Acquisitions and Divestitures

Sale of North Sea Properties On August 13, 2012, we closed the sale of our 30% non-operated working interest in the Dumbarton and Lochranza fields, located in the UK sector of the North Sea. Proceeds from the transaction were $117 million, and included final closing adjustments from the effective date of January 1, 2012. The net book value of assets sold was $256 million. Asset retirement obligations associated with the sale were $55 million. We reversed a deferred tax liability and recognized a corresponding income tax benefit of $106 million when the sale closed.

We continue to market our remaining North Sea properties. As of September 30, 2012, all the properties remaining in our North Sea geographical segment are included in assets held for sale in our consolidated balance sheet. 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.

Summarized results of discontinued operations are as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
(millions)
Oil and Gas Sales	$	54	$	45		$	194	$	271
Income Before Income Taxes	38		23			117		161
Income Tax Expense	3		73			50		139
Operating Income (Loss), Net of Tax	35		(50		)	67		22
Gain on Sale, Net of Tax	22		—			22		—
Discontinued Operations, Net of Tax	$	57	$	(50	)	$	89	$	22

Sale of Onshore US Properties During the third quarter of 2012, we closed the sales of certain crude oil and natural gas properties in Kansas, western Oklahoma, western Texas, and the Texas Panhandle with an effective date of April 1, 2012. Additionally, in June 2012, we closed the sale of certain non-core assets located in Wyoming. The information regarding the assets sold is as follows:



	Nine Months Ended September 30,
	2012
(millions)
Cash Proceeds	$	1,044
Less
Net Book Value of Assets Sold	(838		)
Goodwill Allocated to Assets Sold	(61		)
Asset Retirement Obligations Associated with Assets Sold	20
Other Closing Adjustments	2
Gain on Divestitures	$	167

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 $938 million as of September 30, 2012, including the first payment under an installment loan. The second payment under the installment loan will be paid in 2013. 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). 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 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:



	September 30, 2012
(millions)
Unproved Oil and Gas Properties	$	803
Proved Oil and Gas Properties	386
Investment in CONE Gathering LLC	69
Total Assets Acquired ⁽¹⁾	$	1,258


⁽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.