nfx10q-09302012.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, 2012

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 22, 2012, there were 135,223,639 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
 


 
 
 
 




TABLE OF CONTENTS
   
Page
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
     
     
     
     
     
     
     
     


ii

 
 

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED BALANCE SHEET
 
(In millions, except share data)
 
(Unaudited)
 
             
   
September 30,
2012
   
December 31,
2011
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 125     $ 76  
Accounts receivable
    427       407  
Inventories
    125       90  
Derivative assets
    88       129  
Other current assets
    94       73  
      Total current assets
    859       775  
Property and equipment, at cost, based on the full cost method of accounting for
               
oil and gas properties ($2,009 and $1,965 were excluded from amortization
               
at September 30, 2012 and December 31, 2011, respectively)
    15,617       14,526  
Less ─ accumulated depreciation, depletion and amortization
    (7,211 )     (6,506 )
   Total property and equipment, net
    8,406       8,020  
                 
Derivative assets
    22       61  
Long-term investments
    55       52  
Deferred taxes
    41       28  
Other assets
    48       55  
      Total assets
  $ 9,431     $ 8,991  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
               
Accounts payable
  $ 76     $ 112  
Accrued liabilities
    747       687  
Advances from joint owners
    27       45  
Asset retirement obligations
    6       10  
Derivative liabilities
    19       50  
Deferred taxes
    24       28  
      Total current liabilities
    899       932  
                 
Other liabilities
    42       44  
Derivative liabilities
    16       3  
Long-term debt
    3,190       3,006  
Asset retirement obligations
    143       135  
Deferred taxes
    973       951  
      Total long-term liabilities
    4,364       4,139  
                 
Commitments and contingencies (Note 11)
           
                 
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, 2012
               
and December 31, 2011; 136,501,207 and 136,379,381 shares issued at
               
September 30, 2012 and December 31, 2011, respectively)
    1       1  
Additional paid-in capital
    1,512       1,495  
Treasury stock (at cost, 1,282,212 and 1,694,623 shares at September 30, 2012 and
               
   December 31, 2011, respectively)
    (39 )     (50 )
Accumulated other comprehensive loss
    (8 )     (10 )
Retained earnings
    2,702       2,484  
      Total stockholders' equity
    4,168       3,920  
      Total liabilities and stockholders' equity
  $ 9,431     $ 8,991  
                 
The accompanying notes to consolidated financial statements are an integral part of this statement.
 

 
1

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF NET INCOME
 
(In millions, except per share data)
 
(Unaudited)
 
                         
                         
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Oil and gas revenues
  $ 615     $ 628     $ 1,921     $ 1,794  
                                 
Operating expenses:
                               
Lease operating
    128       115       384       333  
Production and other taxes
    79       95       250       245  
Depreciation, depletion and amortization
    237       189       702       528  
General and administrative
    59       51       165       132  
Other
    6             6        
      Total operating expenses
    509       450       1,507       1,238  
                                 
Income from operations
    106       178       414       556  
                                 
Other income (expenses):
                               
Interest expense
    (53 )     (43 )     (153 )     (124 )
Capitalized interest
    17       24       53       61  
Commodity derivative income (expense)
    (98 )     262       61       249  
Other
    (16 )     3       (18 )     2  
      Total other income (expenses)
    (150 )     246       (57 )     188  
                                 
Income (loss) before income taxes
    (44 )     424       357       744  
                                 
Income tax provision (benefit):
                               
Current
    38       9       134       39  
Deferred
    (49 )     146       5       234  
      Total income tax provision (benefit)
    (11 )     155       139       273  
                                 
      Net income (loss)
  $ (33 )   $ 269     $ 218     $ 471  
                                 
Earnings (loss) per share:
                               
Basic
  $ (0.24 )   $ 2.00     $ 1.62     $ 3.52  
Diluted
  $ (0.24 )   $ 1.99     $ 1.61     $ 3.49  
                                 
Weighted-average number of shares outstanding for basic earnings (loss) per share
    135       134       134       134  
                                 
Weighted-average number of shares outstanding for diluted earnings (loss) per share
    135       135       135       135  
                                 
The accompanying notes to consolidated financial statements are an integral part of this statement.
 

 
2

NEWFIELD EXPLORATION COMPANY
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
(In millions)
 
(Unaudited)
 
                 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
                 
Net income (loss)
$ (33 ) $ 269   $ 218   $ 471  
Other comprehensive income (loss):
                       
Unrealized gain (loss) on investments, net of tax
      (2 )   2     2  
Other comprehensive income (loss), net of tax
      (2 )   2     2  
Comprehensive income (loss)
$ (33 ) $ 267   $ 220   $ 473  
                         
The accompanying notes to consolidated financial statements are an integral part of this statement.
 

 
3

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS
 
(In millions)
 
(Unaudited)
 
             
   
Nine Months Ended
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
       
Net income
  $ 218     $ 471  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    702       528  
Deferred tax provision
    5       234  
Stock-based compensation
    27       20  
Commodity derivative income
    (61 )     (249 )
Cash receipts on derivative settlements, net
    123       156  
Other non-cash charges
    11       2  
Changes in operating assets and liabilities:
               
(Increase) decrease in accounts receivable
    (43 )     34  
Increase in inventories
    (21 )     (24 )
Increase in other current assets
    (21 )     (17 )
(Increase) decrease in other assets
    7       (6 )
Increase (decrease) in accounts payable and accrued liabilities
    (116 )     24  
Increase (decrease) in advances from joint owners
    (19 )     5  
Decrease in other liabilities
    (8 )     (5 )
Net cash provided by operating activities
    804       1,173  
                 
Cash flows from investing activities:
               
Additions to oil and gas properties
    (1,279 )     (1,723 )
Acquisitions of oil and gas properties
    (9 )     (299 )
Proceeds from sales of oil and gas properties
    382       202  
Additions to furniture, fixtures and equipment
    (15 )     (23 )
Redemptions of investments
          1  
Net cash used in investing activities
    (921 )     (1,842 )
                 
Cash flows from financing activities:
               
Proceeds from borrowings under credit arrangements
    2,347       3,148  
Repayments of borrowings under credit arrangements
    (2,288 )     (3,217 )
Proceeds from issuance of senior notes
    1,000       750  
Debt issue costs
    (10 )     (16 )
Repayment of senior subordinated notes
    (875 )      
Proceeds from issuances of common stock
    1       12  
Purchases of treasury stock, net
    (9 )     (16 )
Net cash provided by financing activities
    166       661  
                 
Increase (decrease) in cash and cash equivalents
    49       (8 )
Cash and cash equivalents, beginning of period
    76       39  
Cash and cash equivalents, end of period
  $ 125     $ 31  
                 
The accompanying notes to consolidated financial statements are an integral part of this statement.
 

 
4

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
 
Retained
 
Accumulated
Other
Comprehensive
 
Total
Stockholders'
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income (Loss)
 
Equity
Balance, December 31, 2011
136.4 
 
$
 
(1.7)
 
$
(50)
 
$
1,495 
 
$
2,484 
 
$
(10)
 
$
3,920 
Issuances of common stock
0.1 
   
 — 
             
 1 
               
 1 
Stock-based compensation
                     
36 
               
36 
Treasury stock, net
         
 0.4 
   
11 
   
(20)
               
(9)
Net income
                           
218 
         
218 
Other comprehensive income, net of tax
                                 
   
Balance, September 30, 2012
136.5 
 
$
 
(1.3)
 
$
(39)
 
$
1,512 
 
$
2,702 
 
$
(8)
 
$
4,168 
                                           
The accompanying notes to consolidated financial statements are an integral part of this statement.

 
5

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 energy company engaged in the exploration, development and production of crude oil, natural gas and natural gas liquids. Our principal domestic areas of operation include the Mid-Continent, the Rocky Mountains and onshore Texas. Internationally, we focus on offshore oil developments 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 natural 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 fairly state 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, 2011.
 
 Dependence on Oil and Natural Gas Prices
     
As an independent oil and natural gas producer, our revenue, profitability and future rate of growth are substantially dependent on prevailing prices for oil and natural gas. Historically, the energy markets have been very volatile, and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil or natural gas prices could have a material adverse effect on our financial position, results of operations, cash flows and access to capital and on the quantities of oil and natural 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 natural gas reserves. Actual results could differ significantly from these estimates. Our most significant financial estimates are associated with our estimated proved oil and natural 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 within the consolidated statement of comprehensive income. 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 $1 million and $0.3 million for the three-month periods ended September 30, 2012 and 2011, respectively, and approximately $2 million and $1 million for the nine-month periods ended September 30, 2012 and 2011, respectively.
 

 
 
6

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 740,000 barrels and 239,000 barrels of crude oil valued at cost of $49 million and $19 million at September 30, 2012 and December 31, 2011, 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 $29 million and $30 million of internal costs during the three-month periods ended September 30, 2012 and 2011, respectively, and $87 million and $81 million during the nine-month periods ended September 30, 2012 and 2011, respectively. Interest expense related to unproved properties is capitalized into oil and gas properties.

    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.
     
    Capitalized costs and estimated future development costs are amortized using 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 natural gas reserve estimation requirements, which require use of the unweighted-average first-day-of-the-month commodity prices for the prior 12 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 cost of properties not included in the costs being amortized, if any; less

·  
related income tax effects.
     
    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 properties increases when oil and natural gas prices decrease significantly for a prolonged period of time or if we have substantial downward revisions in our estimated proved reserves. At September 30, 2012, the ceiling value of our reserves was calculated based upon the unweighted-average first-day-of-the-month commodity prices for the prior 12 months of $2.83 per MMBtu for natural gas and $95.05 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, 2012.
 
     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 ARO is incurred. Settlements include payments made to satisfy the AROs, as well as transfer of the ARO to purchasers of our divested properties.

    In general, the amount of an ARO and the costs capitalized will equal 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 net income.
 
 
 
7

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


 
 
    The change in our ARO for the nine months ended September 30, 2012 is set forth below (in millions):

            Balance at January 1, 2012
 
$
 145 
 
                 Accretion expense
   
 8 
 
                 Additions
   
 8 
 
                 Revisions
   
 12 
 
                 Settlements
   
 (24)
 
            Balance at September 30, 2012
   
 149 
 
            Less: Current portion of ARO at September 30, 2012
   
 (6)
 
           Total long-term ARO at September 30, 2012
 
$
 143 
 

 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 consolidated 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 periodically utilize 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 4, “Derivative Financial Instruments,” for a more detailed discussion of our derivative activities.
 
 
 
8

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


 
 
 New Accounting Requirements
 
    In May 2011, the FASB issued additional guidance regarding fair value measurement and disclosure requirements. The most significant change requires 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. Adopting the additional fair value measurement and disclosure requirements did not have a material impact on our financial position or results of operations.

    In December 2011, the FASB issued guidance regarding the disclosure of offsetting assets and liabilities. The guidance will require disclosure of gross information and net information about instruments and transactions eligible for offset arrangement. The guidance is effective for interim and annual periods beginning on or after January 1, 2013. We do not expect adoption of the additional disclosures regarding offsetting assets and liabilities to have a material 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 (excluding 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 10, “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
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In millions, except per share data)
 
Income (numerator):
                       
  Net income (loss) — basic and diluted
  $ (33 )   $ 269     $ 218     $ 471  
                                 
Weighted-average shares (denominator):
                               
  Weighted-average shares — basic
    135       134       134       134  
  Dilution effect of stock options and unvested restricted stock
                               
   and restricted stock units outstanding at end of period(1)(2) 
          1       1       1  
  Weighted-average shares — diluted
    135       135       135       135  
                                 
Earnings (loss) per share:
                               
  Basic
  $ (0.24 )   $ 2.00     $ 1.62     $ 3.52  
  Diluted
  $ (0.24 )   $ 1.99     $ 1.61     $ 3.49  
_______________
                               
(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 September 30, 2012 as their effect would have been anti-dilutive. Had we recognized net income for that 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 0.6 million shares for the three months ended September 30, 2012.
(2)
The calculation of shares outstanding for diluted EPS for the nine months ended September 30, 2012 excludes the effect of 3 million unvested restricted stock or restricted stock units and stock options, and the calculation of shares outstanding for diluted EPS for the three and nine months ended September 30, 2011 excludes the effect of 1 million unvested restricted stock or restricted stock units and stock options because including the effect would be anti-dilutive.
 
 
 
9

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


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

   
September 30,
2012
   
December 31,
2011
 
   
(In millions)
 
      Oil and gas properties:
           
      Subject to amortization
  $ 13,456     $ 12,423  
      Not subject to amortization
    2,009       1,965  
      Gross oil and gas properties
    15,465       14,388  
      Accumulated depreciation, depletion and amortization
    (7,131 )     (6,436 )
  Net oil and gas properties
    8,334       7,952  
      Other property and equipment
    152       138  
      Accumulated depreciation and amortization
    (80 )     (70 )
  Net other property and equipment
    72       68  
             Total property and equipment, net
  $ 8,406     $ 8,020  

    The following is a summary of our oil and gas properties not subject to amortization as of September 30, 2012. 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, 2012, approximately 77% of oil and gas properties not subject to amortization were associated with our unconventional resource plays.

   
Costs Incurred In
       
   
2012
   
2011
   
2010
   
2009 and prior
   
Total
 
   
(In millions)
 
Acquisition costs
  $ 105     $ 296     $ 299     $ 411     $ 1,111  
Exploration costs
    390       44       22       34       490  
Development costs
    48       62       25       36       171  
Fee mineral interests
                      23       23  
Capitalized interest
    53       78       55       28       214  
    Total oil and gas properties not
                                       
         subject to amortization
  $ 596     $ 480     $ 401     $ 532     $ 2,009  

Non-Strategic Asset Sales

    During the nine months ended September 30, 2012 and the year ended December 31, 2011, we received payment for sales of non-strategic assets of approximately $382 million and $406 million, respectively. The cash flows and results of operations for the assets included in a sale are included in our consolidated financial statements up to the date of sale. On October 5, 2012, we closed the sale of our remaining Gulf of Mexico assets. See Note 14, “Subsequent Events.”


 
10

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


 
 
4.  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 income 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 while we are required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling price. 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 7, “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 net income under the caption “Commodity derivative income (expense).” Settlements of derivative contracts are included in operating cash flows on our consolidated statement of cash flows.
 
 
 
11

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


 
 
    At September 30, 2012, we had outstanding contracts with respect to our future production that were 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 2012 – December 2012
                                     
Price swap contracts
    11,340     $3.19     ¾     ¾     ¾     ¾     ¾     ¾   $ 1  
Price swap contracts
 
(A)
    2.72     ¾     ¾     ¾     ¾     ¾     ¾     (9 )
    3-Way collar contracts
    15,070         $3.50-$4.50     $4.19     $5.00-$6.00     $5.51     $5.20-$7.55     $6.41     19  
January 2013 – December 2013
                                                       
Price swap contracts
    54,750     4.08     ¾     ¾     ¾     ¾     ¾     ¾     13  
Price swap contracts
 
(A)
    3.45     ¾     ¾     ¾     ¾     ¾     ¾     (15 )
    3-Way collar contracts
    39,530         3.50-4.50     4.04     5.00-6.00     5.44     6.00-7.55     6.48     42  
January 2014 – December 2014
                                                       
Price swap contracts
    54,750     3.85     ¾     ¾     ¾     ¾     ¾     ¾     (17 )
    Collar contracts
    14,600     ¾     ¾     ¾     3.75     3.75     4.54-4.57     4.55     (1 )
                                                    $ 33  
_______________
 
(A)
During the first quarter of 2012, natural gas spot market prices were below the puts we sold on our three-way collars for April through December 2012 and the full-year 2013, exposing us further to the softening natural gas spot market. As a result, during the first quarter of 2012 we entered into additional fixed-price swap contracts in the over-the-counter market that effectively prevented any further erosion in the value of our natural gas three-way collars. The new swap contracts added during the first quarter of 2012 were for the same volumes as our October through December 2012 and the full-year 2013 three-way collar contracts. The economics from the combination of these additional fixed-price swap contracts and our natural gas three-way collar contracts will result in effective average fixed prices of $4.04 and $4.85 per MMBtu for the fourth quarter of 2012 and the full-year 2013, respectively, as long as natural gas spot prices for the respective time periods settle below the puts we sold on our three-way collar contracts.
 
 
 
12

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


 
 
Oil
  
       
NYMEX Contract Price Per Bbl
     
           
Collars
 
Estimated
       
Additional Put
 
Floors
 
Ceilings
 
Fair Value
   
Volume in
     
Weighted
     
Weighted
     
Weighted
 
Asset
Period and Type of Contract
 
MBbls
 
Range
 
Average
 
Range
 
Average
 
Range
 
Average
   (Liability)
                               
(In millions)
October 2012 – December 2012
                               
    3-Way collar contracts
    3,220     $55.00-$90.00     $66.86     $75.00-$100.00     $82.96     $91.90-$137.80     $108.30   $  1  
January 2013 – December 2013
                                                 
    3-Way collar contracts
    12,115     80.00     80.00     95.00     95.00     106.50-130.40     118.05      30  
January 2014 – December 2014
                                                 
    3-Way collar contracts
    5,110     80.00     80.00     95.00     95.00     117.50-120.75     119.16      14  
                                              $  45  

Basis Contracts
 
    At September 30, 2012, we had natural gas basis contracts that were 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  
 
Volume in
MMMbtus
 
Weighted-
Average
Differential
 
Volume in
MMMbtus
 
Weighted-
Average
Differential
 
Fair Value
Asset
(Liability)
 
                     
(In millions)
 
October 2012 – December 2012
 1,230 
 
$
(0.91)
 
 4,600 
 
$
(0.55)
 
$
 (3)
 
 
Additional Disclosures about Derivative Instruments and Hedging Activities

    We had derivative financial instruments recorded in our consolidated 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
 
2012
   
2011
 
     
(In millions)
 
  Derivatives not designated as hedging instruments:
             
      Natural gas contracts
Derivative assets – current
  $ 65     $ 133  
      Oil contracts
Derivative assets – current
    24       1  
      Basis contracts
Derivative assets – current
    (1 )     (5 )
      Natural gas contracts
Derivative assets – noncurrent
    1       61  
      Oil contracts
Derivative assets – noncurrent
    21        
      Natural gas contracts
Derivative liabilities – current
    (17 )      
      Oil contracts
Derivative liabilities – current
          (45 )
      Basis contracts
Derivative liabilities – current
    (2 )     (5 )
      Natural gas contracts
Derivative liabilities – noncurrent
    (16 )      
      Oil contracts
Derivative liabilities – noncurrent
          (3 )
     Total
  $ 75     $ 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 was as follows:

 
Location of Gain (Loss)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 Type of Contract  
Recognized in Income
 
2012
   
2011
   
2012
   
2011
 
     
(In millions)
 
Derivatives not designated as hedging instruments:
                         
     Realized gain on natural gas contracts
Commodity derivative income (expense)
  $ 37     $ 68     $ 135     $ 198  
     Realized gain (loss) on oil contracts
Commodity derivative income (expense)
    3       (5 )     (4 )     (37 )
     Realized loss on basis contracts
Commodity derivative income (expense)
    (3 )     (2 )     (8 )     (5 )
      Total realized gain
      37       61       123       156  
     Unrealized gain (loss) on natural gas contracts
Commodity derivative income (expense)
    (79 )     5       (162 )     (68 )
     Unrealized gain (loss) on oil contracts
Commodity derivative income (expense)
    (59 )     197       92       162  
     Unrealized gain (loss) on basis contracts
Commodity derivative income (expense)
    3       (1 )     8       (1 )
       Total unrealized gain (loss)
    (135 )     201       (62 )     93  
       Total
  $ (98 )   $ 262     $ 61     $ 249  

   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, 2012, six of our 14 counterparties accounted for approximately 85% of our estimated future hedged production with no single counterparty accounting for more than 25% of that 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.
 

5.  Accounts Receivable:

   As of the indicated dates, our accounts receivable consisted of the following:
             
   
September 30,
2012
   
December 31,
2011
 
 
(In millions)
 
            Revenue
  $ 298     $ 301  
            Joint interest
    124       96  
            Other
    6       11  
            Reserve for doubtful accounts
    (1 )     (1 )
             Total accounts receivable
  $ 427     $ 407  


 
14

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


 
 
6.  Accrued Liabilities:

    As of the indicated dates, our accrued liabilities consisted of the following:
             
   
September 30,
2012
   
December 31,
2011
 
   
(In millions)
 
            Revenue payable
  $ 86     $ 94  
            Accrued capital costs
    332       231  
            Accrued lease operating expenses
    84       86  
            Employee incentive expense
    46       61  
            Accrued interest on debt
    46       52  
            Taxes payable
    116       122  
            Other
    37       41  
             Total accrued liabilities
  $ 747     $ 687  


7.  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, and other financial investments. Although we utilize third-party broker quotes to assess the reasonableness of our prices and valuation techniques for derivative instruments, 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 table summarizes 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, 2011:                          
Investments available-for-sale:
                       
     Equity securities
  $ 10     $     $     $ 10  
     Auction rate securities
                32       32  
Oil and gas derivative swap contracts
          66       (10 )     56  
Oil and gas derivative option contracts
                81       81  
     Total
  $ 10     $ 66     $ 103     $ 179  
                                 
 As of September 30, 2012:                                  
Money market fund investments
  $ 13     $     $     $ 13  
Investments available-for-sale:
                               
     Equity securities
    12                   12  
     Auction rate securities
                34       34  
Oil and gas derivative swap contracts
          (27 )     (3 )     (30 )
Oil and gas derivative option contracts
                105       105  
     Total
  $ 25     $ (27 )   $ 136     $ 134  

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, 2012, we held $34 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 $11 million ($7 million net of tax) recorded under the caption “Accumulated other comprehensive loss” on our consolidated balance sheet. As of December 31, 2011, we held $32 million of auction rate securities, which reflected a decrease in the fair value of $13 million ($8 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 table sets 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, 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 or losses included in earnings relating to
                       
investments and derivatives still held at September 30, 2011
  $     $ 150     $ 150  
                         
Balance at January 1, 2012
  $ 32     $ 71     $ 103  
    Total realized or unrealized gains (losses):
                       
 Included in earnings
          100       100  
 Included in other comprehensive income
    2             2  
    Purchases, issuances and settlements:
                       
 Settlements
          (69 )     (69 )
    Transfers in and out of Level 3
                 
Balance at September 30, 2012
  $ 34     $ 102     $ 136  
                         
Change in unrealized gains or losses included in earnings relating to
                       
investments and derivatives still held at September 30, 2012
  $     $ 67     $ 67  

Qualitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements

    Commodity Derivatives. Our valuation models for derivative contracts are primarily industry-standard models that consider various factors, including certain significant unobservable inputs such as (a) quoted forward prices for commodities, (b) volatility factors and (c) counterparty credit risk. The calculation of the fair value of our option contracts requires the use of an option-pricing model. The estimated future prices are compared to the prices fixed by the hedge agreements and the resulting estimated future cash inflows or outflows over the lives of the hedges are discounted to calculate the fair value of the derivative contracts. These pricing and discounting variables are sensitive to market volatility as well as changes in future price forecasts, regional price differences and interest rates. Significant increases (decreases) in the quoted forward prices for commodities generally leads to corresponding decreases (increases) in the fair value measurement of our oil and gas derivative contracts. Significant changes in the volatility factors utilized in our option-pricing model can cause significant changes in the fair value measurement of our oil and gas derivative contracts.

    The determination of the fair values of derivative instruments incorporates various factors that 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). Historically, we have not experienced significant changes in the fair value of our derivative contracts resulting from changes in counterparty credit risk as the counterparties for all of our hedging transactions have an “investment grade” credit rating.

    Auction Rate Securities. We utilize a discounted cash flow model in the determination of the valuation of our auction rate securities classified as Level 3. This model considers various inputs including (a) the coupon rate specified under the debt instrument, (b) the current credit rating of the underlying issuers, (c) collateral characteristics and (d) risk-adjusted discount rates. The most significant unobservable factor in the determination of the investments fair value, however, is market liquidity for these instruments. A significant change in the liquidity of the market for auction rate securities would lead to a corresponding change in the fair value measurement of these investments.
 
 
17

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


 

Quantitative Disclosures about Unobservable Inputs

     Estimated                        
   
Fair Value
                       
   
Asset
 
Quantitative Information about Level 3 Fair Value Measurements
Instrument Type
 
(Liability)
 
Valuation Technique
 
Unobservable Input
 
Range
   
(In millions)
                       
Basis contracts
 
$
 (3)
 
Discounted cash flow
 
NYMEX Natural gas price forward curve
 
$
2.93 
 
-
$
3.62 
 
             
Physical pricing point forward curves
 
$
2.72 
 
-
$
3.50 
 
             
Credit risk
   
0.02 
%
-
 
0.08 
%
Oil 3-way collar contracts
 
$
 45 
 
Option model
 
NYMEX Oil price forward curve
 
$
90.77 
 
-
$
94.12 
 
             
Oil price volatility curves
   
22.32 
%
-
 
39.69 
%
             
Credit risk
   
0.01 
%
-
 
4.00 
%
Natural gas collars and 3-way collar contracts
 
$
 60 
 
Option model
 
NYMEX Natural gas price forward curve
 
$
2.93 
 
-
$
4.44 
 
             
Natural gas price volatility curves
   
23.12 
%
-
 
44.24 
%
             
Credit risk
   
0.01 
%
-
 
4.08 
%

    The underlying inputs in the determination of the valuation of our auction rate securities are developed by a third party and, therefore, not included in the quantitative analysis above.

Fair Value of Debt
 
    The estimated fair value of our notes, based on quoted prices in active markets (Level 1) as of the indicated dates, was as follows:

 
September 30,
 
December 31,
 
 
2012
 
2011
 
 
(In millions)
 
            5¾% Senior Notes due 2022
  $ 840     $ 808  
            5⅝% Senior Notes due 2024
    1,117        
            6⅝% Senior Subordinated Notes due 2014
          329  
            6⅝% Senior Subordinated Notes due 2016
          568  
            7⅛% Senior Subordinated Notes due 2018
    635       635  
            6⅞% Senior Subordinated Notes due 2020
    770       745  

    Amounts outstanding under our credit arrangements at September 30, 2012 and December 31, 2011 are stated at cost, which approximates fair value. Please see Note 8, “Debt.”
 
 
 
18

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


 
 
8. Debt:
 
Debt consisted of the following at:
             
   
September 30,
2012
   
December 31,
2011
 
   
(In millions)
 
        Senior unsecured debt:
           
            Revolving credit facility ― LIBOR based loans
  $ 145     $ 85  
           Money market lines of credit(1) 
          1  
              Total credit arrangements
    145       86  
            5¾% Senior Notes due 2022
    750       750  
            5⅝% Senior Notes due 2024
    1,000        
              Total senior unsecured debt
    1,895       836  
            6⅝% Senior Subordinated Notes due 2014
          325  
            6⅝% Senior Subordinated Notes due 2016
          550  
            7⅛% Senior Subordinated Notes due 2018
    600       600  
            6⅞% Senior Subordinated Notes due 2020
    695       695  
               Total long-term debt
  $ 3,190     $ 3,006  
_______________
           
(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
     
    We have a 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, N.A., 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, 2012, 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, N.A. 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, 2012) 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, 2012).

    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, 2012). We incurred aggregate commitment fees under our current credit facility of approximately $0.9 million and $2.5 million for the three and nine months ended September 30, 2012, respectively, which are recorded in “Interest expense” on our consolidated statement of net income. For the three and nine months ended September 30, 2011, we incurred commitment fees under our current and previous credit facility of approximately $0.3 million and $1.2 million, respectively.

    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 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, 2012, we were in compliance with all of our debt covenants.

    As of September 30, 2012, we had $15 million of undrawn letters of credit outstanding under our credit facility. 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, 2012). Additionally, as of September 30, 2012, we had $5 million of other undrawn letters of credit outstanding.
     
    Subject to compliance with the restrictive covenants in our credit facility, we also have a total of $195 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.
 

 
 
19

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


 
 
Senior and Senior Subordinated Notes

    In September 2011, we issued $750 million of 5¾% Senior Notes due 2022 and received proceeds of $742 million (net of discount and offering costs). These notes were issued at 99.956% of par to yield 5¾%. We used the net proceeds to repay a portion of our then outstanding borrowings under our credit facility and money market lines of credit.

    In April 2012, we redeemed our $325 million aggregate principal of 6⅝% Senior Subordinated Notes due 2014 at 101.1042% of the principal amount plus accrued interest, which included the payment of an early redemption premium of $4 million. This premium was recorded under the caption “Other income (expenses) – Other” on our consolidated statement of net income. The repayment of the outstanding principal balance of $325 million was funded through the use of our revolving credit facility. In addition, unamortized offering costs of approximately $0.6 million were written off.
   
    In June 2012, we issued $1 billion of 5⅝% Senior Notes due 2024 and received proceeds of $990 million (net of offering costs of approximately $10 million). These notes were issued at par to yield 5⅝%. We used a portion of the net proceeds to repay borrowings outstanding under our credit facility and money market lines of credit, as well as in July 2012, redeem our $550 million aggregate principal amount of 6⅝% Senior Subordinated Notes due 2016. In connection with the redemption, we paid a premium of $14 million. The premium was recorded under the caption “Other income (expenses) – Other” on our consolidated statement of income. In addition, unamortized offering costs of approximately $2 million were written off in July 2012 as a result of the repayment.


9.  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
September 30,
 
Nine Months Ended
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In millions)
 
Amount computed using the statutory rate
$ (15 ) $ 148   $ 125   $ 260  
 Increase (decrease) in taxes resulting from:
                       
 State and local income taxes, net of federal effect
  (1 )   4     3     9  
 Net effect of different tax rates in non-U.S. jurisdictions
  5         11     1  
 Other
      3         3  
   Total provision (benefit) for income taxes
$ (11 ) $ 155   $ 139   $ 273  

    As of September 30, 2012, we did not have a liability for uncertain tax positions and as such we had not accrued related interest or penalties. The tax years 2009-2011 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject.


10.  Stock-Based Compensation:
     
    All stock-based compensation equity awards to employees and non-employee directors are granted currently under the 2011 Omnibus Stock Plan. 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. These awards 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 consisted of the following:
                 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2012
 
2011
 
2012
 
2011
 
 
(In millions)
 
Total stock-based compensation
$ 13   $ 9   $ 37   $ 28  
Capitalized in oil and gas properties
  (3 )   (3 )   (10 )   (8 )
  Net stock-based compensation expense
$ 10   $ 6   $ 27   $ 20  

   As of September 30, 2012, we had approximately $94 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 periods. The full amount is expected to be recognized within five years.
 
 
 
20

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


 

Stock Options. The following table provides information about stock option activity for the nine months ended September 30, 2012:
                               
   
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, 2011
    1.1     $ 36.31             4.0     $ 7  
   Granted
              $                  
   Exercised/Forfeited
    (0.1 )     20.30                       1  
Outstanding at September 30, 2012
    1.0     $ 37.52               3.5