nfx10q-03312010.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 March 31, 2010

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 April 27, 2010, there were 133,399,285 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 
 



 
 

 

TABLE OF CONTENTS
   
Page
PART I
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
     
PART II
     
     
     
     
 
 
ii
 
 


NEWFIELD EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
(Unaudited)
   
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 112     $ 78  
Accounts receivable
    352       339  
Inventories
    83       84  
Derivative assets  
    349       269  
Other current assets 
    82       123  
             Total current assets  
    978       893  
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties
     ($1,480 and $1,223 were excluded from amortization at March 31, 2010 and December 31, 2009, respectively)
      10,977         10,406  
Less—accumulated depreciation, depletion and amortization
    (5,306 )     (5,159 )
             Total property and equipment, net     5,671       5,247  
                 
Derivative assets 
    75       19  
Long-term investments 
    54       55  
Deferred taxes
    26       26  
Other assets 
    23       14  
Total assets 
  $ 6,827     $ 6,254  
   
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Accounts payable
  $ 65     $ 83  
Current debt 
    32        
Accrued liabilities 
    649       640  
Advances from joint owners 
    49       51  
Asset retirement obligation 
    10       10  
Derivative liabilities
    1       2  
Deferred taxes 
    116       87  
Total current liabilities 
    922       873  
                 
Other liabilities 
    60       55  
Derivative liabilities
    11       5  
Long-term debt 
    2,189       2,037  
Asset retirement obligation 
    88       82  
Deferred taxes 
    537       434  
Total long-term liabilities 
    2,885       2,613  
                 
Commitments and contingencies (Note 12) 
           
                 
Stockholders' equity:
               
Preferred stock ($0.01 par value; 5,000,000 shares authorized; no shares issued)
           
Common stock ($0.01 par value; 200,000,000 shares authorized at March 31, 2010 and December 31, 2009;
             135,001,290 and 134,493,670 shares issued at March 31, 2010 and December 31, 2009, respectively) 
      1         1  
Additional paid-in capital 
    1,406       1,389  
Treasury stock (at cost; 1,715,643 and 1,488,968 shares at March 31, 2010 and December 31, 2009, respectively)
    (43 )     (33 )
Accumulated other comprehensive income (loss):
               
Unrealized loss on investments
    (10 )     (11 )
Retained earnings 
    1,666       1,422  
Total stockholders' equity 
    3,020       2,768  
Total liabilities and stockholders' equity 
  $ 6,827     $ 6,254  

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


 
1

 
NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share data)
(Unaudited)
   
Three Months Ended
March 31,
 
   
2010
   
2009
 
             
Oil and gas revenues
  $ 458     $ 262  
                 
Operating expenses:
               
Lease operating 
    67       71  
Production and other taxes
    25       9  
Depreciation, depletion and amortization 
    147       159  
General and administrative 
    36       32  
Ceiling test writedown 
          1,344  
Other 
    8       2  
Total operating expenses
    283       1,617  
                 
Income (loss) from operations 
    175       (1,355 )
                 
Other income (expenses):
               
Interest expense
    (38 )     (32 )
Capitalized interest  
    12       14  
Commodity derivative income 
    237       278  
Other 
    2       3  
Total other income (expenses) 
    213       263  
                 
Income (loss) before income taxes
    388       (1,092 )
                 
Income tax provision (benefit):
               
Current
    13       5  
Deferred 
    131       (403 )
                Total income tax provision (benefit)     144       (398 )
                 
                Net income (loss) 
  $ 244     $ (694 )
                 
Income (loss) per share:
               
      Basic
  $ 1.87     $ (5.35 )
      Diluted 
  $ 1.84     $ (5.35 )
                 
Weighted average number of shares outstanding for basic income (loss) per share
    130       130  
                 
Weighted average number of shares outstanding for diluted income (loss) per share 
    133       130  

The accompanying notes to consolidated financial statements are an integral part of this statement.
 
 
 
2


NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
   
Three Months Ended
March 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
  Net income (loss) 
  $ 244     $ (694 )
                 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    147       159  
Deferred tax provision (benefit) 
    131       (403 )
Stock-based compensation
    6       8  
Ceiling test writedown
          1,344  
Commodity derivative income 
    (237 )     (278 )
Cash receipts on derivative settlements 
    102       211  
                 
  Changes in operating assets and liabilities:
               
(Increase) decrease in accounts receivable 
    (13 )     73  
(Increase) decrease in inventories 
    5       (17 )
(Increase) decrease in other current assets 
    42       (46 )
Decrease in other assets 
          7  
Decrease in accounts payable and accrued liabilities 
    (16 )     (54 )
Increase (decrease) in advances from joint owners 
    (2 )     22  
Increase in other liabilities 
    5       17  
                Net cash provided by operating activities 
    414       349  
                 
Cash flows from investing activities:
               
  Additions to oil and gas properties 
    (340 )     (403 )
  Acquisitions of oil and gas properties 
    (217 )     (9 )
  Proceeds from sales of oil and gas properties 
    2        
  Additions to furniture, fixtures and equipment 
    (2 )     (2 )
  Redemptions of investments 
    1       7  
                Net cash used in investing activities  
    (556 )     (407 )
                 
Cash flows from financing activities:
               
  Proceeds from borrowings under credit arrangements 
    198       455  
  Repayments of borrowings under credit arrangements
    (562 )     (382 )
  Net proceeds from issuance of senior subordinated notes  
    686        
  Repayment of senior notes  
    (143 )      
  Proceeds from issuances of common stock
    11        
  Purchases of treasury stock, net  
    (14 )     (1 )
                Net cash provided by financing activities 
    176       72  
                 
Increase in cash and cash equivalents 
    34       14  
Cash and cash equivalents, beginning of period
    78       24  
Cash and cash equivalents, end of period 
  $ 112     $ 38  

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

 
 
3


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, 2009
  134.5   $ 1     (1.5 )   $ (33 )   $ 1,389   $ 1,422   $ (11 )   $ 2,768  
Issuances of common and restricted stock
  0.5                           7                   7  
Treasury stock, at cost
              (0.2 )     (10 )                         (10 )
Stock-based compensation 
                              10                   10  
Comprehensive income:
                                                     
Net income 
                                    244             244  
Unrealized gain on investments
                                          1       1  
Total comprehensive income
                                                  245  
Balance, March 31, 2010 
  135.0   $ 1     (1.7 )   $ (43 )   $ 1,406   $ 1,666   $ (10 )   $ 3,020  

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

 
 
4


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 oil and gas 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, 2009.
 
  Dependence on Oil and 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 gas. Historically, the energy markets have been very volatile, and there can be no assurance that oil and gas prices will not be subject to wide fluctuations in the future.  A substantial or extended decline in oil or 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 and fair value of our derivative positions.

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 regularly assess our investments for impairment and consider any impairment to be other than temporary if we intend to sell the security, it is more likely than not that we will be required to sell the security, or we do not expect to recover our cost of the security.  We realized interest income and gains on our investment securities of $1 million for the three months ended March 31, 2010 and 2009.

 
 
5


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 FPSO’s and sold periodically as barge quantities are accumulated. The product inventory consisted of approximately 494,000 barrels and 289,000 barrels of crude oil valued at cost of $21 million and $11 million at March 31, 2010 and December 31, 2009, 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 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. For the three months ended March 31, 2010, 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 the newly effective oil and gas reserve estimation requirements (See “New Accounting Requirements” in this Note) which require use of the unweighted average first-day-of-the-month commodity prices for the prior twelve months, adjusted for market differentials 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.
 
During the first quarter of 2009, the present value (10% per annum discount rate) of estimated future net revenues from proved reserves was calculated using the end of period quoted market prices for oil and gas.

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 gas prices decrease significantly or if we have substantial downward revisions in our estimated proved reserves. At March 31, 2010, the ceiling value of our reserves was calculated based upon the unweighted average first-day-of-the-month commodity prices for the prior twelve months of $3.98 per MMBtu for natural gas and $69.61 per barrel for oil, adjusted for market differentials.  Using these prices, 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 at March 31, 2010.

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 period-end 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).

 
 
6


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 in depreciation, depletion and amortization expense on our consolidated statement of income.
     
The change in our ARO for the three months ended March 31, 2010 is set forth below (in millions):
Balance as of January 1, 2010
  $ 92  
Accretion expense
    1  
Additions
    5  
Balance at March 31, 2010
  $ 98  
Less: Current portion of ARO at March 31, 2010
    (10 )
Total long-term ARO at March 31, 2010
  $ 88  

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 in 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 first quarter of 2010, there was no change to our liability of $1 million for uncertain tax positions.  As of March 31, 2010, we had not accrued interest or penalties related to uncertain tax positions. The tax years 2006-2009 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 (IRS) commenced a limited scope audit of our U.S. income tax return for the 2005 tax year.  The IRS issued a “No Change” letter for the 2005 tax year and closed the audit.
   
Derivative Financial Instruments
 
We account for our derivative activities by applying authoritative accounting and reporting guidance which requires that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured 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. 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.  Previously, we also utilized derivatives to manage our exposure to variable interest rates.  See Note 5, “Derivative Financial Instruments—Interest Rate Swap.”

The related cash flow impact of our derivative activities are reflected as cash flows from operating activities.  See Note 5, “Derivative Financial Instruments,” for a more detailed discussion of our derivative activities.
 

 
7


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


New Accounting Requirements
     
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-03, Oil and Gas Reserve Estimation and Disclosures (ASU 2010-03), which aligns the FASB’s oil and gas reserve estimation and disclosure requirements with the requirements in the Securities and Exchange Commission’s final rule, Modernization of the Oil and Gas Reporting Requirements (Final Rule), which was issued on December 31, 2008 and became effective for the year ended December 31, 2009.  We adopted the Final Rule and ASU 2010-03 effective December 31, 2009, as a change in accounting principle that is inseparable from a change in accounting estimate.  Such a change is accounted for prospectively under the authoritative accounting guidance.  Comparative disclosures applying the new rules for periods before the adoption of ASU 2010-03 and the Final Rule are not required.

In January 2010, the FASB issued additional disclosure requirements related to fair value measurements.  The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 in the fair value measurement hierarchy, including the reasons for the transfers and disclosure of major purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 reconciliation disclosures which are effective for interim and annual periods beginning after December 15, 2010.  We adopted the provisions for the quarter ending March 31, 2010, except for the Level 3 reconciliation disclosures, which we will adopt for the quarter ending March 31, 2011.  Adopting the disclosure requirements for the quarter ending March 31, 2010 did not have an impact on our financial position or results of operations.  We do not expect adoption of the Level 3 reconciliation disclosures in 2011 to have an impact on our financial position or results of operations.


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.”

The following is the calculation of basic and diluted weighted average shares outstanding and EPS for the indicated periods:
 
   
Three Months Ended
March 31,
 
   
2010
   
2009
 
   
(In millions, except per share data)
 
Income (numerator):
           
     Net income (loss) – basic and diluted 
  $ 244     $ (694 )
                 
Weighted average shares (denominator):
               
     Weighted average shares — basic 
    130       130  
     Dilution effect of stock options and unvested restricted
stock and restricted stock units outstanding at end of period (1)
    3        
     Weighted average shares — diluted 
    133       130  
                 
Income (loss) per share:
               
     Basic 
  $ 1.87     $ (5.35 )
     Diluted 
  $ 1.84     $ (5.35 )
 
     
(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 three months ended March 31, 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 1 million shares.
 
 
 
8

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


3.  Comprehensive Income (Loss):
     
For the periods indicated, our comprehensive income (loss) consisted of the following:
 
   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
(In millions)
 
             
Net income (loss)
  $ 244     $ (694 )
Unrealized gain (loss) on investments, net of tax of $1
    1       (2 )
Total comprehensive income (loss)
  $ 245     $ (696 )
 

4.  Oil and Gas Assets:
   
Property and Equipment
     
Property and equipment consisted of the following at:

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(In millions)
 
             
Oil and gas properties:
           
Subject to amortization
  $ 9,402     $ 9,090  
Not subject to amortization
    1,480       1,223  
Gross oil and gas properties 
    10,882       10,313  
Accumulated depreciation, depletion and amortization
    (5,253 )     (5,108 )
Net oil and gas properties 
    5,629       5,205  
Other property and equipment 
    95       93  
Accumulated depreciation and amortization
    (53 )     (51 )
Net other property and equipment 
    42       42  
Total property and equipment, net
  $ 5,671     $ 5,247  

The following is a summary of Newfield’s oil and gas properties not subject to amortization as of March 31, 2010.  We believe that our evaluation activities related to substantially all of our properties not subject to amortization will be completed within four years except the Monument Butte field.  Because of its size, evaluation of the field in its entirety will take significantly longer than four years.

   
Costs Incurred In
       
   
2010
   
2009
   
2008
   
2007 and prior
   
Total
 
   
(In millions)
 
                               
Acquisition costs 
  $ 169     $ 154     $ 176     $ 389     $ 888  
Exploration costs
    101       109       54       17       281  
Development costs 
    47       40       34       27       148  
Fee mineral interests
    2                   23       25  
Capitalized interest 
    12       51       60       15       138  
          Total oil and gas properties not subject to amortization
  $ 331     $ 354     $ 324     $ 471     $ 1,480  

 
 
9

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


Maverick Basin Asset Acquisition

On February 11, 2010, we acquired certain of TXCO Resources Inc.’s assets in the Maverick Basin of southwest Texas for approximately $215 million.  In the acquisition, Newfield obtained an interest in approximately 300,000 net acres, primarily in the Pearsall and Eagle Ford shale plays, as well as production of 1,500 barrels of oil equivalent per day.  Our consolidated financial statements include the cash flows and results of operations for these assets subsequent to February 11, 2010.


5.  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, two of our derivative contracts contain 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 under the captions “Derivative assets” and “Derivative liabilities.” 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 8, “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.” Settlements of derivative contracts are included in operating cash flows on our consolidated statement of cash flows.


 
10

 
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
    
 At March 31, 2010, 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
 
Additional Put
 
Floors
 
Ceilings
 
Fair Value
 
   
Volume in
 
(Weighted
     
Weighted
     
Weighted
     
Weighted
 
Asset
 
Period and Type of Contract
 
MMMBtus
 
Average)
 
Range
 
Average
 
Range
 
Average
 
Range
 
Average
 
(Liability)
 
                                   
(In millions)
 
April 2010 – June 2010
                                     
Price swap contracts
  34,850   $ 6.41               $ 87  
July 2010 – September 2010
                                       
Price swap contracts
  35,200   6.41                 79  
October 2010 – December 2010
                                       
Price swap contracts
  28,320   6.49                 50  
January 2011 – December 2011
                                       
Price swap contracts
  63,840   6.55                 81  
    3-Way collar contracts
  42,590     $ 4.50   $ 4.50   $ 6.00   $ 6.00   $ 7.10 - $ 8.03   $ 7.84     27  
January 2012 – December 2012
                                       
    3-Way collar contracts
  25,620     4.50   4.50   5.75-6.00   5.85   6.20-7.55   6.87      
January 2013 – October 2013
                                       
    3-Way collar contracts
  21,280     4.50   4.50   5.75-6.00   5.82   6.60- 7.55   6.88      
                                    $ 324  
 
 Oil
  
       
NYMEX Contract Price Per Bbl
     
               
Collars
 
Estimated
 
       
Swaps
 
Additional Put
 
Floors
 
Ceilings
 
Fair Value
 
   
Volume in
 
(Weighted
     
Weighted
     
Weighted
     
Weighted
 
Asset
 
Period and Type of Contract
 
MBbls
 
Average)
 
Range
 
Average
 
Range
 
Average
 
Range
 
Average
 
(Liability)
 
                                     
(In millions)
 
April 2010 – June 2010
                                       
    Price swap contracts
  272     $ 86.44               $ 1  
    Collar contracts
  819           $125.50–$130.50   $ 127.97   $ 170.00   $ 170.00     36  
    3-Way collar contracts
  364       $ 50.00-$60.00   $ 55.00   60.00-75.00   67.50   100.00-112.10   106.28     ¾  
July 2010 – September 2010
                                         
    Price swap contracts
  274     86.42                 ¾  
    Collar contracts
  828           125.50–130.50   127.97   170.00   170.00     36  
    3-Way collar contracts
  368       50.00-60.00   55.00   60.00-75.00   67.50   100.00-112.10   106.28     ¾  
October 2010 – December 2010
                                         
    Price swap contracts
  274     86.42                 ¾  
    Collar contracts
  828           125.50–130.50   127.97   170.00   170.00     35  
    3-Way collar contracts
  368       50.00-60.00   55.00   60.00-75.00   67.50   100.00-112.10   106.28     ¾  
January 2011 – December 2011
                                         
    3-Way collar contracts
         4,564       60.00-65.00   60.80   75.00-80.00   75.80   102.25-121.50   108.30     1  
January 2012 – December 2012
                                         
    3-Way collar contracts
         3,294       60.00   60.00   75.00   75.00   111.00-111.50   111.31     (3 )
                                      $ 106  
 
 
11

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

Basis Contracts
 
 
At March 31, 2010, we had natural gas basis contracts that are not designated for hedge accounting to lock in the differential between the NYMEX Henry Hub posted prices and those of our physical pricing points in the Rocky Mountains and Mid-Continent, as set forth in the table below.

                   
   
Rocky Mountains
   
Mid-Continent
   
Estimated
 
         
Weighted
         
Weighted
   
Fair Value
 
   
Volume in
   
Average
   
Volume in
   
Average
   
Asset
 
   
MMMBtus
   
Differential
   
MMMBtus
   
Differential
   
(Liability)
 
                           
(In millions)
 
April 2010 – June 2010
    1,380     $ (0.99 )     1,820     $ (0.55 )   $ (2 )
July 2010 – September 2010
    1,380     $ (0.99 )     1,840     $ (0.55 )     (2 )
October 2010 – December 2010 
    1,380     $ (0.99 )     1,840     $ (0.55 )     (1 )
January 2011 – December 2011
    5,280     $ (0.95 )     10,350     $ (0.55 )     (5 )
January 2012 – December 2012
    4,920     $ (0.91 )     18,300     $ (0.55 )     (8 )
                                    $ (18 )

Interest Rate Swap
 
We previously entered into an interest rate swap agreement to take advantage of low interest rates and to obtain what we viewed as a more desirable proportion of variable and fixed rate debt. The agreement was designated as a fair value hedge of $50 million principal amount of our $175 million 7⅝% Senior Notes due 2011.  The interest rate swap provided for us to pay variable and receive fixed interest payments.  Changes in the fair value of derivatives designated as fair value hedges were recognized as offsets to the changes in the fair value of the exposure being hedged. As a result, at December 31, 2009, the fair value of our interest rate swap was reflected as a derivative asset on our consolidated balance sheet and changes in its fair value were recorded as an adjustment to the carrying value of the associated debt. Receipts and payments related to our interest rate swap were reflected in interest expense.  The related cash flow impact was reflected as cash flows from operating activities in our consolidated statement of cash flows.  During the first quarter of 2010, we terminated the swap and received approximately $2 million in settlement of the swap.  The settlement of the swap is included under the caption “Operating expenses – Other” on our consolidated statement of income and partially offsets the early redemption premium paid for the tender of the associated 7⅝% Senior Notes due 2011.  See Note 9, "Debt Senior and Senior Subordinated Notes" for a detailed discussion of this transction.

Additional Disclosures about Derivative Instruments and Hedging Activities

At March 31, 2010, we had derivative financial instruments recorded in our balance sheet as set forth below.

       
Estimated
 
Type of Contract
 
Balance Sheet Location
 
Fair Value
 
       
(In millions)
 
Derivatives not designated as hedging instruments:
         
    Natural gas contracts
 
Derivative assets – current
  $ 245  
    Oil contracts
 
Derivative assets – current
    110  
    Basis contracts
 
Derivative assets – current
    (6 )
    Natural gas contracts
 
Derivative assets – noncurrent
    79  
    Oil contracts
 
Derivative assets – noncurrent
    3  
    Basis contracts
 
Derivative assets – noncurrent
    (7 )
    Oil contracts
 
Derivative liabilities – current
    (1 )
    Oil contracts
 
Derivative liabilities – noncurrent
    (6 )
    Basis contracts
 
Derivative liabilities – noncurrent
    (5 )
Total derivatives not designated as hedging instruments
    412  
             
Net derivative assets
  $ 412  


 
12

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


The amount of gain (loss) recognized in income related to our derivative financial instruments was as follows:
           
       
Three Months Ended
 
   
Location of Gain/(Loss)
 
March 31,
 
Type of Contract
 
Recognized in Income
 
2010
   
2009
 
       
(In millions)
 
Derivatives not designated as hedging instruments:
               
Natural gas contracts
 
Commodity derivative income
  $ 253     $ 274  
Oil contracts
 
Commodity derivative income
    (11 )     17  
Basis contracts
 
Commodity derivative income
    (5 )     (13 )
           Total  
 
  $ 237     $ 278  
 
 
The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions.  Our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty and we have netting arrangements with all of our counterparties that provide for offsetting payables against receivables from separate derivative instruments with that counterparty.  At March 31, 2010, Barclays Capital, JPMorgan Chase Bank, N.A., Credit Suisse Energy LLC, Credit Agricole Corporate & Investment Bank London Branch, J Aron & Company and Societe Generale were the counterparties with respect to 86% of our future hedged production, the largest of which was J Aron & Company and accounted for 28% of our future hedged production.

A significant number of the counterparties to our derivative instruments also are lenders under our credit facility.  Our credit facility, senior subordinated notes and substantially all of our derivative instruments contain provisions that provide for cross defaults and acceleration of those debt and derivative instruments in certain situations.
 
 
6.  Accounts Receivable:
     
As of the indicated dates, our accounts receivable consisted of the following:
   
March 31,
2010
   
December 31,
2009
 
   
(In millions)
 
             
Revenue
  $ 213     $ 214  
Joint interest  
    121       114  
Other   
    24       17  
Reserve for doubtful accounts 
    (6 )     (6 )
Total accounts receivable 
  $ 352     $ 339  
 
 
7.  Accrued Liabilities:
     
As of the indicated dates, our accrued liabilities consisted of the following:
   
March 31,
2010
   
December 31,
2009
 
   
(In millions)
 
             
Revenue payable 
  $ 68     $ 55  
Accrued capital costs 
    295       289  
Accrued lease operating expenses  
    44       47  
Employee incentive expense  
    30       61  
Accrued interest on debt
    44       25  
Taxes payable   
    114       101  
Other   
    54       62  
       Total accrued liabilities  
  $ 649     $ 640  


 
13

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


8.  Fair Value Measurements:
     
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The authoritative guidance requires disclosure of the framework for measuring fair value and requires that fair value measurements be classified and disclosed in one of the following categories:

 
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
     
 
Level 2:
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity price swaps, certain investments and interest rate swaps.
     
 
Level 3:
Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our valuation models for derivative contracts are primarily industry-standard models (i.e., Black-Scholes) that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, (c) volatility factors, (d) counterparty credit risk and (e) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our valuation methodology for investments is a discounted cash flow model that considers various inputs including: (a) the coupon rate specified under the debt instruments, (b) the current credit ratings of the underlying issuers, (c) collateral characteristics and (d) risk adjusted discount rates. Level 3 instruments primarily include derivative instruments, such as basis swaps, commodity price collars and floors and some financial investments. Although we utilize third party broker quotes to assess the reasonableness of our prices and valuation techniques, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.
     
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
 

 
14


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


Fair Value of Investments and Derivative Instruments

The following tables summarize the valuation of our investments and financial instrument assets (liabilities) by pricing levels:

   
Fair Value Measurement Classification
       
   
Quoted Prices
                   
   
in Active
   
Significant
             
   
Markets for
   
Other
   
Significant
       
   
Identical Assets
   
Observable
   
Unobservable
       
   
or Liabilities
   
Inputs
   
Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(In millions)
 
As of December 31, 2009:
                       
   Money market fund investments
  $ 15     $     $     $ 15  
   Investments  available-for-sale:
                               
Equity securities
    7                   7  
Auction rate securities
                40       40  
   Oil and gas derivative swap contracts
          119       (14 )     105  
   Oil and gas derivative option contracts
                173       173  
   Interest rate swap
          3             3  
Total
  $ 22     $ 122     $ 199     $ 343  
                                 
As of March 31, 2010:
                               
Money market fund investments
  $ 67     $     $     $ 67  
Investments available-for-sale:
                               
Equity securities
    8                   8  
Auction rate securities
                40       40  
Oil and gas derivative swap contracts
          298       (18 )     280  
   Oil and gas derivative option contracts
                132       132  
Total
  $ 75     $ 298     $ 154     $ 527  
                                 

The determination of the fair values above incorporates various factors which include not only the impact of our non-performance risk on our liabilities but also the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests).  We utilize credit default swap values to assess the impact of non-performance risk when evaluating both our liabilities to and receivables from counterparties.
     
As of March 31, 2010, we continued to hold $40 million of auction rate securities maturing beginning in 2033 that are classified as a Level 3 fair value measurement. This amount reflects a decrease in the fair value of these investments of $13 million ($10 million net of tax), recorded under the caption “Accumulated other comprehensive income (loss)” on our consolidated balance sheet.  The debt instruments underlying these investments are investment grade (rated BBB- or better) and are guaranteed by the United States government or backed by private loan collateral.  We do not believe the decrease in the fair value of these securities is permanent because we currently intend to hold these investments until the auction succeeds, the issuer calls the securities or the securities mature. Our current available borrowing capacity under our credit arrangements provides us the liquidity to continue to hold these securities.
     

 
15

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


The following tables set forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the indicated periods:

 
   
Investments
   
Derivatives
   
Total
 
   
(In millions)
 
Balance at January 1, 2009
  $ 59     $ 542     $ 601  
    Total realized or unrealized gains (losses):
                       
        Included in earnings
          27       27  
        Included in other comprehensive income (loss)
    (2 )           (2 )
    Purchases, issuances and settlements
    (7 )     (77 )     (84 )
    Transfers in and out of Level 3
                 
Balance at March 31, 2009
  $ 50     $ 492     $ 542  
                         
Change in unrealized gains (losses) relating to investments and derivatives still held at March 31, 2009
  $ (2 )   $ 9     $ 7  
                         
                         
Balance at January 1, 2010
  $ 40     $ 159     $ 199  
    Total realized or unrealized gains (losses):
                       
        Included in earnings
          (20 )     (20 )
        Included in other comprehensive income (loss)
    1             1  
    Purchases, issuances and settlements
    (1 )     (25 )     (26 )
    Transfers in and out of Level 3
                 
Balance at March 31, 2010
  $ 40     $ 114     $ 154  
                         
Change in unrealized gains (losses) relating to investments and derivatives still held at March 31, 2010
  $ 1     $ (14 )   $ (13 )

 
 
16


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


Fair Value of Debt

The estimated fair value of our notes, based on quoted market prices on March 31, 2010, was as follows (in millions):

7 ⅝% Senior Notes due 2011
  $ 32  
6 ⅝% Senior Subordinated Notes due 2014
    336  
6 ⅝% Senior Subordinated Notes due 2016
    560  
7 ⅛% Senior Subordinated Notes due 2018
    608  
6 ⅞% Senior Subordinated Notes due 2020
    694  

Amounts outstanding under our credit arrangements at March 31, 2010 are stated at cost, which approximates fair value.  Please see Note 9, “Debt.”
 
 
9.  Debt:
     
As of the indicated dates, our debt consisted of the following:
 
   
March 31,
2010
   
December 31,
2009
 
   
(In millions)
 
Senior unsecured debt:
           
Revolving credit facility:
           
LIBOR based loans
  $ 20     $ 384  
                 
7 ⅝% Senior Notes due 2011 
    32       175  
Fair value of interest rate swap (1)
          3  
Total senior unsecured notes  
    32       178  
Total senior unsecured debt 
    52       562  
                 
6 ⅝% Senior Subordinated Notes due 2014 
    325       325  
6 ⅝% Senior Subordinated Notes due 2016 
    550       550  
7 ⅛% Senior Subordinated Notes due 2018 
    600       600  
6 ⅞% Senior Subordinated Notes due 2020
    694        
Total debt
    2,221       2,037  
Less: Current portion of debt
    32        
Total long-term debt 
  $ 2,189     $ 2,037  

     
(1)
 
We previously hedged $50 million principal amount of our $175 million 7⅝% Senior Notes due 2011 through an interest rate swap.  The swap provided for us to pay variable and receive fixed interest payments.  During the first quarter of 2010, we terminated the swap and received approximately $2 million in settlement of the swap.  See Note 5, “Derivative Financial Instruments – Interest Rate Swap.”

Credit Arrangements
     
We have a revolving credit facility which provides for loan commitments of $1.25 billion from a syndicate of more than 15 financial institutions, led by JPMorgan Chase Bank, as agent, and matures June 2012. However, the amount that we can borrow under the facility could be limited by changing expectations of future oil and gas prices because the maximum amount that we can borrow under the facility is determined by our lenders annually each May (and may be adjusted 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. We do not believe we could access such additional capacity in the current credit market. As of March 31, 2010, the largest commitment was 16% of total commitments.


 
17

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


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 March 31, 2010).

We pay commitment fees on available but undrawn amounts based on a grid of our debt rating (0.175% per annum at March 31, 2010). We incurred fees under this arrangement of approximately $0.5 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively, which are recorded in interest expense on our consolidated statement of income.

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 reserves 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 March 31, 2010 we were in compliance with all of our debt covenants.

As of March 31, 2010, we had no 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 March 31, 2010).
     
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 institutions.

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.

Senior and Senior Subordinated Notes

On January 25, 2010, we sold $700 million of 6⅞% Senior Subordinated Notes due 2020 and received net proceeds of $686 million (net of discount and offering costs).  These notes were issued at 99.109% of par to yield 7%.  We used $294 million of the net proceeds to repay all of our then outstanding borrowings under our credit facility and $215 million to fund the acquisition of assets from TXCO Resources Inc.

On February 19, 2010, we accepted for purchase and payment approximately $143 million of our $175 million aggregate principal amount of 7⅝% Senior Notes due 2011, representing approximately 82% of the outstanding principal.  The tender included the payment of an early redemption premium of $10 million.  This premium was recorded under the caption “Operating expenses – Other” on our consolidated statement of income.  We funded the tender offer with a portion of the proceeds from our January 25, 2010 Senior Subordinated Notes issuance.


 
18

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


10.  Income Taxes:
     
The provision (benefit) for income taxes for the indicated periods was different than the amount computed using the federal statutory rate (35%) for the following reasons:

   
Three Months Ended
 
   
March 31,
 
   
2010
   
2009
 
   
(In millions)
 
             
Amount computed using the statutory rate
  $ 136     $ (382 )
Increase (decrease) in taxes resulting from:
               
State and local income taxes, net of federal effect
    6       (19 )
Net effect of different tax rates in non-U.S. jurisdictions
    2        
Valuation allowance
          3  
Total income tax provision (benefit)
  $ 144     $ (398 )
 
As of March 31, 2010, we had net operating loss (NOL) carryforwards for international income tax purposes of approximately $17 million. We currently estimate that we will not be able to utilize our international NOLs because we do not have sufficient estimated future taxable income in the appropriate jurisdictions.  Therefore, valuation allowances have been established for these items.  Estimates of future taxable income can be significantly affected by changes in oil and gas prices, estimates of the timing and amount of future production and estimates of future operating and capital costs.
 
 
11.  Stock-Based Compensation:
     
We make stock-based compensation awards to employees through the Newfield Exploration Company 2009 Omnibus Stock Plan (the 2009 Omnibus Stock Plan) and to non-employee directors through the Newfield Exploration Company 2009 Non-Employee Director Restricted Stock Plan.  We utilize the Black-Scholes option pricing model to measure the fair value of stock options and a lattice-based model for our performance and market-based restricted stock and restricted stock units.
     
Historically, we have used unissued shares of stock when stock options are exercised.  Beginning in 2009, we began to utilize treasury shares when stock options are exercised, restricted stock is issued or restricted stock units vest.
     
Shares available for grant under our 2009 Omnibus Stock Plan are reduced by 1.5 times the number of shares of restricted stock or restricted stock units awarded under the plan, and are reduced by 1 times the number of shares subject to stock options awarded under the plan.  At March 31, 2010, we had approximately (1) 1.9 million additional shares available for issuance pursuant to our existing employee and director plans if all future employee awards under our 2009 Omnibus Stock Plan are stock options, or (2) 1.2 million additional shares available for issuance pursuant to our existing employee and director plans if all future employee awards under our 2009 Omnibus Stock Plan are restricted stock or restricted stock units. Thus far, all awards under our 2009 Omnibus Stock Plan have been restricted stock unit awards.

For the three month periods ended March 31, 2010 and 2009, we recorded stock-based compensation expense of $10 million and $12 million, respectively, for all plans. Of these amounts, $3 million and $4 million, respectively, were capitalized in oil and gas properties.
     
The excess tax benefit realized from stock options exercised is recognized as a credit to additional paid in capital and is calculated as the amount by which the tax deduction we receive exceeds the deferred tax asset associated with recorded stock compensation expense. We did not realize an excess tax benefit from stock compensation for the three months ended March 31, 2010 or 2009 because we do not anticipate having sufficient taxable income to fully realize the deduction. Any excess tax benefits associated with the exercise of stock options in 2010 will be realized when the deduction can be utilized to reduce current income taxes on future tax returns.


 
19

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


As of March 31, 2010, we had approximately $68 million of total unrecognized stock-based compensation expense related to unvested stock-based compensation awards. This compensation expense is expected to be recognized on a straight-line basis over the applicable remaining vesting period. The full amount is expected to be recognized within approximately five years.

Stock Options.  We have granted stock options under several plans. Options generally expire ten years from the date of grant and become exercisable at the rate of 20% per year. The exercise price of options cannot be less than the fair market value per share of our common stock on the date of grant.

The following table provides information about stock option activity for the three months ended March 31, 2010:
 
   
Number of
Shares
Underlying
Options
   
Weighted
Average
Exercise
Price
per Share
   
Weighted
Average
Grant Date
Fair Value
per Share
   
Weighted
Average
Remaining
Contractual
Life
   
 
Aggregate
Intrinsic
Value(1)
 
   
(In millions)
               
(In years)
   
(In millions)
 
Outstanding at December 31, 2009 
   2.9       $   29.82              4.7       $   56    
                                       
Granted    
   ―        ―       $                      
Exercised  
   (0.5 )      22.64                        15    
Forfeited 
   ―        ―                            
Outstanding at March 31, 2010 
   2.4       $   31.29                4.8       $   49    
                                         
Exercisable at March 31, 2010 
   2.1       $   28.90                4.4       $   48    

     
(1)
The intrinsic value of a stock option is the amount by which the market value of our common stock at the indicated date, or at the time of exercise, exceeds the exercise price of the option.
   
On March 31, 2010, the last reported sales price of our common stock on the New York Stock Exchange was $52.05 per share.

The following table summarizes information about stock options outstanding and exercisable at March 31, 2010:

Options Outstanding
 
Options Exercisable
   
Number of
 
Weighted
    Weighted  
Number of
 
Weighted
   
Shares
 
Average
    Average  
Shares
 
Average
Range of
 
Underlying
 
Remaining
    Exercise Price  
Underlying
 
Exercise Price
Exercise Prices
 
Options
 
Contractual Life
    per Share  
Options
 
per Share
   
(In millions)
 
(In years)
       
(In millions)
   
$ 12.51 to $ 17.50   0.4   2.4    $    16.60   0.4   $   16.60
17.51 to 22.50
  0.2   2.4       18.70   0.2       18.70
22.51 to 27.50
  0.4   3.9       24.76   0.4       24.76
27.51 to 35.00
  0.7   4.8       31.19   0.7       31.18
35.01 to 41.72
  0.1   5.1       37.33   0.1       37.03
41.73 to 48.45
  0.6   7.9       48.85   0.3       48.45
    2.4   4.8    $    31.29   2.1   $   28.90
     
Restricted Stock.  At March 31, 2010, our employees held an aggregate of 2.3 million shares of restricted stock and restricted stock units that primarily vest over a service period of three to five years. The vesting of these shares and units is dependant upon the employee’s continued service with our company.  In addition, at March 31, 2010, our employees held 0.3 million shares of restricted stock subject to performance-based vesting criteria (substantially all of which are considered market-based restricted stock under authoritative accounting guidance).
     

 
20


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


The following table provides information about restricted stock and restricted stock unit activity for the three months ended March 31, 2010:
   
Service-Based
Shares
   
 
Performance/
Market-Based
Shares
   
 
 
 
Total Shares
   
Weighted
Average
Grant Date
Fair Value
per Share
 
   
(In thousands, except per share data)
 
                         
Non-vested shares outstanding at December 31, 2009
    2,424       782       3,206     $ 31.60  
                                 
Granted
    298       140       438       50.14  
Forfeited
    (46 )     (73 )     (119 )     28.83  
Vested
    (347 )     (521 )     (868 )     31.43  
                                 
Non-vested shares outstanding at March 31, 2010
    2,329       328       2,657     $ 34.83  
     
The total fair value of restricted stock and restricted stock units that vested during the three months ended March 31, 2010 was $27 million.
     
Employee Stock Purchase Plan.  Pursuant to our employee stock purchase plan, for each six month period beginning on January 1 or July 1 during the term of the plan, each eligible employee has the opportunity to purchase our common stock for a purchase price equal to 85% of the lesser of the fair market value of our common stock on the first day of the period or the last day of the period. No employee may purchase common stock under the plan valued at more than $25,000 in any calendar year. Employees of our foreign subsidiaries are not eligible to participate in the plan.
     
During the first three months of 2010, options to purchase 40,821 shares of our common stock were issued under the plan.  The weighted average fair value of each option was $13.08 per share.  The fair value of the options granted was determined using the Black-Scholes option valuation method assuming no dividends, a risk-free weighted average interest rate of 0.20%, an expected life of six months and weighted average volatility of 43%.  At March 31, 2010, 358,651 shares of our common stock remained available for issuance under the plan.
 
 
12.  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.
 
 
13.  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 the geographic operating segment information as of and for the three months ended March 31, 2010 and 2009. Income tax allocations have been determined based on statutory rates in the applicable geographic segment.


 
21

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

   
Domestic
   
Malaysia
   
China
   
Other
International
   
Total
 
   
(In millions)
 
Three Months Ended March 31, 2010:
                             
                               
Oil and gas revenues 
  $ 359     $ 84     $ 15     $     $ 458