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

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 million. We 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.

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.