Quarterly Report

Table of Contents

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

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 I. Financial Information	3

Item 1. Financial Statements	3

Consolidated Statements of Operations	3

Consolidated Statements of Comprehensive Income	4

Consolidated Balance Sheets	5

Consolidated Statements of Cash Flows	6

Consolidated Statements of Shareholders' Equity	7

Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3. Quantitative and Qualitative Disclosures About Market Risk	48

Item 4. Controls and Procedures	50

Part II. Other Information	50

Item 1. Legal Proceedings	50

Item 1A. Risk Factors	50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3. Defaults Upon Senior Securities	50

Item 4. Mine Safety Disclosures	50

Item 5. Other Information	50

Item 6. Exhibits	51

Signatures	52

Index to Exhibits	53

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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 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.

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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.

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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

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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.

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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

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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

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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:

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	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.

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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

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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

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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,