nfx10q-09302011.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, 2011

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)

4 Waterway Square Place
Suite 100
The Woodlands, Texas 77380
(Address and Zip Code of principal executive offices)

(281) 210-5100
(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 19, 2011, there were 134,597,964 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
 


 
 
 
 


TABLE OF CONTENTS
   
Page
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
     
     
     
     
     

 
 
 


 NEWFIELD EXPLORATION COMPANY  
CONSOLIDATED BALANCE SHEET
 
(In millions, except share data)
 
(Unaudited)
 
 
September 30,
2011
 
December 31,
2010
 
 
ASSETS
 
Current assets:
           
  Cash and cash equivalents
  $ 31     $ 39  
  Accounts receivable
    322       354  
  Inventories
    107       79  
  Derivative assets
    170       197  
  Other current assets
    78       62  
   Total current assets
    708       731  
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($2,346
           
   and $1,658 were excluded from amortization at September 30, 2011 and December 31, 2010, respectively)
14,357       12,399  
Less ─ accumulated depreciation, depletion and amortization
    (6,363 )     (5,791 )
   Total property and equipment, net
    7,994       6,608  
                 
Derivative assets
    67       39  
Long-term investments
    50       48  
Deferred taxes
    29       29  
Other assets
    55       39  
   Total assets
  $ 8,903     $ 7,494  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
  Accounts payable
  $ 97     $ 92  
  Accrued liabilities
    747       670  
  Advances from joint owners
    56       51  
  Asset retirement obligation
    10       11  
  Derivative liabilities
    6       53  
  Deferred taxes
    57       51  
   Total current liabilities
    973       928  
                 
     Other liabilities
    51       56  
     Derivative liabilities
    1       46  
     Long-term debt
    2,985       2,304  
     Asset retirement obligation
    110       97  
     Deferred taxes
    945       720  
   Total long-term liabilities
    4,092       3,223  
                 
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 September 30, 2011 and December 31,
           
   2010; 136,320,031 and 135,910,641 shares issued at September 30, 2011 and December 31, 2010, respectively)
1       1  
Additional paid-in capital
    1,482       1,450  
Treasury stock (at cost, 1,721,720 and 1,664,538 shares at September 30, 2011 and December 31, 2010, respectively)
(51 )     (41 )
Accumulated other comprehensive loss
    (10 )     (12 )
Retained earnings
    2,416       1,945  
   Total stockholders' equity
    3,838       3,343  
   Total liabilities and stockholders' equity
  $ 8,903     $ 7,494  
                 
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
September 30,
   
Nine Months Ended
September 30,
 
 
   
2011
   
2010
   
2011
   
2010
 
                         
Oil and gas revenues
  $ 628     $ 449     $ 1,794     $ 1,355  
                                 
Operating expenses:
                               
  Lease operating
    115       86       333       237  
  Production and other taxes
    95       21       245       77  
  Depreciation, depletion and amortization
    189       156       528       463  
  General and administrative
    51       40       132       117  
  Other
                      10  
Total operating expenses
    450       303       1,238       904  
                                 
Income from operations
    178       146       556       451  
                                 
Other income (expenses):
                               
  Interest expense
    (43 )     (39 )     (124 )     (116 )
  Capitalized interest
    24       15       61       43  
  Commodity derivative income
    262       131       249       414  
  Other
    3       1       2       2  
Total other income
    246       108       188       343  
                                 
Income before income taxes
    424       254       744       794  
                                 
Income tax provision:
                               
  Current
    9       7       39       34  
  Deferred
    146       86       234       259  
Total income tax provision
    155       93       273       293  
                                 
Net income
  $ 269     $ 161     $ 471     $ 501  
                                 
Earnings per share:
                               
  Basic
  $ 2.00     $ 1.22     $ 3.52     $ 3.80  
  Diluted
  $ 1.99     $ 1.20     $ 3.49     $ 3.75  
                                 
Weighted-average number of shares outstanding for basic earnings per share
  134       132       134       132  
                                 
Weighted-average number of shares outstanding for diluted earnings per share
  135       134       135       134  
                                 
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)
 
             
   
Nine Months Ended
September 30,
 
 
   
2011
   
2010
 
Cash flows from operating activities:
       
  Net income
  $ 471     $ 501  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
  Depreciation, depletion and amortization
    528       463  
  Deferred tax provision
    234       259  
  Stock-based compensation
    20       16  
  Commodity derivative income
    (249 )     (414 )
  Cash receipts on derivative settlements, net
    156       345  
  Other non-cash charges
    2       3  
Changes in operating assets and liabilities:
               
  Decrease in accounts receivable
    34       63  
  (Increase) decrease in inventories
    (24 )     3  
  (Increase) decrease in other current assets
    (17 )     49  
  Increase in other assets
    (6 )     (14 )
  Increase in accounts payable and accrued liabilities
    24       26  
  Increase (decrease) in advances from joint owners
    5       (1 )
  Increase (decrease) in other liabilities
    (5 )     8  
  Net cash provided by operating activities
    1,173       1,307  
                 
Cash flows from investing activities:
               
  Additions to oil and gas properties
    (1,723 )     (1,191 )
  Acquisitions of oil and gas properties
    (299 )     (209 )
  Proceeds from sales of oil and gas properties
    202       14  
  Additions to furniture, fixtures and equipment
    (23 )     (11 )
  Redemptions of investments
    1       5  
  Net cash used in investing activities
    (1,842 )     (1,392 )
                 
Cash flows from financing activities:
               
  Proceeds from borrowings under credit arrangements
    3,148       558  
  Repayments of borrowings under credit arrangements
    (3,217 )     (942 )
  Proceeds from issuance of senior subordinated notes
          694  
  Proceeds from issuance of senior notes
    750        
  Debt issue costs
    (16 )     (8 )
  Repayment of senior notes
          (175 )
  Proceeds from issuances of common stock
    12       22  
  Purchases of treasury stock, net
    (16 )     (14 )
  Net cash provided by financing activities
    661       135  
                 
Increase (decrease) in cash and cash equivalents
    (8 )     50  
Cash and cash equivalents, beginning of period
    39       78  
Cash and cash equivalents, end of period
  $ 31     $ 128  
                 
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)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
Balance, December 31, 2010
135.9
 
$
1
 
(1.7)
 
$
(41)
 
$
1,450    
$
1,945
 
$
(12
)
 
$
3,343
 
Issuances of common stock
0.4
   
 — 
          12
 
         
12
 
Stock-based compensation
                  26
 
         
26
 
Treasury stock, net
         
 — 
 
(10)
  (6
)
          (16
)
Comprehensive income:
                               
    Net income
                     
471
     
471
 
    Unrealized gain on investments, net of tax of $(1)
                            2    
2
 
        Total comprehensive income
                             
473
 
Balance, September 30, 2011
136.3
 
$
1
 
(1.7)
 
$
(51)
    1,482    
$
2,416
 
$
(10
)
 
$
3,838
 
 
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, Appalachia 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, 2010.
 
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 the fair value of our derivative positions.

Investments

Investments consist primarily of debt and equity securities, as well as auction rate securities, a majority 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 net gains on our investment securities of approximately $0.3 million and $0.4 million for the three-month periods ended September 30, 2011 and 2010, respectively, and $1 million for each of the nine-month periods ended September 30, 2011 and 2010.

 
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.  Substantially all of the crude oil from our operations offshore Malaysia and China is produced into FPSOs and sold periodically as barge quantities are accumulated.  The product inventory consisted of approximately 384,000 barrels and 277,000 barrels of crude oil valued at cost of $29 million and $15 million at September 30, 2011 and December 31, 2010, respectively.  Cost for purposes of the carrying value of oil inventory is the sum of production costs and depletion 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.  We capitalized $30 million and $17 million of internal costs during the three months ended September 30, 2011 and 2010, respectively, and $81 million and $53 million during the nine months ended September 30, 2011 and 2010, respectively.  Interest expense related to unproved properties is also capitalized into oil and gas properties.
     
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.  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 oil and gas reserve estimation requirements, 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; 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 gas prices decrease significantly or if we have substantial downward revisions in our estimated proved reserves.  At September 30, 2011, 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 $4.16 per MMBtu for natural gas and $94.48 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 September 30, 2011.

 
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 nine months ended September 30, 2011 is set forth below (in millions):

 
Balance as of January 1, 2011
 
$
 108
 
 
     Accretion expense
   
 8
 
 
     Additions
   
 9
 
 
     Settlements
   
 (5
 
Balance at September 30, 2011
   
 120
 
 
Less: Current portion of ARO at September 30, 2011
   
 (10
 
Total long-term ARO at September 30, 2011
 
$
 110
 

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.

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.  We also have utilized derivatives to manage our exposure to variable interest rates.

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 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 was effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 reconciliation disclosures, which were effective for interim and annual periods beginning after December 15, 2010.  We adopted the provisions for the quarter ended March 31, 2010, except for the Level 3 reconciliation disclosures, which we adopted for the quarter ended March 31, 2011.  Adopting the disclosure requirements did not have a material impact on our financial position or results of operations.

In May 2011, the FASB issued additional guidance regarding fair value measurement and disclosure requirements.  The most significant change will require us, for Level 3 fair value measurements, to disclose quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements.  The guidance is effective for interim and annual periods beginning on or after December 15, 2011.  We do not expect adoption of the additional fair value measurement and disclosure requirements to have a material impact on our financial position or results of operations.

In June 2011, the FASB issued guidance impacting the presentation of comprehensive income.  The guidance eliminates the current option to report components of other comprehensive income in the statement of changes in equity.  The guidance is intended to provide a more consistent method of presenting non-owner transactions that affect an entity's equity.  The guidance is effective for interim and annual periods beginning on or after December 15, 2011.  We do not expect adoption of the comprehensive income presentation 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 incorporate 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.”
 

 
8

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,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In millions, except per share data)
 
Income (numerator):
                       
 
Net income — basic and diluted
  $ 269     $ 161     $ 471     $ 501  
                                   
Weighted-average shares (denominator):
                               
 
Weighted-average shares — basic
    134       132       134       132  
 
Dilution effect of stock options and unvested restricted stock
                               
 
and restricted stock units outstanding at end of period (1) 
    1       2       1       2  
 
Weighted-average shares — diluted
    135       134       135       134  
                                   
Earnings per share:
                               
 
Basic
  $ 2.00     $ 1.22     $ 3.52     $ 3.80  
 
Diluted
  $ 1.99     $ 1.20     $ 3.49     $ 3.75  
                                   
(1)
 
The calculation of shares outstanding for diluted EPS does not include the effect of one million unvested restricted stock and restricted stock units for each of the three and nine-month periods ended September 30, 2011 and 2010, respectively, because to do so would be anti-dilutive.
 
 
 
3.  Comprehensive Income:

        For the periods indicated, our comprehensive income consisted of the following:

  Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2011
   2010  
2011
 
2010
 
 
(In millions)
 
 Net income
 $ 269    $  161    $ 471    $ 501  
 Unrealized gain (loss) on investments, net of tax of $1 and ($1) for the three
    and nine-month periods ended September 30, 2011, respectively, and net
    of tax of $1 for the nine-month period ended September 30, 2010
  (2 )  —     2     (2 )
    Total comprehensive income
 $ 267    $ 161    $ 473    $ 499  

 
 
9

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

4. Oil and Gas Assets:
 
  Property and Equipment
 
     As of the indicated dates, our property and equipment consisted of the following:
 
   
September 30,
2011
   
December 31,
2010
 
   
(In millions)
 
Oil and gas properties:
           
Subject to amortization
  $ 11,874     $ 10,627  
Not subject to amortization
    2,346       1,658  
Gross oil and gas properties
    14,220       12,285  
Accumulated depreciation, depletion and amortization
    (6,293 )     (5,730 )
Net oil and gas properties
    7,927       6,555  
Other property and equipment
    137       114  
Accumulated depreciation and amortization
    (70 )     (61 )
Net other property and equipment
    67       53  
Total property and equipment, net
  $ 7,994     $ 6,608  

The following is a summary of our oil and gas properties not subject to amortization as of September 30, 2011.  We believe that our evaluation activities related to substantially all of our conventional properties not subject to amortization will be completed within four years.  Because of the size of our unconventional resource plays, the entire evaluation will take significantly longer than four years.  At September 30, 2011, approximately 75% of oil and gas properties not subject to amortization were associated with our unconventional resource plays.
 
   
Costs Incurred In
       
   
2011
   
2010
   
2009
   
2008 and prior
   
Total
 
   
(In millions)
 
Acquisition costs
  $ 370     $ 357     $ 143     $ 464     $ 1,334  
Exploration costs
    450       78       61       67       656  
Development costs
    42       32       16       48       138  
Fee mineral interests
                      23       23  
Capitalized interest
    61       58       51       25       195  
Total oil and gas properties not subject to amortization
$ 923     $ 525     $ 271     $ 627     $ 2,346  

    Uinta Basin Asset Acquisitions

       On May 17, 2011, we closed two previously announced transactions to acquire assets in the Uinta Basin of Utah for a total of approximately $299 million.  The assets include approximately 66,000 net acres, which are largely undeveloped and located north of our Greater Monument Butte field.

Other Asset Sales

During 2011, we sold certain non-strategic domestic assets for approximately $202 million.  The cash flows and results of operations for the assets sold are included in our consolidated financial statements up to the date of sale.


 
10

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


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.
     
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 realized and unrealized 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.
 

 
11

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
At September 30, 2011, 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)
 
October 2011 – December 2011
                                     
Price swap contracts
  12,030   $6.03               $ 27  
    3-Way collar contracts
  17,440     $4.50   $4.50   $5.50-$6.00   $5.86   $6.60-$8.03   $7.37     23  
January 2012 – December 2012
                                       
Price swap contracts
  18,300   5.42                 23  
    3-Way collar contracts
  83,570     3.50-4.50   4.28   5.00-6.00   5.49   5.20-7.55   6.36     70  
January 2013 – December 2013
                                       
Price swap contracts
  18,250   5.33                 9  
    3-Way collar contracts
  39,530     3.50-4.50   4.04   5.00-6.00   5.44   6.00- 7.55   6.48     21  
                                    $ 173  
 
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)
 
October 2011 – December 2011
                                     
    Price swap contracts
  920   $81.51               $ 2  
    3-Way collar contracts
  1,932   $60.00-$90.00   $66.90 $75.00-$100.00   $81.67 $102.25-$129.75   $111.68     10  
January 2012 – December 2012
                                       
    3-Way collar contracts
  12,810     55.00-90.00   66.86   75.00-100.00   82.96   88.20-137.80   111.14     37  
January 2013 – December 2013
                                       
    3-Way collar contracts
  4,745     55.00   55.00   80.00   80.00   109.50-111.40   110.54     20  
                                    $ 69  
 
 
 
12

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

Basis Contracts
 
At September 30, 2011, 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
Fair Value
Asset
(Liability)
     
Weighted-
Average
Differential
     Weighted-
Average
Differential
 
 
Volume in
MMMBtus
    Volume in
MMMBtus
 
     
                 
(In millions)
October 2011 – December 2011
 1,320
 
$
(0.95)
 
 4,290
 
(0.55)
 
$
 (3)
January 2012 – December 2012
 4,920
   
(0.91)
  18,300
 
 (0.55)    
 (9)
                 
$
 (12)

Additional Disclosures about Derivative Instruments and Hedging Activities

We had derivative financial instruments recorded in our balance sheet as assets (liabilities) at their respective estimated fair value, as set forth below.

       
September 30,
   
December 31,
 
Type of Contract
 
Balance Sheet Location
 
2011
   
2010
 
       
(In millions)
 
Derivatives not designated as hedging instruments:
               
    Natural gas contracts
 
Derivative assets – current
  $ 130     $ 201  
    Oil contracts
 
Derivative assets – current
    44       1  
    Basis contracts
 
Derivative assets – current
    (4 )     (5 )
    Natural gas contracts
 
Derivative assets – noncurrent
    43       45  
    Oil contracts
 
Derivative assets – noncurrent
    25        
    Basis contracts
 
Derivative assets – noncurrent
    (1 )     (6 )
    Oil contracts
 
Derivative liabilities – current
          (53 )
    Basis contracts
 
Derivative liabilities – current
    (6 )      
    Natural gas contracts
 
Derivative liabilities – noncurrent
          (4 )
    Oil contracts
 
Derivative liabilities – noncurrent
          (42 )
    Basis contracts
 
Derivative liabilities – noncurrent
    (1 )      
        Total
  $ 230     $ 137  

 
 
13

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

 
The amount of gain (loss) recognized in income related to our derivative financial instruments is recorded under “Commodity derivative income” in our income statement, as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Type of Contract
 
2011
   
2010
   
2011
   
2010
 
   
(In millions)
 
Derivatives not designated as hedging instruments:
                       
Realized gain on natural gas contracts
  $ 68     $ 70     $ 198     $ 214  
Realized gain (loss) on oil contracts
    (5 )     41       (37 )     112  
Realized loss on basis contracts
    (2 )           (5 )     (3 )
Total realized gain
    61       111       156       323  
Unrealized gain (loss) on natural gas contracts
    5       111       (68 )     191  
Unrealized gain (loss) on oil contracts
    197       (90 )     162       (102 )
Unrealized gain (loss) on basis contracts
    (1 )     (1 )     (1 )     2  
Total unrealized gain
    201       20       93       91  
Total commodity derivative income
  $ 262     $ 131     $ 249     $ 414  

The total realized gain on commodity derivatives for the three and nine months ended September 30, 2010 differs from the cash receipts on derivative settlements due to the recognition of option premiums associated with derivatives settled during the period.  There were no option premiums recognized during the three and nine months ended September 30, 2011.
 
       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 September 30, 2011, Barclays Capital, Morgan Stanley, JPMorgan Chase Bank, N.A., Bank of Montreal, J Aron & Company and Societe Generale were the counterparties with respect to approximately 85% of our future hedged production, none of which were counterparty to more than 25% of our future hedged production.

The counterparties to the majority of our derivative instruments also are lenders under our credit facility.  Our credit facility, senior notes, 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:

 
September 30,
2011
 
December 31,
2010
 
 
(In millions)
 
Revenue
 $ 231    $ 199  
Joint interest
    77       133  
Other
    15       23  
Reserve for doubtful accounts
  (1 )   (1 )
  Total accounts receivable
 $ 322    $ 354  


 
14

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


7.  Accrued Liabilities:

As of the indicated dates, our accrued liabilities consisted of the following:

   
September 30,
2011
   
December 31,
2010
 
   
(In millions)
 
Revenue payable
  $ 80     $ 69  
Accrued capital costs
    369       327  
Accrued lease operating expenses
    75       54  
Employee incentive expense
    54       59  
Accrued interest on debt
    43       41  
Taxes payable
    106       81  
Other
    20       39  
  Total accrued liabilities
  $ 747     $ 670  


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 and certain investments.

 
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 options including, price collars, floors and three-way collars (as of September 30, 2011, our options were comprised of only three-way collars) 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.


 
15

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
Markets for
Identical Assets
or Liabilities
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
       
       
       
   
Total
 
   
(In millions)
 
As of December 31, 2010:
                       
Investments available-for-sale:
                       
     Equity securities
  $ 7     $     $     $ 7  
     Auction rate securities
                30       30  
Oil and gas derivative swap contracts
          89       (11 )     78  
Oil and gas derivative option contracts
                59       59  
     Total
  $ 7     $ 89     $ 78     $ 174  
                                 
As of September 30, 2011:
                               
Investments available-for-sale:
                               
     Equity securities
  $ 8     $     $     $ 8  
     Auction rate securities
                32       32  
Oil and gas derivative swap contracts
          61       (12 )     49  
Oil and gas derivative option contracts
                181       181  
     Total
  $ 8     $ 61     $ 201     $ 270  
 
        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), if any.  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 September 30, 2011, we continued to hold $32 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 $14 million ($9 million net of tax), recorded under the caption “Accumulated other comprehensive loss” on our consolidated balance sheet.  As of December 31, 2010, we held $30 million of auction rate securities, which reflected a decrease in the fair value of $17 million ($11 million net of tax).  The debt instruments underlying our auction rate securities are mostly 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.


 
16

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, 2010
  $ 40     $ 159     $ 199  
    Total realized or unrealized gains (losses):
                       
        Included in earnings
          74       74  
        Included in other comprehensive loss
    (3 )           (3 )
    Purchases, issuances and settlements
    (5 )     (108 )     (113 )
    Transfers in and out of Level 3
                 
Balance at September 30, 2010
  $ 32     $ 125     $ 157  
                         
Change in unrealized gains included in earnings relating to
                       
    investments and derivatives still held at September 30, 2010
  $     $ 87     $ 87  
                         
Balance at January 1, 2011
  $ 30     $ 48     $ 78  
    Total realized or unrealized gains (losses):
                       
        Included in earnings
          163       163  
        Included in other comprehensive income
    3             3  
    Purchases, issuances and settlements:
                       
        Settlements
    (1 )     (42 )     (43 )
    Transfers in and out of Level 3
                 
Balance at September 30, 2011
  $ 32     $ 169     $ 201  
                         
Change in unrealized gains included in earnings relating to
                       
    investments and derivatives still held at September 30, 2011
  $     $ 150     $ 150  

Fair Value of Debt
 
The estimated fair value of our notes, based on quoted market prices as of the indicated dates, was as follows:

 
September 30,
 
December 31,
 
 
2011
 
2010
 
 
(In millions)
 
6 ⅝% Senior Subordinated Notes due 2014
 $ 327    $ 333  
6 ⅝% Senior Subordinated Notes due 2016
    557       568  
7 ⅛% Senior Subordinated Notes due 2018
    630       626  
6 ⅞% Senior Subordinated Notes due 2020
    735       733  
5 ¾% Senior Notes due 2022
    741        

Amounts outstanding under our credit arrangements at September 30, 2011 and December 31, 2010 are stated at cost, which approximates fair value.  Please see Note 9, “Debt.”


 
17

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
9. Debt:
 
As of the indicated dates, our debt consisted of the following:

   
September 30,
2011
   
December 31,
2010
 
   
(In millions)
 
Senior unsecured debt:
           
    Revolving credit facility ― LIBOR based loans
  $ 50     $ 100  
    Money market lines of credit(1) 
    16       35  
        Total credit arrangements
    66       135  
    5 ¾% Senior Notes due 2022
    750        
        Total senior unsecured debt
    816       135  
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       694  
        Total long-term debt
  $ 2,985     $ 2,304  
 
         
(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.
 
Credit Arrangements
     
In June 2011, we entered into a new revolving credit facility that matures in June 2016.  The terms of the credit facility provide for loan commitments of $1.25 billion from a syndicate of 13 financial institutions, led by JPMorgan Chase Bank, as agent.  In September 2011, we entered into the first amendment to the credit facility, which allows us to issue senior notes or other debt instruments that are secured equally and ratably with the credit facility.  As of September 30, 2011, the largest individual loan commitment by any lender was 13% of total commitments.

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, plus a margin that is based on a grid of our debt rating (75 basis points per annum at September 30, 2011) or (b) the London Interbank Offered Rate, plus a margin that is based on a grid of our debt rating (175 basis points per annum at September 30, 2011).

Under our credit facility, we pay commitment fees on available but undrawn amounts based on a grid of our debt rating (30 basis points per annum at September 30, 2011).  We incurred aggregate commitment fees under our current and previous credit facilities of approximately $0.3 million and $1.2 million for the three and nine months ended September 30, 2011, respectively, which are recorded in interest expense on our consolidated statement of income.  For the three and nine months ended September 30, 2010, we incurred aggregate commitment fees of approximately $0.6 million and $2 million, respectively.

Our credit facility has restrictive financial covenants that include the maintenance of a ratio of total debt to book capitalization not to exceed 0.6 to 1.0 and maintenance of a ratio of 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) to interest expense of at least 3.0 to 1.0.  At September 30, 2011, we were in compliance with all of our debt covenants.

Letters of credit are subject to a fronting fee of 20 basis points and annual fees based on a grid of our debt rating (175 basis points at September 30, 2011).  As of September 30, 2011, we had no letters of credit outstanding under our credit facility.
     
 
 
18

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
Subject to compliance with the restrictive covenants in our credit facility, we also have a total of $135 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.

The credit facility includes events of default relating to customary matters, including, among other things, nonpayment of principal, interest or other amounts; violation of covenants; inaccuracy of representations and warranties in any material respect; a change of control; or certain other material adverse changes in our business.  Our senior notes and senior subordinated notes also contain standard events of default.  If any of the foregoing defaults were to occur, our lenders under the credit facility could terminate future lending commitments and our lenders under both the credit facility and our notes could declare the outstanding borrowings due and payable.  In addition, our credit facility, senior notes, 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 Notes

On September 30, 2011, we sold $750 million of 5 ¾% Senior Notes due 2022 and received proceeds of approximately $743 million (net of discount and offering costs).  These notes were issued at 99.956% of par to yield 5 ¾%.  We used the net proceeds to repay a portion of our then outstanding borrowings under our credit facility and money market lines of credit.


10.  Income Taxes:

The provision 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
September 30,
 
Nine Months Ended
September 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(In millions)
 
Amount computed using the statutory rate
  148    $ 89    $ 260    $ 278  
   Increase in taxes resulting from:
                               
     State and local income taxes, net of federal effect
    4       3       9       10  
     Net effect of different tax rates in non-U.S. jurisdictions
          1       1       4  
     Other
  3         3     1  
       Total provision for income taxes
  155    $ 93    $ 273    $ 293  

As of September 30, 2011, 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 $17 million of our international NOLs because we do not have sufficient estimated future taxable income in the appropriate jurisdictions.  Therefore, valuation allowances were established for these items in 2005 and 2006.  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.

As of September 30, 2011, we did not have a liability for uncertain tax positions and, as such, had not accrued related interest or penalties.  The tax years 2008-2010 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject.
 
 
 
19

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
11.  Stock-Based Compensation:
     
On May 5, 2011, at our 2011 annual meeting of stockholders, our stockholders approved the Newfield Exploration Company 2011 Omnibus Stock Plan (the 2011 Omnibus Stock Plan), and our 2009 Omnibus Stock Plan and 2009 Non-Employee Director Restricted Stock Plan were terminated such that no new grants will be made under the previous plans.  All stock-based compensation equity awards to employees and non-employee directors will be granted under the 2011 Omnibus Stock Plan.  Outstanding awards under those previous plans were not impacted by the termination of those previous plans.  The fair value of grants is determined utilizing the Black-Scholes option pricing model for stock options and a lattice-based model for our performance and market-based restricted stock and restricted stock units.  In February 2011, we also granted cash-settled restricted stock units to employees that were not issued under any of our plans as they will be settled in cash upon vesting and are accounted for as liability awards.
  
As of the indicated dates, our stock-based compensation for our equity and liability awards consisted of the following:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(In millions)
 
Total stock-based compensation
 $ 9    $ 6    $ 28    $ 24  
Capitalized in oil and gas properties
  (3 )   (2 )   (8 )   (8 )
Net stock-based compensation expense
 $ 6    $ 4    $ 20    $ 16  

As of September 30, 2011, we had approximately $88 million of total unrecognized stock-based compensation expense related to unvested stock-based compensation equity 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.  The following table provides information about stock option activity for the nine months ended September 30, 2011:

   
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, 2010
    1.5     $ 34.58             4.7     $ 58  
   Granted
              $                  
   Exercised
    (0.4 )     30.04                       17  
   Forfeited
                                   
Outstanding at September 30, 2011
    1.1     $ 35.86               4.2     $ 8  
                                         
Exercisable at September 30, 2011
    1.0     $ 33.83               3.8     $ 8  
 
                         
(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 September 30, 2011, the last reported sales price of our common stock on the New York Stock Exchange was $39.69 per share.


 
20

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

 
Restricted Stock.  The following table provides information about equity-classified restricted stock and restricted stock unit activity for the nine months ended September 30, 2011:

   
Service-Based
Shares
   
Performance/ Market-Based
Shares
   
Total Shares
   
Weighted-
Average
Grant Date
Fair Value
per Share
 
   
(In millions, except per share data)
 
Non-vested shares outstanding at December 31, 2010
    2.2       0.3       2.5     $ 36.84  
     Granted
    0.9       0.1       1.0       66.69  
     Forfeited
    (0.2 )           (0.2 )     43.86  
     Vested
    (0.8 )     (0.1 )     (0.9 )     34.71  
Non-vested shares outstanding at September 30, 2011
    2.1       0.3       2.4     $ 49.64  

Cash-Settled Restricted Stock Units.  During the first quarter of 2011, we granted cash-settled restricted stock units to employees that vest over three years.  The value of the awards, and the associated stock-based compensation expense, is based on the Company's stock price.  As of September 30, 2011, 132,920 cash-settled restricted stock units were outstanding.

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.

 During the first six months of 2011, options to purchase 34,073 shares of our common stock were issued under our employee stock purchase plan.  The weighted-average fair value of each option was $17.13 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 0.19%, an expected life of six months and weighted-average volatility of 31%.

 On July 1, 2011, options to purchase 37,236 shares of our common stock were issued under our employee stock purchase plan. The weighted-average fair value of each option was $16.83 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 0.10%, an expected life of six months and weighted-average volatility of 33%.


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.


 
21

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
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 for the three and nine months ended September 30, 2011 and 2010.  Income tax allocations have been determined based on statutory rates in the applicable geographic segment.

Three Months Ended September 30, 2011:
                             
   
Domestic
   
Malaysia
   
China
   
Other
International
   
Total
 
 
   
(In millions)
 
Oil and gas revenues
  $ 444     $ 159     $ 25     $     $ 628  
                                         
Operating expenses:
                                       
Lease operating
    93       21       1             115  
Production and other taxes
    19       71       5             95  
Depreciation, depletion and amortization
  154       29       6             189  
General and administrative
    49       1       1             51  
Allocated income taxes
    48       14       3                
Net income from oil and gas properties
$ 81     $ 23     $ 9     $          
                                         
Total operating expenses
                                    450  
Income from operations
                                    178  
Interest expense, net of interest income,
                                     
     capitalized interest and other
                                    (16 )
Commodity derivative income
                                    262  
Income before income taxes
                                  $ 424  
                                         
Total assets
  $ 7,879     $ 789     $ 235     $     $ 8,903  
                                         
Additions to long-lived assets
  $ 597     $ 81     $ 13     $     $ 691  
 
 
 
22

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
 
 
Three Months Ended September 30, 2010:
                             
                     
Other
International
       
   
Domestic
   
Malaysia
   
China
   
Total
 
   
(In millions)
 
Oil and gas revenues
  $ 357     $ 80     $ 12     $     $ 449  
                                         
Operating expenses:
                                       
Lease operating
    68       17       1             86  
Production and other taxes
    2       17       2             21  
Depreciation, depletion and amortization
  128       24       4             156  
General and administrative
    39       1                   40  
Allocated income taxes
    44       8       2                
  Net income from oil and gas properties
$ 76     $ 13     $ 3     $          
                                         
  Total operating expenses
                                    303  
Income from operations
                                    146  
Interest expense, net of interest income,
                                     
       capitalized interest and other
                                    (23 )
Commodity derivative income
                                    131  
Income before income taxes
                                  $ 254  
                                         
Total assets