nfx10q-09302009.htm
 



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

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: 1-12534

NEWFIELD EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
   
Delaware
72-1133047
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)

363 North Sam Houston Parkway East
Suite 100
Houston, Texas 77060
(Address and Zip Code of principal executive offices)

(281) 847-6000
(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 þ 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) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ 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. (Check one):
 
             
Large accelerated filer þ     
 
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 Act).  Yes o No þ

     As of October 22, 2009, there were 132,868,433 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 



 
 

 

TABLE OF CONTENTS
   
Page
PART I
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
     
PART II
     
     
     
     
 
 

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
(Unaudited)
   
September 30,
   
December 31,
 
   
2009
   
2008
 
ASSETS
 
Current assets:
           
Cash and cash equivalents  
  $ 96     $ 24  
Accounts receivable 
    293       375  
Inventories 
    110       96  
Derivative assets 
    377       663  
Other current assets 
    66       48  
Total current assets                                                                                                               
    942       1,206  
Property and equipment, at cost, based on the full cost method of accounting for oil and gas
     properties ($1,265 at September 30, 2009 and $1,303 at December 31, 2008 were excluded from amortization) 
      9,960         10,349  
Less—accumulated depreciation, depletion and amortization 
    (5,020 )     (4,591 )
Total property and equipment, net 
    4,940       5,758  
                 
Derivative assets 
    48       247  
Long-term investments 
    56       72  
Deferred taxes 
    36       ¾  
Other assets   
    15       22  
Total assets  
  $ 6,037     $ 7,305  
   
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Accounts payable  
  $ 34     $ 103  
Accrued liabilities 
    566       672  
Advances from joint owners  
    74       73  
Asset retirement obligation 
    6       11  
Deferred taxes  
    125       226  
Total current liabilities   
    805       1,085  
                 
Other liabilities 
    41       22  
Derivative liabilities 
    25       ¾  
Long-term debt  
    2,106       2,213  
Asset retirement obligation  
    77       70  
Deferred taxes  
    345       658  
Total long-term liabilities 
    2,594       2,963  
                 
Commitments and contingencies (Note 5) 
    ¾       ¾  
                 
Stockholders' equity:
               
Preferred stock ($0.01 par value; 5,000,000 shares authorized; no shares issued)
    ¾       ¾  
Common stock ($0.01 par value; 200,000,000 shares authorized at September 30, 2009 and December 31, 2008;
            134,338,720 and 133,985,751 shares issued at September 30, 2009 and December 31, 2008, respectively)  
      1         1  
Additional paid-in capital   
    1,375       1,335  
Treasury stock (at cost; 1,492,640 and 1,908,243 shares at September 30, 2009 and
December 31, 2008, respectively)  
    (33 )     (32 )
Accumulated other comprehensive income (loss):
               
Unrealized loss on investments 
    (13 )     (13 )
Unrealized gain (loss) on post retirement benefits 
    (1 )     2  
Retained earnings 
    1,309       1,964  
Total stockholders' equity   
    2,638       3,257  
Total liabilities and stockholders' equity  
  $ 6,037     $ 7,305  

The accompanying notes to consolidated financial statements are an integral part of this statement.




NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share data)
(Unaudited)
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Oil and gas revenues  
  $ 375     $ 680     $ 924     $ 1,887  
                                 
Operating expenses:
                               
Lease operating  
    64       67       192       184  
Production and other taxes 
    14       51       38       154  
Depreciation, depletion and amortization 
    144       181       440       504  
General and administrative 
    40       36       106       105  
Ceiling test writedown  
    ¾       ¾       1,344       ¾  
Other  
    1       ¾       8       ¾  
Total operating expenses  
    263       335       2,128       947  
                                 
Income (loss) from operations  
    112       345       (1,204 )     940  
                                 
Other income (expenses):
                               
Interest expense  
    (31 )     (36 )     (95 )     (83 )
Capitalized interest 
    13       16       39       43  
Commodity derivative income (expense) 
    (8 )     726       189       (247 )
Other  
    (1 )     8       4       10  
Total other income (expenses) 
    (27 )     714       137       (277 )
                                 
Income (loss) before income taxes  
    85       1,059       (1,067 )     663  
                                 
Income tax provision (benefit):
                               
Current   
    35       9       36       34  
Deferred  
    (28 )     326       (448 )     213  
Total income tax provision (benefit) 
    7       335       (412 )     247  
                                 
              Net income (loss) 
  $ 78     $ 724     $ (655 )   $ 416  
                                 
Income (loss) per share:
                               
         Basic 
  $ 0.59     $ 5.59     $ (5.06 )   $ 3.22  
   Diluted  
  $ 0.58     $ 5.48     $ (5.06 )   $ 3.15  
                                 
Weighted average number of shares outstanding for basic
income (loss) per share 
    130       129       129       129  
                                 
Weighted average number of shares outstanding for diluted
income (loss) per share 
    132       132       129       132  

The accompanying notes to consolidated financial statements are an integral part of this statement.
 
 

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income (loss) 
  $ (655 )   $ 416  
                 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation, depletion and amortization  
    440       504  
Deferred tax provision (benefit)  
    (448 )     213  
Stock-based compensation   
    22       17  
Ceiling test writedown   
    1,344        
Commodity derivative (income) expense  
    (189 )     247  
Cash receipts (payments) on derivative settlements  
    701       (783 )
                 
Changes in operating assets and liabilities:
               
(Increase) decrease in accounts receivable 
    81       (63 )
Increase in inventories   
    (22 )     (5 )
Increase in commodity derivative assets  
          (65 )
Increase in other current assets  
    (18 )     (10 )
Increase (decrease) in accounts payable and accrued liabilities
    (59 )     135  
Increase (decrease) in advances from joint owners  
    1       2  
Increase in other liabilities  
    19       14  
                Net cash provided by operating activities  
    1,217       622  
                 
Cash flows from investing activities:
               
Additions to oil and gas properties 
    (1,045 )     (1,537 )
Acquisition of oil and gas properties   
    (9 )     (231 )
Proceeds from sale of oil and gas properties   
          2  
Additions to furniture, fixtures and equipment  
    (7 )     (14 )
      Purchases of investments  
          (22 )
Redemptions of investments   
    18       70  
                Net cash used in investing activities   
    (1,043 )     (1,732 )
                 
Cash flows from financing activities:
               
Proceeds from borrowings under credit arrangements  
    813       1,826  
Repayments of borrowings under credit arrangements  
    (920 )     (1,541 )
Net proceeds from issuance of senior subordinated notes  
          592  
Proceeds from issuances of common stock  
    6       18  
Purchases of treasury stock, net   
    (1 )      
                Net cash provided by (used in) financing activities  
    (102 )     895  
                 
Increase (decrease) in cash and cash equivalents  
    72       (215 )
Cash and cash equivalents, beginning of period   
    24       250  
Cash and cash equivalents, end of period 
  $ 96     $ 35  

The accompanying notes to consolidated financial statements are an integral part of this statement.

 

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
                                 
Accumulated
       
                       
Additional
       
Other
   
Total
 
   
Common Stock
 
Treasury Stock
   
Paid-in
 
Retained
   
Comprehensive
   
Stockholders'
 
   
Shares
 
Amount
 
Shares
   
Amount
   
Capital
 
Earnings
   
Income (Loss)
   
Equity
 
Balance, December 31, 2008
  134.0   $ 1   (1.9 )   $ (32 )   $ 1,335   $ 1,964     $ (11 )   $ 3,257  
Issuances of common and restricted stock
  0.3                         6                     6  
Treasury stock, at cost
            0.4       (1 )                           (1 )
Stock-based compensation 
                            34                     34  
Comprehensive loss:
                                                     
    Net loss
                                  (655 )             (655 )
Realized loss on post retirement 
    benefits, net of tax of $2
                                          (3 )     (3 )
     Total comprehensive loss
                                                  (658 )
Balance, September 30, 2009
  134.3   $ 1   (1.5 )   $ (33 )   $ 1,375   $ 1,309     $ (14 )   $ 2,638  

The accompanying notes to consolidated financial statements are an integral part of this statement.

 

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Summary of Significant Accounting Policies:
   
Organization and Principles of Consolidation
     
We are an independent oil and gas company engaged in the exploration, development and acquisition of natural gas and crude oil properties. Our domestic areas of operation include the Anadarko and Arkoma Basins of the Mid-Continent, the Rocky Mountains, onshore Texas and the Gulf of Mexico. Internationally, we are active in Malaysia and China.
     
Our financial statements include the accounts of Newfield Exploration Company, a Delaware corporation, and its subsidiaries. We proportionately consolidate our interests in oil and gas exploration and production ventures and partnerships in accordance with industry practice. All significant intercompany balances and transactions have been eliminated. Unless otherwise specified or the context otherwise requires, all references in these notes to “Newfield,” “we,” “us” or “our” are to Newfield Exploration Company and its subsidiaries.
     
These unaudited consolidated financial statements reflect, in the opinion of our management, all adjustments, consisting only of normal and recurring adjustments, necessary to state fairly our financial position as of, and results of operations for, the periods presented. These financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Interim period results are not necessarily indicative of results of operations or cash flows for a full year.
     
These financial statements and notes should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008.
 
  Dependence on Oil and Natural Gas Prices
     
As an independent oil and gas producer, our revenue, profitability and future rate of growth are substantially dependent on prevailing prices for oil and natural gas. Historically, the energy markets have been very volatile, and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future.  An extended decline in oil or natural gas prices could have a material adverse effect on our financial position, results of operations, cash flows and access to capital and on the quantities of oil and gas reserves that we can economically produce.

Use of Estimates
     
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the reported amounts of proved oil and gas reserves. Actual results could differ from these estimates. Our most significant financial estimates are associated with our estimated proved oil and gas reserves.

Investments

Investments consist primarily of debt and equity securities as well as auction rate securities, substantially all of which are classified as “available-for-sale” and stated at fair value. Accordingly, unrealized gains and losses and the related deferred income tax effects are excluded from earnings and reported as a separate component of stockholders’ equity. Realized gains or losses are computed based on specific identification of the securities sold. We realized interest income and gains on our investments for the three months ended September 30, 2009 and 2008 of $0.5 million and $1 million, respectively, and for the nine months ended September 30, 2009 and 2008 of $2 million and $3 million, respectively.

 

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
   
Inventories
     
Inventories primarily consist of tubular goods and well equipment held for use in our oil and gas operations and oil produced in our operations offshore Malaysia and China but not sold. Inventories are carried at the lower of cost or market. Crude oil from our operations offshore Malaysia and China is produced into floating production, storage and off-loading vessels and sold periodically as barge quantities are accumulated. The product inventory consisted of approximately 197,000 barrels and 293,000 barrels of crude oil valued at cost of $6 million and $9 million at September 30, 2009 and December 31, 2008, respectively. Cost for purposes of the carrying value of oil inventory is the sum of production costs and depreciation, depletion and amortization expense.
   
Oil and Gas Properties

We use the full cost method of accounting for our oil and gas producing activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and gas properties, including salaries, benefits and other internal costs directly attributable to these activities, are capitalized into cost centers that are established on a country-by-country basis.
     
Capitalized costs and estimated future development and abandonment costs are amortized on a unit-of-production method based on proved reserves associated with the applicable cost center. For each cost center, the net capitalized costs of oil and gas properties are limited to the lower of the unamortized cost or the cost center ceiling. A particular cost center ceiling is equal to the sum of:

·
 
the present value (10% per annum discount rate) of estimated future net revenues from proved reserves using end of period oil and natural gas prices applicable to our reserves (including the effects of hedging contracts that are designated for hedge accounting, if any); plus
     
·
 
the lower of cost or estimated fair value of properties not included in the costs being amortized, if any; less
     
·
 
related income tax effects.
     
Proceeds from the sale of oil and gas properties are applied to reduce the costs in the applicable cost center unless the reduction would significantly alter the relationship between capitalized costs and proved reserves, in which case a gain or loss is recognized.
     
If net capitalized costs of oil and gas properties exceed the cost center ceiling, we are subject to a ceiling test writedown to the extent of such excess. If required, a ceiling test writedown reduces earnings and stockholders’ equity in the period of occurrence and, holding other factors constant, results in lower depreciation, depletion and amortization expense in future periods.
     
The risk that we will be required to writedown the carrying value of our oil and gas properties increases when oil and natural gas prices decrease significantly or if we have substantial downward revisions in our estimated proved reserves. During the first quarter of 2009, natural gas prices decreased significantly as compared to prices in effect at December 31, 2008.  At March 31, 2009, the ceiling value of our reserves was calculated based upon quoted market prices of $3.63 per MMBtu for natural gas and $49.65 per barrel for oil, adjusted for market differentials.  Using these prices, the unamortized net capitalized costs of our domestic oil and gas properties at March 31, 2009 exceeded the ceiling amount by approximately $1.3 billion ($854 million, after-tax).  At September 30, 2009, the cost center ceilings with respect to our properties in the U.S., Malaysia and China exceeded the net capitalized costs of the respective properties.  As such, no ceiling test writedowns were required.
 


NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Accounting for Asset Retirement Obligations
     
If a reasonable estimate of the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells can be made, we record a liability (an asset retirement obligation or ARO) on our consolidated balance sheet and capitalize the present value of the asset retirement cost in oil and gas properties in the period in which the retirement obligation is incurred. In general, the amount of an ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation assuming the normal operation of the asset, using current prices that are escalated by an assumed inflation factor up to the estimated settlement date, which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for our company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds and the additional capitalized costs are depreciated on a unit-of-production basis within the related full cost pool. Both the accretion and the depreciation are included as depreciation, depletion and amortization expense on our consolidated statement of income.
     
The changes to our ARO for the nine months ended September 30, 2009 are set forth below (in millions):
Balance as of January 1, 2009
  $ 81    
Accretion expense
    4    
Additions
    8    
Settlements
    (10 )  
Balance at September 30, 2009
  $ 83    
Less: Current portion of ARO at September 30, 2009
    (6 )  
Total long-term ARO at September 30, 2009
  $ 77    

Income Taxes
     
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined by applying tax regulations existing at the end of a reporting period to the cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts on our financial statements. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
     
During the third quarter of 2009, there was no change to our liability of $1 million for uncertain tax positions.  As of September 30, 2009, we had not accrued interest or penalties related to uncertain tax positions. The tax years 2005-2008 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject.  During the fourth quarter of 2008, the Internal Revenue Service commenced a limited scope audit of our U.S. income tax return for the 2005 tax year.  We anticipate that this audit should be completed by December 31, 2009.
   
Derivative Financial Instruments
 
Authoritative accounting and reporting guidance requires that every derivative instrument be recorded on the balance sheet at its fair value and that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Substantially all of the derivative instruments that we utilize are to manage the price risk attributable to our expected oil and gas production.  We have elected not to designate price risk management activities as accounting hedges under the accounting guidance, and, accordingly, account for them using the mark-to-market accounting method. Under this method, the changes in contract values are reported currently in earnings.  We also utilize derivatives to manage our exposure to variable interest rates.

Derivative assets and liabilities with the same counterparty and subject to contractual terms which provide for net settlement are reported on a net basis on our consolidated balance sheet.  Please see Note 7, “Derivative Financial Instruments,” for a more detailed discussion of our derivative activities.

Subsequent Events
     
As of October 22, 2009, the day prior to issuing these financial statements, we completed our review and analysis of potential subsequent events and none were identified.



NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


New Accounting Requirements
     
In September 2006, the Financial Accounting Standards Board (FASB) defined fair value, established criteria to be considered when measuring fair value and expanded disclosures about fair value measurements.  The guidance is effective for all recurring measures of financial assets and financial liabilities (e.g. derivatives and investment securities) for fiscal years beginning after November 15, 2007. We adopted the provisions for all recurring measures of financial assets and liabilities on January 1, 2008.  In February 2008, the FASB issued additional authoritative guidance, which granted a one-year deferral of the effective date as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis (e.g. those measured at fair value in a business combination and asset retirement obligations).  Beginning January 1, 2009, we applied the provisions to non-financial assets and liabilities.   The adoption did not have a material impact on our financial position or results of operations.

In March 2008, the FASB issued guidance requiring enhanced disclosures about our derivative and hedging activities that is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  We adopted the disclosure requirements beginning January 1, 2009.  Please see Note 7, Derivative Financial Instruments – Additional Disclosures about Derivative Instruments and Hedging Activities.”  The adoption did not have an impact on our financial position or results of operations.

In April 2009, the FASB issued additional guidance regarding fair value measurements and impairments of securities which makes fair value measurements more consistent with fair value principles, enhances consistency in financial reporting by increasing the frequency of fair value disclosures, and provides greater clarity and consistency in accounting for and presenting impairment losses on securities.  The additional guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We adopted the provisions for the period ending March 31, 2009.  The adoption did not have a material impact on our financial position or results of operations.

In May 2009, the FASB established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Although there is new terminology, the guidance is based on the same principles as those that previously existed.  This guidance, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009.  Our adoption of these provisions beginning with the period ending June 30, 2009 did not have an impact on our financial position or results of operations.

In September 2009, the FASB issued its proposed updates to oil and gas accounting rules to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries—Oil and Gas (Topic 932) with the requirements in the Securities and Exchange Commission’s final rule, Modernization of the Oil and Gas Reporting Requirements, which was issued on December 31, 2008 and is effective for the year ended December 31, 2009. The public comment period for the FASB’s proposed updates ended October 15, 2009; however, no final guidance has been issued by the FASB.  We are evaluating the potential impact of any updates to the oil and gas accounting rules and will comply with any new accounting and disclosure requirements once they become effective. 

2.  Earnings Per Share:
     
Basic earnings per share (EPS) is calculated by dividing net income (the numerator) by the weighted average number of shares of common stock (other than unvested restricted stock and restricted stock units) outstanding during the period (the denominator). Diluted earnings per share incorporates the dilutive impact of outstanding stock options and unvested restricted stock and restricted stock units (using the treasury stock method). Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of unrecognized compensation expense related to unvested stock-based compensation grants and the amount of excess tax benefits that would be recorded when the award becomes deductible are assumed to be used to repurchase shares. Please see Note 11, “Stock-Based Compensation.”
 

 
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following is the calculation of basic and diluted weighted average shares outstanding and EPS for the indicated periods:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In millions, except per share data)
 
Income (numerator):
                       
     Net income (loss) – basic and diluted
  $ 78     $ 724     $ (655 )   $ 416  
                                 
Weighted average shares (denominator):
                               
     Weighted average shares — basic
    130       129       129       129  
     Dilution effect of stock options and unvested restricted
stock and restricted stock units outstanding at end of period (1)
    2       3             3  
     Weighted average shares — diluted
    132       132       129       132  
                                 
Income (loss) per share:
                               
     Basic
  $ 0.59     $ 5.59     $ (5.06 )   $ 3.22  
     Diluted
  $ 0.58     $ 5.48     $ (5.06 )   $ 3.15  
 
     
(1)
 
The effect of stock options and unvested restricted stock and restricted stock units outstanding has not been included in the calculation of shares outstanding for diluted EPS for the nine months ended September 30, 2009 as their effect would have been anti-dilutive. Had we recognized net income for this period, incremental shares attributable to the assumed exercise of outstanding options and the assumed vesting of unvested restricted stock and restricted stock units would have increased diluted weighted average shares outstanding by 2 million shares.

3.  Oil and Gas Assets:
   
Property and Equipment
     
Property and equipment consisted of the following at:
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(In millions)
 
             
Oil and Gas Properties:
           
Subject to amortization  
  $ 8,604     $ 8,961  
Not subject to amortization:
               
Exploration in progress 
    271       207  
Development in progress 
    65       71  
Capitalized interest 
    136       129  
Fee mineral interests 
    23       23  
Other capital costs:
               
Incurred in 2009  
    55        
Incurred in 2008 
    222       328  
Incurred in 2007 
    213       242  
Incurred in 2006 and prior 
    280       303  
Total not subject to amortization 
    1,265       1,303  
Gross oil and gas properties
    9,869       10,264  
Accumulated depreciation, depletion and amortization
    (4,971 )     (4,550 )
Net oil and gas properties  
    4,898       5,714  
Other property and equipment  
    91       85  
Accumulated depreciation and amortization
    (49 )     (41 )
Net other property and equipment  
    42       44  
Property and equipment, net  
  $ 4,940     $ 5,758  
 


NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


4.  Debt:
     
As of the indicated dates, our debt consisted of the following:
 
   
September 30,
2009
   
December 31,
2008
 
   
(In millions)
 
Senior unsecured debt:
           
Revolving credit facility:
           
Prime rate based loans  
  $     $  
LIBOR based loans  
    454       514  
Total revolving credit facility 
    454       514  
Money market lines of credit (1)
          47  
Total credit arrangements 
    454       561  
                 
7 5/8% Senior Notes due 2011 
    175       175  
Fair value of interest rate swap (2)
    2       2  
Total senior unsecured notes 
    177       177  
Total senior unsecured debt 
    631       738  
6 5/8% Senior Subordinated Notes due 2014  
    325       325  
6 5/8% Senior Subordinated Notes due 2016  
    550       550  
7 1/8% Senior Subordinated Notes due 2018 
    600       600  
Total debt 
  $ 2,106     $ 2,213  

     
(1)
 
Because capacity under our credit facility was available to repay borrowings under our money market lines of credit as of the indicated dates, amounts outstanding under these obligations, if any, are classified as long-term.
     
(2)
 
We have hedged $50 million principal amount of our $175 million 7 5/8% Senior Notes due 2011. The hedge provides for us to pay variable and receive fixed interest payments.  Please see Note 7, “Derivative Financial Instruments – Interest Rate Swap.”

Credit Arrangements
     
We have a revolving credit facility that matures in June 2012 and provides for loan commitments of $1.25 billion from a syndicate of more than 15 financial institutions, led by JPMorgan Chase Bank, as agent.  As of September 30, 2009, the largest commitment was 16% of total commitments.  However, the amount that we can borrow under the facility could be limited by changing expectations of future oil and natural gas prices because the amount that we can borrow under the facility is determined by our lenders annually each May (and may be redetermined at the option of our lenders in the case of certain acquisitions or divestitures) using a process that takes into account the value of our estimated reserves and hedge position and the lenders’ commodity price assumptions. In the future, total loan commitments under the facility could be increased to a maximum of $1.65 billion if the existing lenders increase their individual loan commitments or new financial institutions are added to the facility.

Loans under the credit facility bear interest, at our option, equal to (a) a rate per annum equal to the higher of the prime rate announced from time to time by JPMorgan Chase Bank or the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System during the last preceding business day plus 50 basis points or (b) a base Eurodollar rate substantially equal to the London Interbank Offered Rate, plus a margin that is based on a grid of our debt rating (87.5 basis points per annum at September 30, 2009).
     
We pay commitment fees on available but undrawn amounts based on a grid of our debt rating (0.175% per annum at September 30, 2009). We incurred fees under this arrangement of approximately $0.3 million and $1 million for the three and nine months ended September 30, 2009, respectively, which are recorded in interest expense on our consolidated statement of income.  For the three and nine months ended September 30, 2008, we incurred commitment fees of approximately $0.4 million and $1 million, respectively.
 


NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Our credit facility has restrictive covenants that include the maintenance of a ratio of total debt to book capitalization not to exceed 0.6 to 1.0; maintenance of a ratio of total debt to earnings before gain or loss on the disposition of assets, interest expense, income taxes and noncash items (such as depreciation, depletion and amortization expense, unrealized gains and losses on commodity derivatives, ceiling test writedowns, and goodwill impairments) of at least 3.5 to 1.0. In addition, for as long as our debt rating is below investment grade, we must maintain a ratio of the calculated net present value of our oil and gas properties to total debt of at least 1.75 to 1.00. For purposes of this ratio, total debt includes only 50% of the principal amount of our senior subordinated notes.  At September 30, 2009 we were in compliance with all of our debt covenants.

As of September 30, 2009, we had $16 million of undrawn letters of credit outstanding under our credit facility. Letters of credit are subject to an issuance fee of 12.5 basis points and annual fees based on a grid of our debt rating (87.5 basis points at September 30, 2009).
     
Subject to compliance with the restrictive covenants in our credit facility, we also have a total of $120 million of borrowing capacity under money market lines of credit with various financial institutions, the availability of which is at the discretion of the financial institution.

Our credit facility and senior and senior subordinated notes contain standard events of default and, if any such events of default were to occur, our lenders could terminate future lending commitments under the credit facility and our lenders could declare the outstanding borrowings due and payable.  In addition, our credit facility, senior subordinated notes and substantially all of our hedging arrangements contain provisions that provide for cross defaults and acceleration of those debt and hedging instruments in certain situations.

5.  Commitments and Contingencies:
     
We have been named as a defendant in a number of lawsuits and are involved in various other disputes, all arising in the ordinary course of our business, such as (1) claims from royalty owners for disputed royalty payments, (2) commercial disputes, (3) personal injury claims and (4) property damage claims. Although the outcome of these lawsuits and disputes cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, cash flows or results of operations.

6.  Segment Information:
     
While we only have operations in the oil and gas exploration and production industry, we are organizationally structured along geographic operating segments. Our current operating segments are the United States, Malaysia, China and Other International. The accounting policies of each of our operating segments are the same as those described in Note 1, “Organization and Summary of Significant Accounting Policies.”
     
The following tables provide our geographic operating segment information as of and for the three and nine months ended September 30, 2009 and 2008. Income tax allocations have been determined based on statutory rates in the applicable geographic segment.

 

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

   
United
States
   
Malaysia
   
China
   
Other
International
   
Total
 
   
(In millions)
 
Three Months Ended September 30, 2009:
                             
                               
Oil and gas revenues  
  $ 231     $ 132     $ 12     $ ¾     $ 375  
                                         
Operating expenses:
                                       
Lease operating 
    48       15       1       ¾       64  
Production and other taxes 
    5       8       1       ¾       14  
Depreciation, depletion and amortization
    100       41       3       ¾       144  
General and administrative 
    39       1       ¾       ¾       40  
Other 
    1       ¾       ¾       ¾       1  
Allocated income taxes 
    14       26       2       ¾          
Net income from oil and gas properties 
  $ 24     $ 41     $ 5     $ ¾          
                                         
Total operating expenses 
                                    263  
Income from operations  
                                    112  
Interest expense, net of interest income,
capitalized interest and other
                                    (19 )
Commodity derivative expense
                                    (8 )
Income before income taxes 
                                  $ 85  
                                         
Total long-lived assets 
  $ 4,393     $ 353     $ 149     $ 3     $ 4,898  
                                         
Additions to long-lived assets 
  $ 245     $ 16     $ 24     $ ¾     $ 285  

   
United
States
   
Malaysia
   
China
   
Other
International
   
Total
 
   
(In millions)
 
Three Months Ended September 30, 2008:
                             
                               
Oil and gas revenues
  $ 560     $ 103     $ 17     $ ¾     $ 680  
                                         
Operating expenses:
                                       
Lease operating 
    54       13       ¾       ¾       67  
Production and other taxes
    21       27       3       ¾       51  
Depreciation, depletion and amortization
    154       24       3       ¾       181  
General and administrative 
    35       1       ¾       ¾       36  
Allocated income taxes 
    113       15       2       ¾          
Net income from oil and gas properties 
  $ 183     $ 23     $ 9     $ ¾          
                                         
Total operating expenses
                                    335  
Income from operations 
                                    345  
Interest expense, net of interest income,
capitalized interest and other
                                    (12 )
Commodity derivative income
                                    726  
Income before income taxes
                                  $ 1,059  
                                         
Total long-lived assets 
  $ 6,629     $ 442     $ 107     $ 2     $ 7,180  
                                         
Additions to long-lived assets 
  $ 462     $ 45     $ 7     $ ¾     $ 514  
 


NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

   
United
States
   
Malaysia
   
China
   
Other
International
   
Total
 
   
(In millions)
 
Nine Months Ended September 30, 2009:
                             
                               
Oil and gas revenues 
  $ 667     $ 226     $ 31     $ ¾     $ 924  
                                         
Operating expenses:
                                       
Lease operating
    152       36       4       ¾       192  
Production and other taxes 
    23       13       2       ¾       38  
Depreciation, depletion and amortization
    344       86       10       ¾       440  
General and administrative 
    103       2       1       ¾       106  
Ceiling test writedown  
    1,344       ¾       ¾       ¾       1,344  
Other  
    8       ¾       ¾       ¾       8  
Allocated income taxes 
    (471 )     34       3       ¾          
Net income (loss) from oil and gas properties 
  $ (836 )   $ 55     $ 11     $ ¾          
                                         
Total operating expenses 
                                    2,128  
Loss from operations 
                                    (1,204 )
Interest expense, net of interest income,
capitalized interest and other
                                    (52 )
Commodity derivative income
                                    189  
Loss before income taxes 
                                  $ (1,067 )
                                         
Total long-lived assets 
  $ 4,393     $ 353     $ 149     $ 3     $ 4,898  
                                         
Additions to long-lived assets 
  $ 860     $ 44     $ 50     $ ¾     $ 954  

   
United
States
   
Malaysia
   
China
   
Other
International
   
Total
 
   
(In millions)
 
Nine Months Ended September 30, 2008:
                             
                               
Oil and gas revenues 
  $ 1,589     $ 246     $ 52     $ ¾     $ 1,887  
                                         
Operating expenses:
                                       
Lease operating 
    147       35       2       ¾       184  
Production and other taxes 
    64       79       11       ¾       154  
Depreciation, depletion and amortization
    438       57       9       ¾       504  
General and administrative 
    101       2       2       ¾       105  
Allocated income taxes 
    319       28       7       ¾          
Net income from oil and gas properties 
  $ 520     $ 45     $ 21     $ ¾          
                                         
Total operating expenses 
                                    947  
Income from operations 
                                    940  
Interest expense, net of interest income,
capitalized interest and other
                                    (30 )
Commodity derivative expense
                                    (247 )
Income before income taxes 
                                  $ 663  
                                         
Total long-lived assets 
  $ 6,629     $ 442     $ 107     $ 2     $ 7,180  
                                         
Additions to long-lived assets 
  $ 1,587     $ 132     $ 38     $ 1     $ 1,758  
 

 
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.  Derivative Financial Instruments:
     
Commodity Derivative Instruments
     
We utilize swap, floor, collar and three-way collar derivative contracts to hedge against the variability in cash flows associated with the forecasted sale of our future oil and gas production. While the use of these derivative instruments limits the downside risk of adverse price movements, their use also may limit future revenues from favorable price movements.
     
With respect to a swap contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is less than the swap price, and we are required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap price. For a floor contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price. We are not required to make any payment in connection with the settlement of a floor contract. For a collar contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price, we are required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling price and neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price. A three-way collar contract consists of a standard collar contract plus a put sold by us with a price below the floor price of the collar. This additional put requires us to make a payment to the counterparty if the settlement price for any settlement period is below the put price. Combining the collar contract with the additional put results in us being entitled to a net payment equal to the difference between the floor price of the standard collar and the additional put price if the settlement price is equal to or less than the additional put price. If the settlement price is greater than the additional put price, the result is the same as it would have been with a standard collar contract only. This strategy enables us to increase the floor and the ceiling price of the collar beyond the range of a traditional no cost collar while defraying the associated cost with the sale of the additional put.  None of our derivative contracts contain collateral posting requirements; however, one of our derivative contracts contains a provision that would permit the counterparty, in certain circumstances, to request adequate assurance of our performance under the contract.
     
All of our derivative contracts are carried at their fair value on our consolidated balance sheet.  Substantially all of our oil and gas derivative contracts are settled based upon reported prices on the NYMEX. The estimated fair value of these contracts is based upon various factors, including closing exchange prices on the NYMEX, over-the-counter quotations, volatility and, in the case of collars and floors, the time value of options. The calculation of the fair value of collars and floors requires the use of an option-pricing model. Please see Note 13, “Fair Value Measurements.”  We recognize all unrealized and realized gains and losses related to these contracts on a mark-to-market basis in our consolidated statement of income under the caption “Commodity derivative income (expense).” Settlements of derivative contracts are included in operating cash flows on our consolidated statement of cash flows.
 
        During the first six months of 2008, we entered into a series of transactions that had the effect of resetting all of our then outstanding crude oil hedges for 2009 and 2010.  At the time of the reset, the mark-to-market value of these hedge contracts was a liability of $502 million and we paid an additional $56 million to purchase option contracts.
 
 
 
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
    At September 30, 2009, we had outstanding contracts with respect to our future production that are not designated for hedge accounting as set forth in the tables below.
   
Natural Gas

       
NYMEX Contract Price Per MMBtu
     
           
Collars
 
Estimated
 
       
Swaps
 
Floors
 
Ceilings
 
Fair Value
 
   
Volume in
 
(Weighted
     
Weighted
     
Weighted
 
Asset
 
Period and Type of Contract
 
MMMBtus
 
Average)
 
Range
 
Average
 
Range
 
Average
 
(Liability)
 
                           
(In millions)
 
October 2009 – December 2009
                             
Price swap contracts
  26,120   $ 7.34   ¾     ¾   ¾     ¾   $ 64  
Collar contracts
  8,435       $8.00 – $8.50   $ 8.23   $8.97 – $14.37   $ 11.20     31  
January 2010 – March 2010
                                     
Price swap contracts
  31,800     6.79   ¾     ¾   ¾     ¾     26  
Collar contracts
  5,700       8.50     8.50   10.00 – 11.00     10.44     15  
April 2010 – June 2010
                                     
Price swap contracts
  34,850     6.41   ¾     ¾   ¾     ¾     16  
July 2010 – September 2010
                                     
Price swap contracts
  35,200     6.41   ¾     ¾   ¾     ¾     8  
October 2010 – December 2010
                                     
Price swap contracts
  28,320     6.49   ¾     ¾   ¾     ¾     (6 )
January 2011 – March 2011
                                     
Price swap contracts
  18,900     6.55   ¾     ¾   ¾     ¾     (12 )
April 2011 – June 2011
                                     
Price swap contracts
  19,110     6.55   ¾     ¾   ¾     ¾     1  
July 2011 – September 2011
                                     
Price swap contracts
  19,320     6.55   ¾     ¾   ¾     ¾     (2 )
October 2011
                                     
Price swap contracts
  6,510     6.55   ¾     ¾   ¾     ¾     (2 )