10-Q 1 nbl-2014331x10q.htm 10-Q NBL-2014.3.31-10Q
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 March 31, 2014

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)
1001 Noble Energy Way
 
 
Houston, Texas
 
77070
(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 March 31, 2014, there were 360,740,081 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
March 31,
 
2014
 
2013
Revenues
 
 
 
Oil, Gas and NGL Sales
$
1,327

 
$
1,083

Income from Equity Method Investees
52

 
60

Total
1,379

 
1,143

Costs and Expenses
 
 
 
Production Expense
232

 
187

Exploration Expense
74

 
61

Depreciation, Depletion and Amortization
425

 
366

General and Administrative
140

 
112

Asset Impairments
97

 

Other Operating (Income) Expense, Net
7

 
(8
)
Total
975

 
718

Operating Income
404

 
425

Other (Income) Expense
 
 
 
Loss on Commodity Derivative Instruments
75

 
72

Interest, Net of Amount Capitalized
47

 
25

Other Non-Operating Expense, Net
5

 
10

Total
127

 
107

Income from Continuing Operations Before Income Taxes
277

 
318

Income Tax Provision
77

 
86

Income from Continuing Operations
200

 
232

Discontinued Operations, Net of Tax

 
29

Net Income
$
200

 
$
261

 
 
 
 
Earnings Per Share, Basic
 
 
 
Income from Continuing Operations
$
0.56

 
$
0.65

Discontinued Operations, Net of Tax

 
0.08

Net Income
$
0.56

 
$
0.73

Earnings Per Share, Diluted
 
 
 
Income from Continuing Operations
$
0.55

 
$
0.64

Discontinued Operations, Net of Tax

 
0.08

Net Income
$
0.55

 
$
0.72

 
 
 
 
Weighted Average Number of Shares Outstanding
 
 
 
   Basic
360

 
358

   Diluted
365

 
362


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
March 31,
 
2014
 
2013
Net Income
$
200

 
$
261

Other Items of Comprehensive Income
 
 
 
Net Change in Pension and Other
5

 
6

      Less Tax Benefit
(2
)
 
(2
)
Other Comprehensive Income
3

 
4

Comprehensive Income
$
203

 
$
265


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


4


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

 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents
$
1,354

 
$
1,117

Accounts Receivable, Net
865

 
947

Other Current Assets
545

 
547

Total Current Assets
2,764

 
2,611

Property, Plant and Equipment
 

 
 

Oil and Gas Properties (Successful Efforts Method of Accounting)
22,837

 
22,243

Property, Plant and Equipment, Other
564

 
517

Total Property, Plant and Equipment, Gross
23,401

 
22,760

Accumulated Depreciation, Depletion and Amortization
(7,284
)
 
(7,035
)
Total Property, Plant and Equipment, Net
16,117

 
15,725

Goodwill
621

 
627

Other Noncurrent Assets
690

 
679

Total Assets
$
20,192

 
$
19,642

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 

 
 

Accounts Payable - Trade
$
1,178

 
$
1,354

Other Current Liabilities
1,021

 
988

Total Current Liabilities
2,199

 
2,342

Long-Term Debt
5,011

 
4,566

Deferred Income Taxes, Noncurrent
2,449

 
2,441

Other Noncurrent Liabilities
1,172

 
1,109

Total Liabilities
10,831

 
10,458

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 per share; 500 Million Shares Authorized; 401 Million and 400 Million Shares Issued, respectively
4

 
4

Additional Paid in Capital
3,502

 
3,463

Accumulated Other Comprehensive Loss
(114
)
 
(117
)
Treasury Stock, at Cost; 38 Million Shares
(674
)
 
(659
)
Retained Earnings
6,643

 
6,493

Total Shareholders’ Equity
9,361

 
9,184

Total Liabilities and Shareholders’ Equity
$
20,192

 
$
19,642


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


5


Noble Energy, Inc.
Consolidated Statements of Cash Flows
(millions)
(unaudited)
 
Three Months Ended
March 31,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net Income
$
200

 
$
261

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

 
 

Depreciation, Depletion and Amortization
425

 
367

Asset Impairments
97

 

Deferred Income Taxes
17

 
52

Income from Equity Method Investees, Net of Dividends
(13
)
 
(35
)
Loss on Commodity Derivative Instruments
75

 
72

Net Cash Received (Paid) in Settlement of Commodity Derivative Instruments
(33
)
 
7

(Gain) Loss on Divestitures
1

 
(53
)
Stock Based Compensation
23

 
18

Other Adjustments for Noncash Items Included in Income
20

 
25

Changes in Operating Assets and Liabilities
 
 
 

(Increase) Decrease in Accounts Receivable
28

 
(56
)
Increase in Accounts Payable
57

 
82

Increase in Current Income Taxes Payable
47

 

Decrease in Other Current Liabilities
(25
)
 
(48
)
Other Operating Assets and Liabilities, Net
10

 
13

Net Cash Provided by Operating Activities
929

 
705

Cash Flows From Investing Activities
 

 
 

Additions to Property, Plant and Equipment
(1,158
)
 
(806
)
Additions to Equity Method Investments
(12
)
 
(20
)
Proceeds from Divestitures
92

 
76

Other

 
2

Net Cash Used in Investing Activities
(1,078
)
 
(748
)
Cash Flows From Financing Activities
 

 
 

Exercise of Stock Options
10

 
22

Excess Tax Benefits from Stock-Based Awards
6

 
9

Dividends Paid, Common Stock
(50
)
 
(44
)
Purchase of Treasury Stock
(15
)
 
(14
)
Proceeds from Credit Facilities
450

 

Repayment of Capital Lease Obligation
(15
)
 
(12
)
Net Cash Provided by (Used in) Financing Activities
386

 
(39
)
Increase (Decrease) in Cash and Cash Equivalents
237

 
(82
)
Cash and Cash Equivalents at Beginning of Period
1,117

 
1,387

Cash and Cash Equivalents at End of Period
$
1,354

 
$
1,305

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


6


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

 
Common
Stock (1)
 
Additional
Paid in
Capital (1)
 
Accumulated Other
Comprehensive
Loss
 
Treasury
Stock at
Cost
 
Retained
Earnings
 
Total
Shareholders'
Equity
December 31, 2013
$
4

 
$
3,463

 
$
(117
)
 
$
(659
)
 
$
6,493

 
$
9,184

Net Income

 

 

 

 
200

 
200

Stock-based Compensation

 
23

 

 

 

 
23

Exercise of Stock Options

 
10

 

 

 

 
10

Tax Benefits Related to Exercise of Stock Options

 
6

 

 

 

 
6

Dividends (14 cents per share)

 

 

 

 
(50
)
 
(50
)
Changes in Treasury Stock, Net

 

 

 
(15
)
 

 
(15
)
Net Change in Pension and Other

 

 
3

 

 

 
3

March 31, 2014
$
4

 
$
3,502

 
$
(114
)
 
$
(674
)
 
$
6,643

 
$
9,361

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
$
4

 
$
3,302

 
$
(113
)
 
$
(648
)
 
$
5,713

 
$
8,258

Net Income

 

 

 

 
261

 
261

Stock-based Compensation

 
18

 

 

 

 
18

Exercise of Stock Options

 
22

 

 

 

 
22

Tax Benefits Related to Exercise of Stock Options

 
9

 

 

 

 
9

Dividends (12.5 cents per share)

 

 

 

 
(44
)
 
(44
)
Changes in Treasury Stock, Net

 

 

 
(14
)
 

 
(14
)
Net Change in Pension and Other

 

 
4

 

 

 
4

March 31, 2013
$
4

 
$
3,351

 
$
(109
)
 
$
(662
)
 
$
5,930

 
$
8,514


(1) 
Amounts reflect impact of 2-for-1 stock split which occurred during the second quarter of 2013.

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 March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 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 months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
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, 2013.
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.
Discontinued Operations In 2012, we initiated a strategy to exit the North Sea geographical area through sales of our non-operated working interests in the assets. The North Sea geographical segment was classified as held for sale and the operations were reflected as discontinued operations in 2012 and 2013.
The most significant North Sea assets were sold during 2012 and 2013. However, we have been unable to locate purchasers for the remaining assets, and a sale is no longer considered probable. Therefore, during first quarter 2014, we reclassified the remaining North Sea assets to held and used, and the North Sea geographical segment is included in continuing operations in first quarter 2014. In addition, we recorded an impairment in first quarter 2014.
North Sea revenues and operating expenses for first quarter 2014, except for the impairment, were de minimis. See Note 3. Divestitures, Note 4. Asset Impairments, and Note 7. Fair Value Measurements and Disclosures.
Common Stock Split   On April 22, 2013, Noble Energy’s Board of Directors approved a 2-for-1 split of its common stock to be effected in the form of a stock dividend. The stock dividend was distributed on May 28, 2013 to shareholders of record as of May 14, 2013. Earnings per share and common shares outstanding are reported giving retrospective effect to the common stock split.
Recently Issued Accounting Standards In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08: Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). ASU 2014-08 changes the criteria for reporting discontinued operations while enhancing disclosures in this area and is effective for annual and interim periods beginning after December 15, 2014. We are currently evaluating the provisions of ASU 2014-08 and assessing the impact, if any, it may have on our financial position and results of operations.
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.
 

8

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Statements of Operations Information   Other statements of operations information is as follows: 
 
Three Months Ended
March 31,
(millions)
2014
 
2013
Production Expense
 
 
 
Lease Operating Expense
$
145

 
$
117

Production and Ad Valorem Taxes
49

 
43

Transportation and Gathering Expense
38

 
27

Total
$
232

 
$
187

Other Operating (Income) Expense, Net
 
 
 
(Gain) Loss on Divestitures
$
1

 
$
(15
)
Other, Net
6

 
7

Total
$
7

 
$
(8
)
Other Non-Operating (Income) Expense, Net
 
 
 
Deferred Compensation Expense (1)
$
4

 
$
10

Other Expense, Net
1

 

Total
$
5

 
$
10

 
(1) 
Amounts represent increases 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:
(millions)
March 31,
2014
 
December 31,
2013
Accounts Receivable, Net
 
 
 
Commodity Sales
$
403

 
$
495

Joint Interest Billings
364

 
382

Other
111

 
81

Allowance for Doubtful Accounts
(13
)
 
(11
)
Total
$
865

 
$
947

Other Current Assets
 

 
 

Inventories, Materials and Supplies
$
113

 
$
96

Inventories, Crude Oil
24

 
25

Deferred Income Taxes, Net
38

 
62

Assets Held for Sale (1)
294

 
292

Prepaid Expenses and Other Current Assets
76

 
72

Total
$
545

 
$
547

Other Noncurrent Assets
 

 
 

Equity Method Investments
$
464

 
$
437

Mutual Fund Investments
116

 
114

Commodity Derivative Assets
11

 
16

Other Assets
99

 
112

Total
$
690

 
$
679

Other Current Liabilities
 

 
 

Production and Ad Valorem Taxes
$
101

 
$
103

Commodity Derivative Liabilities
95

 
65

Income Taxes Payable
210

 
156

Asset Retirement Obligations
39

 
39

Interest Payable
61

 
63

Current Portion of Long Term Debt (2)
200

 
200

Current Portion of Capital Lease Obligations and Other (2)
55

 
58

Liabilities Associated with Assets Held for Sale (1)
58

 
111

Other
202

 
193

Total
$
1,021

 
$
988

Other Noncurrent Liabilities
 

 
 

Deferred Compensation Liabilities
$
263

 
$
253

Asset Retirement Obligations
616

 
547

Accrued Benefit Costs
107

 
155

Other
186

 
154

Total
$
1,172

 
$
1,109

(1) 
Assets held for sale as of March 31, 2014 include oil and gas properties located onshore US, offshore Israel, and offshore China. Assets held for sale as of December 31, 2013 include oil and gas properties located onshore US, offshore China, and the North Sea. Liabilities associated with assets held for sale primarily include asset retirement obligations. See Note 3. Divestitures.
(2) See Note 6. Debt.



10

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 3. Divestitures
Onshore US Properties   During the first three months of 2014, we sold certain non-core onshore US crude oil and natural gas properties. The information regarding the assets sold is as follows:
 
Three Months Ended
March 31,
(millions)
2014
Sales Proceeds
$
92

Less
 
     Net Book Value of Assets Sold
(106
)
     Goodwill Allocated to Assets Sold
(6
)
     Asset Retirement Obligations Associated with Assets Sold
20

     Other Closing Adjustments
(1
)
Loss on Divestitures
$
(1
)

Offshore Israel Properties Assets held for sale as of March 31, 2014, include two natural gas discoveries, offshore Israel. We expect to divest these assets pursuant to an agreement we and our partners reached with the Israeli Antitrust Authority in March 2014 on various antitrust matters. The agreement is subject to final approval of the Israeli government. The assets are held for sale at their carrying amounts as expected sales proceeds, less costs to sell, exceed the carrying amounts.
North Sea Properties   During the first three months of 2013, we sold non-operated working interests in properties located in the North Sea. The sales resulted in a $37 million gain based on net sales proceeds of $38 million. See Note 2. Basis of Presentation - Discontinued Operations.
Summarized results of discontinued operations are as follows:
 
Three Months Ended
March 31,
(millions)
2013
Oil and Gas Sales
$
10

Income Before Income Taxes
(1
)
Income Tax Expense
7

Operating Income (Loss), Net of Tax
(8
)
Gain on Sale, Net of Tax
37

Discontinued Operations, Net of Tax
$
29


Note 4. Asset Impairments
Pre-tax (non-cash) asset impairment charges were as follows:
 
Three Months Ended March 31,
(millions)
2014
 
2013
North Sea Property
$
92

 
$

Non-Core US Property
5

 

Total
$
97

 
$

During first quarter 2014, we recorded pre-tax asset impairment expense of $97 million. Approximately $92 million was related to the North Sea. In March 2014, the operator of one of the remaining fields notified the working interest owners that expected field abandonment costs would be higher than originally projected. The operator also notified the working interest owners that it would begin working with the appropriate regulatory agency for approval of cessation of production and subsequent field abandonment sooner than anticipated.
As a result of this new information, we adjusted the asset retirement obligation to reflect the updated estimate of abandonment costs and timing. We assessed the asset for impairment and determined that it was impaired. The impairment charge was included in consolidated income from continuing operations. See Note 2. Basis of Presentation and Note 7. Fair Value Measurements and Disclosures.

11

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 5.  Derivative Instruments and Hedging Activities
Objective and Strategies for Using Derivative Instruments   We are exposed to fluctuations in crude oil and natural gas prices on the majority of our production. In order to mitigate the effect of commodity price volatility and enhance the predictability of cash flows relating to the marketing of our global crude oil and domestic natural gas, we enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. 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.
Unsettled Commodity Derivative Instruments   As of March 31, 2014, we had entered into the following crude oil derivative instruments: 
 
 
 
 
Swaps
 
Collars
Settlement
Period
Type of Contract
Index (1)
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 March 31, 2014
 
 
 
 
 
 
2014
Swaps
NYMEX WTI
37,000
$
92.67

 
$

$

$

2014
Swaps
Dated Brent
13,000
103.21

 



2014
Three-Way Collars
NYMEX WTI
12,000

 
75.67

90.67

100.88

2014
Three-Way Collars
Dated Brent
8,000

 
84.38

98.25

121.56

2015
Swaps
NYMEX WTI
21,000
88.05

 



2015
Swaps
Dated Brent
9,000
100.16

 



2015
Three-Way Collars
NYMEX WTI
18,000

 
70.56

87.50

94.34

2015
Three-Way Collars
Dated Brent
13,000

 
76.92

96.00

108.49

2016
Swaps
Dated Brent
4,000
95.84

 



2016
Three-Way Collars
Dated Brent
6,000

 
80.00

95.00

105.87

(1) 
West Texas Intermediate
As of March 31, 2014, we had entered into the following natural gas derivative instruments:
 
 
 
 
Swaps
 
Collars
Settlement
Period
Type of Contract
Index (1)
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 March 31, 2014
 
 
 
 
 
 
2014
Swaps
NYMEX HH
60,000
$
4.24

 
$

$

$

2014
Three-Way Collars
NYMEX HH
230,000

 
2.83

3.75

4.98

2015
Swaps
NYMEX HH
110,000
4.30

 



2015
Three-Way Collars
NYMEX HH
120,000

 
3.54

4.25

5.06

(1) 
Henry Hub

12

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Fair Value Amounts and Loss on Commodity Derivative Instruments   The fair values of commodity derivative instruments in our consolidated balance sheets were as follows:
Fair Value of Derivative Instruments
 
Asset Derivative Instruments
 
Liability Derivative Instruments
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
(millions)
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
 Value
 
Balance Sheet Location
 
Fair
Value
 
Balance Sheet Location
 
Fair
Value
Commodity Derivative Instruments
Current
Assets
 
$

 
Current Assets
 
$
1

 
Current Liabilities
 
$
95

 
Current Liabilities
 
$
65

 
Noncurrent Assets
 
11

 
Noncurrent Assets
 
16

 
Noncurrent Liabilities
 
16

 
Noncurrent Liabilities
 
10

Total
 
 
$
11

 
 
 
$
17

 
 
 
$
111

 
 
 
$
75


The effect of commodity derivative instruments on our consolidated statements of operations was as follows:
 
Three Months Ended
March 31,
(millions)
2014
 
2013
Loss on Commodity Derivative Instruments
 
 
 
   Crude Oil
$
55

 
$
49

   Natural Gas
20

 
23

Total Loss on Commodity Derivative Instruments
75

 
72

Cash (Received) Paid in Settlement of Commodity Derivative Instruments
 
 
 
  Crude Oil
27

 
8

  Natural Gas
6

 
(15
)
Total Cash (Received) Paid in Settlement of Commodity Derivative Instruments
33

 
(7
)
Non-cash Portion of Loss on Commodity Derivative Instruments
 
 
 
   Crude Oil
28

 
41

   Natural Gas
14

 
38

Total Non-cash Portion of Loss on Commodity Derivative Instruments
$
42

 
$
79

AOCL Accumulated other comprehensive loss (AOCL) at March 31, 2014 included deferred losses of $24 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. The amount of deferred losses (net of tax) which will be reclassified to earnings during the next 12 months, and recorded as an increase in interest expense, is de minimis.

13

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 6. Debt
Debt consists of the following:
 
March 31,
2014
 
 
December 31,
2013
 
(millions, except percentages)
Debt
 
Interest Rate
 
 
Debt
 
Interest Rate
 
Credit Facility, due October 3, 2018
$
450

 
1.43
%
 
 
$

 
%
 
Capital Lease and Other Obligations
351

 

 
 
359

 

 
5¼% Senior Notes, due April 15, 2014 (1)
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
%
 
5¼% Senior Notes, due November 15, 2043
1,000

 
5.25
%
 
 
1,000

 
5.25
%
 
7¼% Senior Debentures, due August 1, 2097
84

 
7.25
%
 
 
84

 
7.25
%
 
Total
5,285

 
 
 
 
4,843

 
 

 
Unamortized Discount
(19
)
 
 

 
 
(19
)
 
 

 
Total Debt, Net of Discount
5,266

 
 

 
 
4,824

 
 

 
Less Amounts Due Within One Year
 

 
 

 
 
 

 
 

 
5¼% Senior Notes, due April 15, 2014, net of discount (1)
(200
)
 
 
 
 
(200
)
 
 
 
Capital Lease Obligations
(55
)
 
 

 
 
(58
)
 
 

 
Long-Term Debt Due After One Year
$
5,011

 
 

 
 
$
4,566

 
 

 
(1) 
We repaid the Senior Notes on their due date.
Credit Facility Our Credit Agreement provides for a $4.0 billion unsecured revolving credit facility (Credit Facility), which is available for general corporate purposes. The Credit Facility (i) provides for facility fee rates that range from 12.5 basis points to 30 basis points per year depending upon our credit rating, (ii) includes sub-facilities for short-term loans and letters of credit up to an aggregate amount of $500 million under each sub-facility and (iii) provides for interest rates that are based upon the Eurodollar rate plus a margin that ranges from 100 basis points to 145 basis points depending upon our credit rating.
See Note 7. Fair Value Measurements and Disclosures for a discussion of methods and assumptions used to estimate the fair values of debt.

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 may include: variable to fixed price commodity swaps, two-way collars, and/or three-way collars. 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 and the contract floors and ceilings using an option pricing model which takes into account market volatility, market prices and contract terms. See Note 5. 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. 

14

Noble Energy, Inc.
Notes to Consolidated Financial Statements

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)
 
 
 
 
 
 
 
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
Mutual Fund Investments
$
116

 
$

 
$

 
$

 
$
116

Commodity Derivative Instruments

 
15

 

 
(4
)
 
11

Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity Derivative Instruments

 
(115
)
 

 
4

 
(111
)
Portion of Deferred Compensation Liability Measured at Fair Value
(181
)
 

 

 

 
(181
)
December 31, 2013
 
 
 
 
 
 
 

 
 

Financial Assets
 

 
 

 
 

 
 

 
 

Mutual Fund Investments
$
114

 
$

 
$

 
$

 
$
114

Commodity Derivative Instruments

 
28

 

 
(11
)
 
17

Financial Liabilities
 

 
 

 
 

 
 

 
 

Commodity Derivative Instruments

 
(86
)
 

 
11

 
(75
)
Portion of Deferred Compensation Liability Measured at Fair Value
(176
)
 

 

 

 
(176
)
 
(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 netting provisions within our master 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 Information about impaired assets is as follows:
 
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 March 31, 2014
 
 
 
 
 
 
 
 
Impaired Oil and Gas Properties
$

 
$

 
$
6

 
$
103

 
$
97

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
Impaired Oil and Gas Properties

 

 

 

 

(1) Amount represents net book value at the date of assessment.
The fair value of impaired oil and gas properties was determined as of the date of the assessment using a discounted cash flow model based on management’s expectations of future crude oil production prior to abandonment date, commodity prices based on the Brent future price curve as of the date of the estimate, estimated operating and abandonment costs, and a risk-adjusted

15

Noble Energy, Inc.
Notes to Consolidated Financial Statements

discount rate of 10%. First quarter 2014 impairment costs were due to increased cost and change in timing of abandonment activities. See Note 4. Asset Impairments.
Additional Fair Value Disclosures
Debt   The fair value of public, fixed-rate 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 amount of our Credit Facility at March 31, 2014 approximates fair value because the interest rate paid on such debt is set for periods of three months or less. As such, we consider the fair values of our Credit Facility to be a Level 2 measurements on the fair value hierarchy. See Note 6. Debt.
Fair value information regarding our debt is as follows:
 
March 31,
2014
 
December 31,
2013
(millions)
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Total Debt, Net of Unamortized Discount (1)
$
4,915

 
$
5,524

 
$
4,465

 
$
4,959

(1) 
Excludes capital lease and other obligations.
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 charged to exploration expense as dry hole cost.
Changes in capitalized exploratory well costs are as follows and exclude amounts that were capitalized and subsequently expensed in the same period:
(millions)
Three Months Ended March 31, 2014
Capitalized Exploratory Well Costs, Beginning of Period
$
1,301

Additions to Capitalized Exploratory Well Costs Pending Determination of Proved Reserves
72

Reclassified to Proved Oil and Gas Properties Based on Determination of Proved Reserves or to Assets Held for Sale
(76
)
Capitalized Exploratory Well Costs Charged to Expense
(2
)
Capitalized Exploratory Well Costs, End of Period
$
1,295


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: 
(millions)
March 31,
2014
 
December 31,
2013
Exploratory Well Costs Capitalized for a Period of One Year or Less
$
465

 
$
568

Exploratory Well Costs Capitalized for a Period Greater Than One Year Since Commencement of Drilling
830

 
733

Balance at End of Period
$
1,295

 
$
1,301

Number of Projects with Exploratory Well Costs That Have Been Capitalized for a Period Greater Than One Year Since Commencement of Drilling
12

 
13

 

16

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 March 31, 2014:
 
 
 
Suspended Since
 
 
(millions)
Total
 
2012 - 2013
 
2010 - 2011
 
2009 & Prior
 
Progress
Country/Project:
 
 
 
 
 
 
 
 
 
Offshore Equatorial Guinea
 
 
 
 
 
 
 
 
 
Diega (including Carmen)
$
106

 
$
1

 
$
52

 
$
53

 
Evaluating regional development scenarios for this 2008 crude oil discovery
Carla
123

 
111

 
12

 

 
Evaluating regional development scenarios for this 2011 crude oil discovery
Felicita
37

 
2

 
6

 
29

 
Evaluating regional development plans for this 2008 condensate and natural gas discovery
Yolanda
18

 
1

 
3

 
14

 
Evaluating regional development plans for this 2007 condensate and natural gas discovery
Offshore Cameroon
 

 
 
 
 
 
 
 
 
YoYo
46

 
3

 
9

 
34

 
Working with the government to assess commercialization of this 2007 condensate and natural gas discovery
Offshore Israel
 

 
 
 
 
 
 
 
 
Leviathan
176

 
66

 
110

 

 
Working to close a definitive farmout agreement and evaluating both domestic and export development concepts for this 2010 natural gas discovery. In addition, the Leviathan licenses were recently converted to Production and Development Leases.
Leviathan-1 Deep
75

 
48

 
27

 

 
Well did not reach the target interval; we are developing future drilling plans to test this deep oil concept
Dalit
24

 
2

 
2

 
20

 
Submitted a development plan to the government to develop this 2009 natural gas discovery as a tie-in to existing infrastructure
Dolphin 1
23

 
1

 
22

 

 
Reviewing regional development scenarios for this 2011 natural gas discovery
Offshore Cyprus
 
 
 
 
 
 
 
 
 
Cyprus A-1
79

 
22

 
57

 

 
Planning additional appraisal activities, including interpretation of seismic data and spudding another exploration well to further refine the ultimate recoverable resources and optimize field development planning.
Falkland Islands
 

 
 
 
 
 
 
 
 
Scotia
74

 
74

 

 

 
Preparing to analyze recently acquired seismic data
Other
 

 
 
 
 
 
 
 
 
Projects less than $10 million
49

 
39

 
4

 
6

 
Continuing to drill and evaluate appraisal wells
Total
$
830

 
$
370

 
$
304

 
$
156

 
 

17

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 9.  Asset Retirement Obligations
Asset retirement obligation (ARO) consists primarily of estimated costs of dismantlement, removal, site reclamation and similar activities associated with our oil and gas properties. Changes in ARO are as follows:
 
Three Months Ended
March 31,
(millions)
2014
 
2013
Asset Retirement Obligations, Beginning Balance
$
586

 
$
402

Liabilities Incurred
1

 
1

Liabilities Settled
(14
)
 
(10
)
Revision of Estimate
72

 
(1
)
Accretion Expense (1)
10

 
7

Asset Retirement Obligations, Ending Balance
$
655

 
$
399

(1) Accretion expense is included in DD&A expense in the consolidated statements of operations.
Liabilities settled in 2014 include $24 million for onshore US and deepwater Gulf of Mexico abandonments and $17 million related to properties classified as held for sale, offset by $27 million as a result of reclassifying remaining North Sea assets from held for sale to held and used.
Liabilities settled in 2013 relate primarily to non-core onshore US properties that were sold. See Note 3. Divestitures.
Revision in estimate for 2014 includes an increase of $67 million related to a non-operated North Sea field due to an increase in costs and a change in timing. See Note 4. Asset Impairments.

Note 10.  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
March 31,
(millions, except per share amounts)
2014
 
2013
Income from Continuing Operations
$
200

 
$
232

 
 
 
 
Weighted Average Number of Shares Outstanding, Basic
360

 
358

Incremental Shares from Assumed Conversion of Dilutive Stock Options, Restricted Stock, and Shares of Common Stock in Rabbi Trust
5

 
4

Weighted Average Number of Shares Outstanding, Diluted
365

 
362

Earnings from Continuing Operations Per Share, Basic
$
0.56

 
$
0.65

Earnings from Continuing Operations Per Share, Diluted
0.55

 
0.64

Number of Antidilutive Stock Options, Shares of Restricted Stock, and Shares of Common Stock in Rabbi Trust Excluded from Calculation Above
6

 
5



18

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 11.  Income Taxes
The income tax provision relating to continuing operations consists of the following: 
 
Three Months Ended
March 31,
(millions)
2014
 
2013
Current
$
60

 
$
36

Deferred
17

 
50

Total Income Tax Provision
$
77

 
$
86

Effective Tax Rate
27.6
%
 
27.1
%

Our effective tax rate (ETR) for the first three months of 2014 remained relatively unchanged as compared with the first three months of 2013.
In our major tax jurisdictions, the earliest years remaining open to examination are as follows: US – 2010, Equatorial Guinea – 2008, Israel – 2009 and China –2010.
See Note 3. Divestitures for income taxes associated with discontinued operations.

Note 12.  Segment Information  
We have operations throughout the world and manage our operations by country. The following information is grouped into four components that are all in the business of crude oil and natural gas exploration, development, production, and acquisition: the United States; West Africa (Equatorial Guinea, Cameroon, and Sierra Leone); Eastern Mediterranean (Israel and Cyprus); and Other International and Corporate. Other International includes China, the North Sea, Falkland Islands, Nicaragua and new ventures. The North Sea geographical segment is included in continuing operations in 2014 and discontinued operations in 2013.
(millions)
Consolidated
 
United
States
 
West
Africa
 
Eastern
Mediterranean
 
Other Int'l &
Corporate
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Revenues from Third Parties
$
1,327

 
$
842

 
$
323

 
$
112

 
$
50

Income from Equity Method Investees
52

 

 
52

 

 

Total Revenues
1,379

 
842

 
375

 
112

 
50

DD&A
425

 
308

 
76

 
14

 
27

Asset Impairments
97

 
5

 

 

 
92

Income (Loss) from Continuing Operations Before Income Taxes
277

 
183

 
261

 
77

 
(244
)
Three Months Ended March 31, 2013
 

 
 

 
 

 
 

 
 

Revenues from Third Parties
$
1,083

 
$
716

 
$
273

 
$
51

 
$
43

Income from Equity Method Investees
60

 

 
60

 

 

Total Revenues
1,143

 
716

 
333

 
51

 
43

DD&A
366

 
266

 
54

 
28

 
18

Asset Impairments

 

 

 

 

Income (Loss) from Continuing Operations Before Income Taxes
318

 
243

 
231

 
15

 
(171
)
March 31, 2014
 

 
 

 
 

 
 

 
 

Total Assets
$
20,192

 
$
13,569

 
$
3,193

 
$
2,822

 
$
608

December 31, 2013
 

 
 

 
 

 
 

 
 

Total Assets
19,598

 
13,094

 
3,199

 
2,753

 
552




19

Noble Energy, Inc.
Notes to Consolidated Financial Statements

Note 13.  Commitments and Contingencies  
CONSOL Carried Cost Obligation In accordance with our Marcellus Shale joint venture arrangement with a subsidiary of CONSOL Energy Inc. (CONSOL), 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. Due to low natural gas prices, the CONSOL Carried Cost Obligation has been suspended since the end of 2011. However, due to recent increases in Henry Hub natural gas prices, we began funding a portion of CONSOL's working interest share of certain drilling and completion costs as of March 1, 2014. Based on the March 31, 2014 NYMEX Henry Hub natural gas price curve and current development plans, we forecast funding approximately $235 million in 2014.
Marcellus Shale Firm Transportation Agreements In February 2014, we signed Precedent Agreements for Firm Transportation (the Agreements) to flow 150,000 MMBtu per day of our Marcellus Shale natural gas production to Gulf Coast markets. The Agreements are for transportation services on new pipeline extensions, to be constructed by, and connecting to, an existing third-party system. The pipeline extensions are expected to be complete and operational in June of 2017. Our financial commitment totals approximately $765 million, undiscounted, over a 15-year period. The Agreements are subject to various conditions, including regulatory approval of the pipeline extension projects.
Legal Proceedings  We are involved in various 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.




20


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a narrative about our business from the perspective of our management. We use common industry terms, such as thousand barrels of oil equivalent per day (MBoe/d) and million cubic feet equivalent per day (MMcfe/d), to discuss production and sales volumes. Our MD&A is presented in the following major sections:

 
The preceding consolidated financial statements, including the notes thereto, contain detailed information that should be read in conjunction with our MD&A.
 
EXECUTIVE OVERVIEW
We are a worldwide producer of crude oil and natural gas. We aim to achieve sustainable growth in value and cash flow through exploration success and the development of a high-quality, diversified, portfolio of assets with investment flexibility between: onshore unconventional developments and offshore organic exploration leading to major development projects; US and international development projects; and production mix among crude oil, natural gas, and NGLs. We currently focus our efforts in five core operating areas: the DJ Basin and Marcellus Shale (onshore US), deepwater Gulf of Mexico, offshore West Africa, and offshore Eastern Mediterranean, where we have strategic competitive advantage and which we believe generate superior returns. We also seek to enter potential new core areas, and we are currently conducting exploratory activities in domestic and international locations such as Northeast Nevada, the Falkland Islands, Cameroon, and Cyprus.
Our financial results for first quarter 2014 included:
net income of $200 million as compared with $261 million for first quarter 2013;
loss on commodity derivative instruments of $75 million (including $42 million non-cash portion of loss) as compared with a loss on commodity derivative instruments of $72 million (including $79 million non-cash portion of loss) for first quarter 2013;
asset impairment charges of $97 million, as compared with zero for first quarter 2013;
diluted earnings per share of $0.55, as compared with $0.72 for first quarter 2013;
cash flow provided by operating activities of $929 million, as compared with $705 million for first quarter 2013;
ending cash balance of $1.4 billion, as compared with $1.1 billion at December 31, 2013;
capital spending, on a cash basis, of $1.2 billion, as compared with $806 million for first quarter 2013;
total liquidity of $4.9 billion at March 31, 2014, as compared with $5.1 billion at December 31, 2013; and
ratio of debt-to-book capital of 36% at March 31, 2014, as compared with 35% at December 31, 2013
Our operating results for first quarter 2014 included:
total sales volumes of 286 MBoe/d, as compared with 246 MBoe/d for the first quarter of 2013;
delivered record horizontal production of 100 MBoe/d on average from the DJ Basin and Marcellus Shale plays, up over 60% versus first quarter 2013;
performed completion operations on initial vertical well in the Wilson play of Northeast Nevada, successfully recovering oil from multiple intervals;
apparent high bidder on 12 deepwater lease blocks in the central Gulf of Mexico Lease Sale 231;
signed first two regional export sales agreements for natural gas sales from Tamar and Leviathan to customers in Jordan and Palestine;
finalized agreement with the Israel Antitrust Authority; and
executed sales agreements to divest of our non-core Haynesville and Powder River Basin assets onshore US.
Exploration Program Update
We have numerous exploration opportunities remaining in our core areas and are also engaged in new venture activity in both our US and international locations.
We were in the process of drilling and/or evaluating significant exploratory wells at March 31, 2014 (See Item 1. Financial Statements – Note 8. Capitalized Exploratory Well Costs), and expect to continue an active exploratory drilling program in the future.

21


A significant portion of our 2014 capital investment program is dedicated to exploration and associated appraisal activities, including leasehold acquisitions. However, we do not always encounter hydrocarbons through our drilling activities. In addition, we may find hydrocarbons but subsequently reach a decision, through additional analysis or appraisal drilling, that a development project is not economically or operationally viable.
In the event we conclude that one of our exploratory wells did not encounter hydrocarbons or that a discovery is not economically or operationally viable, the associated capitalized exploratory well costs would be charged to expense.  Additionally, we may not be able to conduct exploration activities prior to lease expirations. As a result, in a future period, dry hole cost and/or leasehold abandonment expense could be significant. See Operating Outlook – Potential for Future Asset Impairment, Dry Hole or Lease Abandonment Expense, below.
Updates on significant exploration activities are as follows:
Northeast Nevada We are evaluating drilling and completion results from our first exploratory vertical wells. We plan to begin flow testing the first well in second quarter 2014 and drill additional exploratory wells later in 2014.
Deepwater Gulf of Mexico During first quarter 2014, we participated in the central Gulf of Mexico Lease Sale 231 and were apparent high bidder on 12 deepwater blocks, providing further opportunities to expand our exploration portfolio. In late March 2014, we spud the Katmai exploration well (Green Canyon Block 40, 50% operated working interest).
Also during the quarter, the new Atwood Advantage drillship successfully mobilized to the Gulf of Mexico where it is undergoing readiness activities for our 2014 drilling plan.
Offshore West Africa We plan to shoot 3D seismic tests across Blocks O and I, offshore Equatorial Guinea, during the second half of 2014, and drill an exploratory well offshore Cameroon in the fourth quarter of 2014. Additionally, we are reprocessing 3D seismic data over our YoYo mining concession, offshore Cameroon.
Offshore Eastern Mediterranean We are processing and evaluating recently acquired 3D seismic data over offshore Israel and Cyprus and continue to study locations for potential exploratory wells, with opportunities offshore both Israel and Cyprus.
Offshore Falkland Islands We continue to process and evaluate 3D seismic data over the northern and southern areas and prepare for our first operated exploratory well.
Major Development Project Updates
We continue to advance our major development projects, which we expect to deliver incremental production over the next several years. Updates on major development projects are as follows:
Sanctioned Ongoing Development Projects
A "sanctioned" development project is one for which a final investment decision has been made.
DJ Basin (Onshore US)   We continue to operate at a high level of horizontal drilling activity with continued growth from strong well performance, new wells brought online, and expanded natural gas and crude oil infrastructure. During the quarter, we spud 54 standard length lateral wells and 13 extended reach lateral wells, and recently increased our 2014 drilling program to include over 90 extended reach lateral wells. Currently, 10 drilling rigs are active across the basin.
Marcellus Shale (Onshore US)   We continue to delineate the wet gas acreage, while our partner, CONSOL Energy, Inc. (CONSOL), continues to develop the dry gas and progress the Allegheny County Airport areas. During the quarter, we and our partner drilled 36 wells, and 11 wells initiated production. The joint venture is currently operating nine drilling rigs.
Due to an increase in Henry Hub natural gas prices, our funding of certain drilling and completion costs under the CONSOL Carried Cost Obligation commenced as of March 1, 2014 . See Liquidity and Capital Resources – Contractual Obligations below.
Gunflint (Deepwater Gulf of Mexico)  In 2013, we sanctioned the development plan for the 2008 Gunflint crude oil discovery, utilizing a subsea tieback to an existing host facility, and are targeting first production in 2016.
Big Bend (Deepwater Gulf of Mexico) The 2012 Big Bend crude oil discovery is located in the Rio Grande area of the deepwater Gulf of Mexico. In October 2013, we sanctioned a development plan, utilizing a subsea tieback to a third party host facility. During first quarter 2014, using the Ensco 8501 drilling rig, we conducted well completion activities, and first production is targeted for late 2015.
Tamar Expansion (Offshore Israel) The Tamar compression project, which is expected to increase capacity by 200 MMcf/d at the Ashdod onshore terminal, is progressing, and we expect operational start-up in the second half of 2015.

22


Tamar Southwest (Offshore Israel) We anticipate first production in the second half of 2015 utilizing Tamar infrastructure as part of our expansion project to meet domestic demand. We also expect Tamar Southwest to provide flow rate assurance for the overall Tamar project.
Unsanctioned Development Projects (As of March 31, 2014)
Dantzler (Deepwater Gulf of Mexico) The 2013 Dantzler crude oil discovery is located in the Rio Grande area of the deepwater Gulf of Mexico and is a co-development opportunity with Big Bend. We plan to drill another Dantzler appraisal well later in the year.
Leviathan (Offshore Israel)   We continue to make progress towards sanctioning the first phase of Leviathan development. In February 2014, we signed a non-binding memorandum of understanding (MOU) regarding the sale of an interest in the Leviathan licenses to Woodside Petroleum (Woodside). All the existing Leviathan partners are participating as sellers of a 25% interest to Woodside. We agreed to convey a 9.66% working interest and will continue as upstream operator with a 30% working interest. We and our existing Leviathan partners continue to work with Woodside to close a definitive agreement. Following completion of the transaction, Woodside will become operator of any LNG development of the field.
Total compensation to us is anticipated to include $525 million in cash payments as follows:
an initial cash payment of $390 million payable at closing of the transaction, which is expected later in 2014; and
a second cash payment of $135 million which is due when a final investment decision is made in relation to an LNG or FLNG development program or as regional export contracts are executed in excess of a threshold volume amount, whichever occurs earlier.
In addition, the MOU provides for Woodside to share a portion of certain of their future revenues, subject to caps, if specified events were to occur, including: reaching a certain level of natural gas export, an increase in ultimate recoverable resources (as defined), or a commercial crude oil discovery and subsequent development.
The MOU includes the agreed-upon commercial terms of the farm-out transaction. The transaction remains subject to the execution of definitive agreements between the parties, as well as necessary and customary regulatory approvals.
In March 2014, the Israeli government converted the Leviathan licenses to Production and Development Leases (Leases). The Leases provide for, among other things:
30-year terms, from February14, 2014 until February 13, 2044;
the right to develop the project giving priority to the domestic natural gas market and requiring a connection to the domestic natural gas transmission system prior to export; and
targeted milestones for development, subject to timing of regulatory and permitting requirements, natural gas sales agreements and financing.
See also Update on Israel's Natural Gas Economy, below.
Cyprus Project (Offshore Cyprus) We are planning additional appraisal activities, including interpretation of seismic data and spudding another exploration or appraisal well to further determine the ultimate recoverable resources on Block 12 and optimize field development planning. In addition, we have filed an application for renewal of the production sharing contract for two additional years.
Diega and Carla (Offshore Equatorial Guinea) We are currently evaluating regional development scenarios and targeting to sanction a Diega development project in 2014, with first production targeted for early 2017.
See Item 1. Financial Statements – Note 8. Capitalized Exploratory Well Costs for additional information on costs incurred related to these projects.
Non-Core Divestiture Program
Our non-core asset divestiture program is winding down with certain smaller onshore US property packages sold during first quarter 2014 or expected to be sold this year. We are also in the process of negotiating a sale of our China assets. Divestitures of non-core properties allow us to allocate capital and employee resources to high-value and high-growth areas.  See Item 1. Financial Statements – Note 3. Divestitures and Operating Outlook - Potential for Future Asset Impairment, Dry Hole or Lease Abandonment Expense, below.
We are currently winding up local business activities in Argentina, Ecuador, and certain North Sea jurisdictions. At this time, we do not believe that any of the activities associated with these areas will have a material effect on our financial position, results of operations or cash flows.

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Update on Israel's Natural Gas Economy
Israel Antitrust Authority We and our partners recently reached an agreement with the Israeli government on various antitrust matters. As a result of the agreement, we will divest two natural gas discoveries. We have initiated an active program to locate a buyer and other actions required to complete the plan to sell the assets. The assets are reported within assets held for sale in our consolidated balance sheet at March 31, 2014.
The agreement also granted the rights, to us and our partners, to jointly market natural gas from the Leviathan field. As a result, we plan to further our domestic natural gas marketing activities. The agreement is subject to final approval by the Israeli government.
On March 26, 2014, the Israel Ministry of Finance (Ministry) issued a memorandum indicating its intent to amend the Petroleum Profits Law in light of the Israeli government's 2013 decision to permit the export of natural gas from Israel. The purpose of the proposed amendments is to regulate the method of taxing petroleum export transactions, and, in particular, exports of natural gas. As a part of the Ministry's final recommendation, several methodologies could be used to establish the transfer price for natural gas sales, depending on various circumstances. We are currently evaluating the recommendation and proposed amendments.
Update on Hydraulic Fracturing
Potential Rulemaking Although hydraulic fracturing is regulated primarily at the state level, governments and agencies at all levels from federal to municipal are conducting studies and considering regulations, and some have proposed rules.
In 2013, several communities in Colorado passed ballot measures supporting restrictions or bans on the practice of hydraulic fracturing within their boundaries. The large majority of our DJ Basin acreage is not located in these municipalities and, therefore, we do not expect our operations to be impacted by these specific developments.
In advance of the upcoming November 2014 state-wide elections, three general types of ballot initiatives have now emerged in Colorado. They can be characterized as:
initiatives relating to local government control;
initiatives relating to mandatory statewide drilling setbacks; and
initiatives relating to constitutional duties to protect the environment.
Should these, or other, Colorado ballot initiatives succeed in regulating, limiting or banning hydraulic fracturing or other facets of oil and gas exploration, development or operations, our business could be impacted resulting in delay or inability to develop certain oil and gas reserves, reducing our long-term reserves, production and cash flow growth, and have a potential negative impact on our stock price.
In Nevada, the State Assembly recently adopted legislation that requires the development of a program to regulate the use of hydraulic fracturing in Nevada. State regulators are in the process of proposing rules and holding public hearings.
We will continue to monitor new and proposed legislation and regulations to assess the potential impact on our operations. We are currently evaluating the possible impact any proposed rules, such as those described above, could have on our business. Any additional federal, state or local restrictions on hydraulic fracturing that may be imposed in areas in which we conduct business could result in substantial incremental operating, capital and compliance costs as well as delay our ability to develop oil and gas reserves.
Concurrently, we are engaged in extensive public education and outreach efforts with the goal of engaging and educating the general public about the energy, economic and environmental benefits of safe and responsible oil and natural gas development.
Regulations
On February 23, 2014, the Colorado Air Quality Control Commission (Commission) adopted a number of revisions to its oil and gas industry regulations. The revisions include the full adoption of EPA's Standards of Performance for Crude Oil and Natural Gas Production, Transmission, and Distribution (also known as NSPS Quad O) with corresponding complementary control measures. The control measures set forth requirements for identifying and repairing leaks, undertaking record keeping, and submitting reports. The revisions also include the first ever regulation of methane emissions from the industry. In collaboration with the Environmental Defense Fund and other oil and gas operators, we provided testimony and evidence to the Commission in support of the adopted revisions. The adopted revised regulations were published in the Colorado Register on March 25, 2014, Volume 37, No. 6, and are effective as of April 14, 2014. Copies of these regulations are available at http://www.sos.state.co.us/CCR. We do not currently believe costs incurred to implement these regulations will be material to our earnings or cash flows.
Sales Volumes
The execution of our strategy has delivered a diversified production growth most recently due to our Tamar natural gas field and Alen condensate project coming online in 2013 along with accelerated activity in onshore US unconventional

24


developments. On a BOE basis, total sales volumes were 16% higher for the first quarter of 2014 as compared with the first quarter of 2013, and our mix of sales volumes was 45% global liquids, 27% international natural gas, and 28% US natural gas. See Results of Operations – Revenues, below.
Commodity Price Changes
Average realized natural gas prices increased 45% in the US and 9% in Israel for first quarter 2014 as compared with the first quarter of 2013. Average realized crude oil prices remained relatively unchanged in the US, and decreased 5% for Equatorial Guinea.
Recently Issued Accounting Standards
OPERATING OUTLOOK
2014 Production   Our expected crude oil, natural gas and NGL production for 2014 may be impacted by several factors including:
changes to drilling plans in the DJ Basin and the Marcellus Shale;
Israeli demand for electricity, which affects demand for natural gas as fuel for power generation and industrial market growth, and which is impacted by unseasonable weather;
potential downtime at key assets including: Galapagos and Swordfish, deepwater Gulf of Mexico; Tamar, offshore Israel; and Aseng and Alen offshore Equatorial Guinea;
natural field decline in the deepwater Gulf of Mexico, non-core onshore US areas, and the Alba and Aseng fields offshore Equatorial Guinea; and
potential weather-related volume curtailments due to hurricanes in the deepwater Gulf of Mexico or flooding in the DJ Basin, Marcellus Shale and/or Rocky Mountain areas, which can shut-in or reduce production or result in the use of produced natural gas to fuel burners.
2014 Capital Investment Program Total capital expenditures are estimated at $4.8 to $5.0 billion for 2014. We expect to invest approximately 70% of the program in onshore US development and approximately 30% of the program in global deepwater activities.
The 2014 capital investment program is estimated to exceed operating cash flows and is expected to be funded from cash flows from operations, cash on hand, and borrowings under our unsecured revolving Credit Facility (Credit Facility) and/or other financing. Funding may also be provided by proceeds from divestment of non-core assets or farm-out of working interests in exploration prospects. See Liquidity and Capital Resources – Financing Activities.
We will continue to evaluate the level of capital spending and remain flexible throughout the year. For further discussion, see Executive Overview – Update on Hydraulic Fracturing, above, regarding potential legislative or regulatory changes in the use of hydraulic fracturing, and Liquidity and Capital Resources – Contractual Obligations, below, regarding the CONSOL Carried Cost Obligation.
Potential for Future Asset Impairment, Dry Hole or Lease Abandonment Expense
Exploration Activities We have an active exploratory drilling program. In the event we conclude that an exploratory well did not encounter hydrocarbons or that a discovery is not economically or operationally viable, the associated capitalized exploratory well costs would be charged to expense. For example, in the Falkland Islands we are processing recently acquired seismic data. We will conduct seismic interpretation and basin modeling during the remainder of 2014 in order to determine our future drilling program. Integration of seismic information with the results of the Scotia exploratory well will allow us to assess the economic viability of this prospect. If we were to determine, based on the results of seismic interpretation and/or additional drilling activities, that the Scotia prospect is not economically viable, the costs we have incurred (approximately $72 million to date) would be written off to dry hole expense.
Additionally, we may not conduct exploration activities prior to lease expirations. For example, in the deepwater Gulf of Mexico, while we continue to mature our prospect portfolio, regulations have become more stringent due to the Deepwater Horizon incident in 2010. In some instances, specifically engineered blowout preventers, rigs, and completion equipment may be required for high pressure environments. Regulatory requirements or lack of readily available equipment could prevent us from engaging in future exploration activities during our current lease terms.
One particular deepwater Gulf of Mexico lease, which we acquired based on regulations in effect prior to the Deepwater Gulf of Mexico Moratorium, is set to expire on July 31, 2014. We intend to request an extension of this lease; however, there is no certainty an extension will be obtained prior to the lease expiration. The lease had a net book value of approximately $41 million at March 31, 2014. If we are unable to obtain an extension, we must relinquish the lease, abandon our exploration plans, and write off the book value to exploration expense.

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Producing Properties Commodity prices remain volatile. A decline in future crude oil or natural gas prices could result in impairment charges. The cash flow model that we use to assess proved properties for impairment includes numerous assumptions, such as management’s estimates of future oil and gas production along with operating and development costs, market outlook on forward commodity prices, and interest rates. All inputs to the cash flow model must be evaluated at each date of estimate. However, a decrease in forward crude oil or natural gas prices alone could result in an impairment.
Occasionally, well mechanical problems arise, which can reduce production and potentially result in reductions in proved reserves estimates. For example, our South Raton development in the deepwater Gulf of Mexico is currently shut-in due to mechanical issues. We are preparing for remediation work to commence in second quarter 2014 and expect return to production by third quarter 2014. No impairment is currently indicated; however, we will monitor production and reserves when South Raton is brought back online and continue to assess the field for possible impairment. South Raton had a net book value of approximately $121 million at March 31, 2014.
In addition, well decommissioning programs, especially in deepwater or remote locations, are often complex and very expensive. It may be difficult to estimate timing of actual abandonment activities, which are subject to regulatory approval and the availability of rigs and services. It may be difficult to estimate costs as rigs and services become more expensive in periods of high demand. Therefore, our ARO estimates may change, sometimes significantly, and could result in asset impairment. For example, in the first quarter of 2014, the ARO estimate for one of our remaining non-operated North Sea fields changed significantly, resulting in asset impairment charges of $92 million.
Divestments We are currently marketing certain non-core onshore US properties. If properties are reclassified as assets held for sale in the future, they will be valued at the lower of net book value or anticipated sales proceeds less costs to sell. Impairment expense would be recorded for any excess of net book value over anticipated sales proceeds less costs to sell. In addition, we would allocate a portion of goodwill to any non-core onshore US property held for sale that constitutes a business, which could potentially decrease any gain or increase any loss recorded on the sale. Goodwill write-offs result in an increase in our effective tax rate because goodwill is nondeductible for US federal income tax purposes.
In addition, certain assets offshore Israel and offshore China are classified held for sale at March 31, 2014. No impairments are indicated at this time. However, failure to achieve acceptable sale terms or delays in closing sales of these properties could result in impairment and/or loss on sale.
RESULTS OF OPERATIONS
In the discussion below, the North Sea geographical segment is reflected as discontinued operations for the first three months of 2013. During first quarter 2014, the remaining unsold North Sea assets were reclassified to held and used, and their operations are included in continuing operations for first quarter 2014. See Item 1. Financial Statements - Note 2. Basis of Presentation, Note 3. Divestitures, Note 4. Asset Impairments and Note 7. Fair Value Measurements and Disclosures. See also Discontinued Operations, below.

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Revenues
Revenues were as follows:
 
 
 
 
 
Increase/(Decrease)
from Prior Year
(millions)
2014
 
2013
 
Three Months Ended March 31,
 
 
 
 
 
Oil, Gas and NGL Sales
$
1,327

 
$
1,083

 
23
 %
Income from Equity Method Investees
52

 
60

 
(13
)%
Total
$
1,379

 
$
1,143

 
21
 %
Changes in revenues are discussed below.
Oil, Gas and NGL Sales Average daily sales volumes and average realized sales prices were as follows:
 
Sales Volumes
 
Average Realized Sales Prices
 
Crude Oil & Condensate
(MBbl/d)
 
Natural
Gas
(MMcf/d)
 
NGLs
(MBbl/d)
 
Total
(MBoe/d) (1)
 
Crude Oil & Condensate
(Per Bbl)
 
Natural
Gas
(Per Mcf)
 
NGLs
(Per Bbl)
Three Months Ended March 31, 2014
United States
64

 
483

 
18

 
163

 
$
97.02

 
$
4.81

 
$
44.50

Equatorial Guinea (2)
34

 
242

 

 
74

 
105.73

 
0.27

 

Israel

 
218

 

 
37

 

 
5.60

 

Other International (3)
5

 

 

 
5

 
104.28

 

 

Total Consolidated Operations
103

 
943

 
18

 
279

 
100.23

 
3.83

 
44.50

Equity Investees (4)
2

 

 
5

 
7

 
104.71

 

 
74.51

Total Continuing Operations
105

 
943


23

 
286

 
$
100.30

 
$
3.83

 
$
51.54

Three Months Ended March 31, 2013
United States
63

 
409

 
16

 
146

 
$
95.70

 
$
3.31

 
$
39.19

Equatorial Guinea (2)
27

 
246

 

 
68

 
111.79

 
0.27

 

Israel