100

 
54

Total Income Tax Provision
$
115