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 $255 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 $99 million related to the sale.

We continue to market our remaining North Sea properties. As of December 31, 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.

Included in income before income taxes during 2012, below, is exploratory expense of $27 million related to our Selkirk field. During the fourth quarter of 2012, the nearby Bligh well, a potential co-development candidate for Selkirk, was drilled. Bligh encountered hydrocarbons but disappointingly tight non-commercial reservoirs. Therefore, we determined that Selkirk was uneconomic for joint development.

Upon reclassification as held for sale, depreciation, depletion, and amortization (DD&A) ceased for the North Sea segment. 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:



	Year Ended December 31,
	2012		2011		2010
(millions)
Oil and Gas Sales	$	208	$	357	$	309
Income Before Income Taxes	101		215		183
Income Tax Expense	55		174		89
Operating Income, Net of Tax	46		41		94
Gain on Sale, Net of Tax	16		—		—
Discontinued Operations, Net of Tax	$	62	$	41	$	94

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 non-core assets located in Wyoming. The information regarding the assets sold is as follows:



	Year Ended December 31,
	2012
(millions)
Cash Proceeds	$	1,044
Less
Net Book Value of Assets Sold	(836		)
Goodwill Allocated to Assets Sold	(61		)
Asset Retirement Obligations Associated with Assets Sold	20
Other Closing Adjustments	(13		)
Gain on Divestitures	$	154

We continue to market certain non-core onshore US properties. However, none of these assets met the criteria for reclassification as an asset held-for-sale at December 31, 2012.

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 December 31, 2012, and the remainder is due September 30, 2013. See Note 12. Long-Term 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 a multi-year period. 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:



	December 31, 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.

Exit from Ecuador On November 25, 2010, the government of Ecuador terminated the Block 3 PSC (100% working interest) with our subsidiary, EDC Ecuador Ltd. as we had not negotiated a service contract on Block 3 in accordance with the terms of a newly enacted hydrocarbon law. The hydrocarbon law aimed to change current production-sharing arrangements into service contracts and provided for renegotiation of certain contracts.

In May 2011, we transferred our assets in Ecuador to the Ecuadorian government. We received cash proceeds of $73 million for the transfer of our offshore Amistad field assets, onshore gas processing facilities and Block 3 PSC and the assignment of the Machala Power electricity concession and its associated assets. Our net book value for the assets had been reduced due to previous impairment charges, resulting in a pre-tax gain of $25 million. We did not consider the property disposition material for discontinued operations presentation.

DJ Basin Asset Acquisition In March 2010, we acquired substantially all of the US Rocky Mountain assets of Petro-Canada Resources (USA) Inc. and Suncor Energy (Natural Gas) America Inc. for $498 million. The acquisition included properties located in the DJ Basin, one of our core operating areas. The total purchase price was allocated to the proved and unproved properties acquired based on fair values at the acquisition date.

The total purchase price and allocation of the total purchase price are as follows:



	December 31,
	2010
(millions)
Total Purchase Price
Cash Paid	$	458
Net Liabilities Assumed	40
Total	$	498

Allocation of Total Purchase Price
Proved Oil and Gas Properties	$	352
Unproved Oil and Gas Properties	146
Total	$	498

Sale of Onshore US Assets In August 2010, we sold non-core assets in the Mid-Continent and Illinois Basin areas. Information regarding the assets sold is as follows:



	Year Ended December 31,
	2010
(millions)
Cash Proceeds	$	552
Less
Net Book Value of Assets Sold	(394		)
Goodwill Allocated to Assets Sold	(61		)
Asset Retirement Obligations Associated with Assets Sold	10
Other Closing Adjustments	3
Gain on Asset Sale	$	110