NFX 2014 Q3 - 10Q


 
 
 
 
 
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, 2014
OR
¨
 
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 ¨

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 ¨

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 ¨   
 
Non-accelerated filer ¨     
 
Smaller reporting company ¨
(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 ¨ No þ

As of October 28, 2014, there were 137,229,465 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, 
 2014
 
December 31, 
 2013
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
396

 
$
95

Restricted cash
 

 
90

Accounts receivable
 
395

 
474

Inventories
 
38

 
163

Derivative assets
 
48

 

Deferred taxes
 

 
22

Other current assets
 
29

 
57

Total current assets
 
906

 
901

Oil and gas properties — full cost method ($1,438 and $1,300 were excluded from amortization at September 30, 2014 and December 31, 2013, respectively)
 
15,786

 
16,407

Less — accumulated depreciation, depletion and amortization
 
(7,915
)
 
(8,306
)
Total oil and gas properties, net
 
7,871

 
8,101

Other property and equipment, net
 
180

 
174

Derivative assets
 
56

 
26

Long-term investments
 
26

 
63

Deferred taxes
 

 
19

Other assets
 
29

 
37

Total assets
 
$
9,068

 
$
9,321

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 

 
 

Accounts payable
 
$
65

 
$
76

Accrued liabilities
 
827

 
978

Deferred liabilities
 

 
90

Advances from joint owners
 
27

 
30

Asset retirement obligations
 
5

 
54

Derivative liabilities
 
1

 
62

Total current liabilities
 
925

 
1,290

Other liabilities
 
40

 
38

Long-term debt
 
3,046

 
3,694

Asset retirement obligations
 
105

 
201

Deferred taxes
 
1,427

 
1,142

Total long-term liabilities
 
4,618

 
5,075

 
 
 
 
 
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, 2014 and December 31, 2013; 137,469,404 and 136,682,631 shares issued at September 30, 2014 and December 31, 2013, respectively)
 
1

 
1

Additional paid-in capital
 
1,564

 
1,539

Treasury stock (at cost, 256,984 and 460,914 shares at September 30, 2014 and December 31, 2013, respectively)
 
(9
)
 
(13
)
Accumulated other comprehensive gain (loss)
 
2

 
2

Retained earnings
 
1,967

 
1,427

Total stockholders' equity
 
3,525

 
2,956

Total liabilities and stockholders' equity
 
$
9,068

 
$
9,321


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

1


NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Oil, gas and NGL revenues
 
$
610

 
$
486

 
$
1,771

 
$
1,291

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Lease operating
 
126

 
104

 
356

 
299

Production and other taxes
 
31

 
19

 
85

 
52

Depreciation, depletion and amortization
 
228

 
171

 
628

 
482

General and administrative
 
48

 
61

 
172

 
160

Other
 
8

 

 
8

 

Total operating expenses
 
441

 
355

 
1,249

 
993

Income (loss) from operations
 
169

 
131

 
522

 
298

 
 
 
 
 
 
 
 
 
Other income (expense):
 
 

 
 

 
 

 
 

Interest expense
 
(51
)
 
(52
)
 
(153
)
 
(153
)
Capitalized interest
 
13

 
13

 
39

 
40

Commodity derivative income (expense)
 
303

 
(99
)
 
33

 
(66
)
Other, net
 
1

 
1

 
4

 
5

Total other income (expense)
 
266

 
(137
)
 
(77
)
 
(174
)
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
435

 
(6
)
 
445

 
124

 
 
 
 
 
 
 
 
 
Income tax provision (benefit):
 
 

 
 

 
 

 
 

Current
 
1

 
(4
)
 
1

 
(4
)
Deferred
 
155

 
2

 
164

 
51

Total income tax provision (benefit)
 
156

 
(2
)
 
165

 
47

Income (loss) from continuing operations
 
279

 
(4
)
 
280

 
77

Income (loss) from discontinued operations, net of tax
 
(1
)
 
31

 
260

 
53

Net income (loss)
 
$
278

 
$
27

 
$
540

 
$
130

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
2.04

 
$
(0.03
)
 
$
2.06

 
$
0.57

Income (loss) from discontinued operations
 

 
0.08

 
1.90

 
0.24

Basic earnings (loss) per share
 
$
2.04

 
$
0.05

 
$
3.96

 
$
0.81

Diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
2.02

 
$
(0.03
)
 
$
2.04

 
$
0.57

Income (loss) from discontinued operations
 

 
0.08

 
1.88

 
0.24

Diluted earnings (loss) per share
 
$
2.02

 
$
0.05

 
$
3.92

 
$
0.81

 
 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding for basic earnings (loss) per share
 
137

 
136

 
137

 
135

 
 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding for diluted earnings (loss) per share
 
138

 
136

 
138

 
136


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,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
278

 
$
27

 
$
540

 
$
130

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gain (loss) on investments, net of tax
 

 

 

 
3

Other comprehensive income (loss), net of tax
 

 

 

 
3

Comprehensive income (loss)
 
$
278

 
$
27

 
$
540

 
$
133


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,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
Net income (loss)
 
$
540

 
$
130

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation, depletion and amortization
 
665

 
664

Deferred tax provision (benefit)
 
308

 
89

Stock-based compensation
 
15

 
35

Commodity derivative (income) expense
 
(33
)
 
66

Cash receipts (payments) related to derivative contracts, net
 
(106
)
 
45

Gain on sale of Malaysia business
 
(388
)
 

Other, net
 
1

 
7

Changes in operating assets and liabilities:
 
 

 
 

(Increase) decrease in accounts receivable
 
89

 
16

(Increase) decrease in inventories
 
(1
)
 
(4
)
(Increase) decrease in other current assets
 
(2
)
 
8

(Increase) decrease in other assets
 
1

 
4

Increase (decrease) in accounts payable and accrued liabilities
 
(20
)
 
30

Increase (decrease) in advances from joint owners
 
(1
)
 
10

Increase (decrease) in other liabilities
 
2

 
(5
)
Net cash provided by (used in) operating activities
 
1,070

 
1,095

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Additions to oil and gas properties
 
(1,535
)
 
(1,441
)
Acquisitions of oil and gas properties
 
(21
)
 
(64
)
Proceeds from sales of oil and gas properties
 
616

 
25

Proceeds received from sale of Malaysia business, net
 
809

 

Additions to other property and equipment
 
(22
)
 
(25
)
Redemptions of investments
 
39

 
1

Net cash provided by (used in) investing activities
 
(114
)
 
(1,504
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from borrowings under credit arrangements
 
2,076

 
2,409

Repayments of borrowings under credit arrangements
 
(2,725
)
 
(1,969
)
Debt issue costs
 

 
(4
)
Proceeds from issuances of common stock
 
4

 
1

Repurchase of preferred shares of subsidiary
 

 
(20
)
Purchases of treasury stock, net
 
(10
)
 
(7
)
Net cash provided by (used in) financing activities
 
(655
)
 
410

 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
301

 
1

Cash and cash equivalents, beginning of period
 
95

 
88

Cash and cash equivalents, end of period
 
$
396

 
$
89


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)
 
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
 Comprehensive
Gain (Loss)
 
 Total
Stockholders' Equity
 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 31, 2013
 
136.7

 
$
1

 
(0.5
)
 
$
(13
)
 
$
1,539

 
$
1,427

 
$
2

 
$
2,956

Issuances of common stock
 
0.8

 

 
 
 
 
 
4

 
 
 
 
 
4

Stock-based compensation
 
 
 
 
 
 
 
 
 
35

 
 
 
 
 
35

Treasury stock, net
 
 
 
 
 
0.2

 
4

 
(14
)
 
 
 
 
 
(10
)
Net income
 
 
 
 
 
 
 
 
 
 
 
540

 
 
 
540

Balance, September 30, 2014
 
137.5

 
$
1

 
(0.3
)
 
$
(9
)
 
$
1,564

 
$
1,967

 
$
2

 
$
3,525


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

5



NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 (NGLs). Our principal areas of operation include the Mid-Continent, the Rocky Mountains and the onshore Gulf Coast regions of North America.

Our consolidated 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,” “our” or the “Company” 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 consolidated 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, 2013.
  
Discontinued Operations

Our businesses in Malaysia and China were classified as held for sale in the second quarter of 2013. Accordingly, the results of our international operations are reflected separately as discontinued operations in the consolidated statement of operations on a line immediately after “Income (loss) from continuing operations.” See Note 3, “Discontinued Operations,” for additional disclosures, as well as information regarding the sale of our Malaysia business, which closed in February 2014. These financial statements and notes are inclusive of our international operations unless otherwise noted.

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 quantities and values of proved oil, natural gas and NGL reserves used in calculating depletion and assessing impairment of our oil and gas properties. Actual results could differ significantly from these estimates. Our most significant estimates are associated with the quantities of proved oil, natural gas and NGL reserves and the fair value of both our derivative positions and our stock-based compensation liability awards. 

Reclassifications

Certain reclassifications have been made to prior years' reported amounts in order to conform to the current year presentation. These reclassifications did not impact our net income (loss), stockholders' equity or cash flows.

Restricted Cash and Deferred Liabilities
     
Restricted cash and the associated deferred liability on our consolidated balance sheet at December 31, 2013, represent a deposit received in the fourth quarter of 2013 related to the sale of our Malaysia business. Amounts were contractually restricted until the transaction closed in February 2014. See Note 3, “Discontinued Operations,” for further discussion about the close of the sale of our Malaysia business.



6

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


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, interest 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 approximately $38 million and $47 million of interest and direct internal costs during the three-month periods ended September 30, 2014 and 2013, respectively, and $158 million and $147 million during the nine-month periods ended September 30, 2014 and 2013, respectively.

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. During the first quarter of 2014, we recognized a gain of approximately $388 million ($249 million, after tax) on the sale of our Malaysia business, which constituted the entire full cost pool for Malaysia. See Note 3, “Discontinued Operations,” for further discussion.

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. We did not have a ceiling test writedown in any periods presented.
   
New Accounting Requirements

In August 2014, the FASB issued guidance regarding disclosures of uncertainties about an entity's ability to continue as a going concern. The guidance applies prospectively to all entities, requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern and disclose certain information when substantial doubt is raised. The guidance is effective for interim and annual periods beginning on or after December 15, 2016. We do not expect adoption of this guidance to have a material impact on our financial position or results of operations.

In June 2014, the FASB issued guidance regarding stock-based compensation awards with targets that affect vesting and that could be achieved after the requisite service period. The guidance applies on a prospective basis to awards that are granted or modified on or after the effective date. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. We do not expect adoption of this guidance to have a material impact on our financial position or results of operations.

In May 2014, the FASB issued guidance regarding the accounting for revenue from contracts with customers. The guidance may be applied retrospectively or using a modified retrospective approach to adjust retained earnings. The guidance is effective for interim and annual periods beginning on or after December 15, 2016. We are currently evaluating the impact of this guidance on our financial statements.

In April 2014, the FASB issued guidance regarding the reporting of discontinued operations. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective for interim and annual periods beginning on or after December 15, 2014. We do not expect adoption of this guidance to have a material impact on our financial position or results of operations.



7

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


2.      Earnings Per Share:
     
The following is the calculation of basic and diluted weighted-average shares outstanding and earnings per share (EPS) for the indicated periods:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In millions, except per share data)
Income (numerator):
 
 
 
 
 
 
 
 
  Income (loss) from continuing operations
 
$
279

 
$
(4
)
 
$
280

 
$
77

  Income (loss) from discontinued operations, net of tax
 
(1
)
 
31

 
260

 
53

Net income (loss)
 
278

 
27

 
540

 
130

Repurchase of preferred shares of subsidiary(3)
 

 
(20
)
 

 
(20
)
Net income (loss) attributable to common shareholders
 
$
278

 
$
7

 
$
540

 
$
110

 
 
 
 
 
 
 
 
 
Weighted-average shares (denominator):
 
 

 
 

 
 

 
 

Weighted-average shares — basic
 
137

 
136

 
137

 
135

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
 
138

 
136

 
138

 
136

 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
2.04

 
$
(0.03
)
 
$
2.06

 
$
0.57

Income (loss) from discontinued operations before preferred share repurchase
 

 
0.23

 
1.90

 
0.39

Repurchase of preferred shares of subsidiary(3)
 

 
(0.15
)
 

 
(0.15
)
Income (loss) from discontinued operations
 

 
0.08

 
1.90

 
0.24

Basic earnings (loss) per share
 
$
2.04

 
$
0.05

 
$
3.96

 
$
0.81

Diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
2.02

 
$
(0.03
)
 
$
2.04

 
$
0.57

Income (loss) from discontinued operations before preferred share repurchase
 

 
0.23

 
1.88

 
0.39

Repurchase of preferred shares of subsidiary(3)
 

 
(0.15
)
 

 
(0.15
)
Income (loss) from discontinued operations
 

 
0.08

 
1.88

 
0.24

Diluted earnings (loss) per share
 
$
2.02

 
$
0.05

 
$
3.92

 
$
0.81

_______
(1)
    Excludes 0.3 million and 1.1 million shares of unvested restricted stock or restricted stock units and stock options for the three and nine months ended September 30, 2014 and 4.1 million shares for the nine months ended September 30, 2013 because including the effect would have been anti-dilutive.
(2)
The effect of unvested restricted stock or restricted stock units and stock options has not been included in the calculation of the shares outstanding for diluted EPS for the three months ended September 30, 2013, as their effect would have been anti-dilutive. Had we recognized income from continuing operations for this period, incremental shares attributable to the assumed vesting of unvested restricted stock and restricted stock units and the assumed exercise of outstanding stock options would have increased diluted weighted-average shares outstanding by 0.7 million shares for the three months ended September 30, 2013.
(3)
The numerator includes an adjustment of $20 million related to the repurchase of preferred shares of a now wholly-owned subsidiary, which reduces net income (loss) for purposes of earnings per share for the three and nine months ended September 30, 2013. The subsidiary is part of our discontinued operations. See Note 14, “Related-Party Transactions,” for additional information.

8

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


3.     Discontinued Operations:

Malaysia Update

In February 2014, Newfield International Holdings, Inc., a wholly-owned subsidiary of the Company, closed the stock purchase agreement to sell its Malaysia business to SapuraKencana Petroleum Berhad, a Malaysian public company, for approximately $898 million (subject to purchase price adjustments). As a result of the sale, we recorded a gain in the first quarter of 2014 of approximately $388 million ($249 million, after tax). As of the date of this report, the final post-close settlement is pending due to a dispute with the purchaser regarding certain post-closing adjustments. We have not recorded any adjustments to the sales price or the gain recognized as we believe the Company would prevail in the event of arbitration on this matter.

China Update

In August 2013, during the installation of the LF-7 topside facilities by a third-party contractor, a hydraulic jacking system malfunctioned, and the installation was suspended. In August 2014, the LF-7 topside facilities were installed, and we began drilling our first well. We expect to achieve first oil production in the fourth quarter of 2014 and continue to work with potential purchasers of our China business.

Loss from discontinued operations from our China business was $2 million ($1 million, net of tax) for the three months ended September 30, 2014, and income was $8 million ($2 million, net of tax) for the nine months ended September 30, 2014. Income from discontinued operations from our China business was $9 million ($8 million, net of tax) for the three months ended September 30, 2013 and $26 million ($13 million, net of tax) for the nine months ended September 30, 2013.

Results of Discontinued Operations
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In millions)
Oil and gas revenues(1)
 
$

 
$
189

 
$
112

 
$
659

Operating expenses
 
2

 
128

 
83

 
501

    Income (loss) from discontinued operations
 
(2
)
 
61

 
29

 
158

Other income (expense)
 

 
(1
)
 

 
(2
)
Gain on sale of Malaysia business
 

 

 
388

 

Income (loss) from discontinued operations before income taxes
 
(2
)
 
60

 
417

 
156

Income tax provision (benefit):
 


 


 


 


    Current
 
(1
)
 
10

 
13

 
65

    Deferred
 

 
19

 
144

 
38

    Total income tax provision (benefit)
 
(1
)
 
29

 
157

 
103

Income (loss) from discontinued operations, net of tax
 
$
(1
)
 
$
31

 
$
260

 
$
53

________________
(1)
Certain payments to foreign governments made on our behalf that are part of the revenue process are recorded as a reduction of the related oil and gas revenues.

Income Taxes

Historically, our international effective tax rate has been approximately 37%. As a result of our December 2012 decision to repatriate earnings from our international operations, we have experienced higher international effective tax rates due to these earnings being taxed both in the U.S. and the local countries. We expect this to continue until we fully divest our international businesses. The effective tax rate for our discontinued operations for the three months ended September 30, 2014 was 63.1% and for the nine months ended September 30, 2014 was 37.8% as the majority of our income (loss) from discontinued operations resulted from the gain on the sale of our Malaysia business, which was only taxable in the U.S. The effective tax rate

9

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


for our discontinued operations for the three months ended September 30, 2013 was 48.2% and for the nine months ended September 30, 2013 was 65.7%.

Assets and Liabilities in the Consolidated Balance Sheet Attributable to Discontinued Operations

 
September 30,
 
December 31,

 
2014
 
2013

 
(In millions)
Current assets:
 

 

Cash and cash equivalents
 
$
27

 
$
84

Accounts receivable
 
89

 
200

Inventories
 
14

 
130

  Other current assets
 
5

 
33

Total current assets
 
135

 
447

Noncurrent assets:
 


 


 Oil and gas properties, net of accumulated depreciation, depletion and amortization of $118 and $1,121 as of September 30, 2014 and December 31, 2013, respectively
 
540

 
989

Deferred taxes
 

 
19

  Other assets
 
1

 
4

Total noncurrent assets
 
541

 
1,012

Total assets
 
$
676

 
$
1,459


 


 


Current liabilities:
 


 


Accounts payable
 
$
3

 
$
38

  Accrued liabilities
 
202

 
324

  Asset retirement obligations
 

 
49

  Other current liabilities
 

 
18

Total current liabilities
 
205
 
429
Noncurrent liabilities:
 


 


  Asset retirement obligations
 
2

 
86

Deferred taxes
 
104

 
129

  Other liabilities
 

 
11

Total noncurrent liabilities
 
106

 
226

Total liabilities
 
$
311

 
$
655


Inventories

Substantially all of the crude oil from our international offshore operations is produced into floating production, storage and off-loading vessels (FPSOs) and “lifted” and sold periodically as barge quantities are accumulated. At December 31, 2013, the crude oil inventory from our Malaysia and China operations consisted of approximately 1.1 million barrels of crude oil valued at cost of $90 million and is included in the “Inventories” line item in the preceding table and in our consolidated balance sheet. Cost for purposes of the carrying value of oil inventory is the sum of related production costs and depletion expense. As of September 30, 2014, we had crude oil inventory of approximately 75,000 barrels valued at cost of $3 million related to our China operations. The remaining inventory is materials and supplies for use in our oil and gas operations.

Oil and Gas Properties

As of September 30, 2014, all of our oil and gas properties in our discontinued operations were subject to amortization. As of December 31, 2013, approximately $115 million of our Malaysia oil and gas properties in our discontinued operations were not subject to amortization.


10

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


Asset Retirement Obligations

During the nine months ended September 30, 2014, asset retirement obligations were reduced by $133 million as a result of the sale of our Malaysia business in February 2014.


4.      Oil and Gas Assets:

  Property and Equipment

  Property and equipment consisted of the following:
 
 
September 30, 
 2014
 
December 31, 
 2013
 
 
(In millions)
Oil and gas properties:
 
 
 
 
Subject to amortization
 
$
14,348

 
$
15,107

Not subject to amortization
 
1,438

 
1,300

Gross oil and gas properties
 
15,786

 
16,407

Accumulated depreciation, depletion and amortization
 
(7,915
)
 
(8,306
)
Net oil and gas properties
 
$
7,871

 
$
8,101

Other property and equipment:
 
 

 
 

Furniture, fixtures and equipment
 
$
150

 
$
139

Gathering systems and equipment
 
111

 
104

Accumulated depreciation and amortization
 
(81
)
 
(69
)
Net other property and equipment
 
$
180

 
$
174


Oil and gas properties not subject to amortization as of September 30, 2014, consisted of the following:
 
 
Costs Incurred In
 
 
 
 
2014
 
2013
 
2012
 
2011 and Prior
 
Total
 
 
(In millions)
Acquisition costs
 
$
129

 
$
199

 
$
86

 
$
410

 
$
824

Exploration costs
 
345

 
1

 
1

 
7

 
354

Development costs
 
14

 
8

 
31

 
11

 
64

Fee mineral interests
 

 
1

 

 
23

 
24

Capitalized interest
 
39

 
53

 
67

 
13

 
172

Total oil and gas properties not subject to amortization
 
$
527

 
$
262

 
$
185

 
$
464

 
$
1,438


Granite Wash Asset Sale

On September 19, 2014, we closed on the sale of our Granite Wash assets, located primarily in Texas, for approximately $588 million, subject to customary post-closing purchase price adjustments. The sale of our Granite Wash assets did not significantly alter the relationship between capitalized costs and proved reserves, and as such, all proceeds were recorded as adjustments to our domestic full cost pool with no gain or loss recognized. These consolidated financial statements include the results of our Granite Wash operations through the date of sale.








11

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


5.      Derivative Financial Instruments:
     
Commodity Derivative Instruments
     
We utilize derivative strategies that consist of either a single derivative instrument or a combination of instruments to manage the variability in cash flows associated with the forecasted sale of our future domestic oil and natural gas production. While the use of derivative instruments limits the downside risk of adverse commodity price movements, their use also may limit future income from favorable commodity price movements.

In addition to the derivative strategies outlined in our annual Report on Form 10-K for the year ended December 31, 2013, we also utilize swaptions from time to time. A swaption is an option to exercise a swap where the buyer (counterparty) of the swaption purchases the right from the seller (Newfield), but not the obligation, to enter into a fixed-price swap with the seller on a predetermined date (expiration date). The swap price is a fixed price determined at the time of the swaption contract. If the swaption is exercised, the contract will become a swap treated consistent with our other fixed-price swaps.     
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, estimated volatility, non-performance risk adjustments using credit default swaps and time to maturity. The calculation of the fair value of options requires the use of an option-pricing model. See Note 8, “Fair Value Measurements.”

At September 30, 2014, we had outstanding derivative positions as set forth in the tables below.

Natural Gas
 
 
 
 
NYMEX Contract Price Per MMBtu
 
 
 
 
 
 
 
 
 
 
Collars
 
Estimated Fair Value Asset (Liability)
Period and Type of Instrument
 
Volume in MMMBtus
 
Swaps (Weighted Average)
 
Sold Puts (Weighted Average)
 
Floors (Weighted Average)
 
Ceilings (Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
2014:
 
 
 
 
 
 
 
 

 
 
 
 
  Fixed-price swaps
 
20,400

 
$
3.97

 
$

 
$

 
$

 
$
(2
)
  Collars
 
5,980

 

 

 
3.75

 
4.62

 

2015:
 
 

 
 

 
 

 
 

 
 

 
 

  Fixed-price swaps
 
49,275

 
4.28

 

 

 

 
14

  Collars
 
38,325

 

 

 
3.93

 
4.74

 
7

Total
 
$
19



12

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


Crude Oil
 
 
 
 
NYMEX Contract Price Per Bbl
 
 
 
 
 
 
 
 
 
 
Collars
 
Estimated Fair Value
Asset (Liability)
Period and Type of Instrument
 
Volume in MBbls
 
Swaps
(Weighted Average)
 
Sold Puts
(Weighted Average)
 
Floors
(Weighted Average)
 
Ceilings
(Weighted Average)
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
2014:
 
 
 
 
 
 
 
 
 
 
 
 
  Fixed-price swaps
 
2,116

 
$
89.94

 
$

 
$

 
$

 
$
(1
)
  Fixed-price swaps with sold puts
 
1,472

 
95.16

 
75.00

 

 

 
7

  Collars with sold puts
 
552

 

 
75.83

 
90.83

 
102.93

 
1

2015:
 
 

 
 

 
 

 
 

 
 

 
 

  Fixed-price swaps
 
8,845

 
90.42

 

 

 

 
23

  Fixed-price swaps with sold puts
 
7,354

 
90.22

 
69.75

 

 

 
11

  Collars with sold puts
 
730

 

 
75.00

 
90.00

 
104.00

 
3

2016:
 
 

 
 

 
 

 
 

 
 

 
 

  Fixed-price swaps with sold puts
 
7,864


90.89


74.59






14

  Collars with sold puts
 
6,220



 
75.00

 
90.00

 
96.15

 
19

  Swaptions (1)
 

 
91.00

 

 

 

 
(1
)
2017:
 
 
 
 
 
 
 
 
 
 
 
 
  Fixed-price swaps with sold puts
 
1,180

 
90.63

 
75.00

 

 

 
2

  Collars with sold puts
 
2,080

 

 
75.00

 
90.00

 
95.59

 
6

Total
 
$
84

________
(1)
During the third quarter of 2014, we sold crude oil swaption contracts that, if exercised on their expiration date in the first quarter of 2015, would hedge 732 MBbls of calendar-year 2016 production. These contracts give the counterparties the option to enter into swap contracts with us at $91.00/Bbl for calendar-year 2016.

Additional Disclosures about Derivative Financial Instruments

We had derivative financial instruments recorded in our consolidated balance sheet as assets (liabilities) at their respective estimated fair value, as set forth below.
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Gross Fair Value
 
Offset in Balance Sheet
 
Balance Sheet Location
 
Gross Fair Value
 
Offset in Balance Sheet
 
Balance Sheet Location
 
 
 
 
Current
 
Noncurrent
 
 
 
Current
 
Noncurrent
 
 
(In millions)
 
(In millions)
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas positions
 
$
23

 
$
(3
)
 
$
15

 
$
5

 
$
(4
)
 
$
3

 
$
(1
)
 
$

Oil positions
 
141

 
(57
)
 
33

 
51

 
(57
)
 
57

 

 

Total
 
$
164

 
$
(60
)
 
$
48

 
$
56

 
$
(61
)
 
$
60

 
$
(1
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Natural gas positions
 
$
11

 
$
(2
)
 
$

 
$
9

 
$
(22
)
 
$
2

 
$
(20
)
 
$

Oil positions
 
26

 
(9
)
 

 
17

 
(51
)
 
9

 
(42
)
 

Total
 
$
37

 
$
(11
)
 
$

 
$
26

 
$
(73
)
 
$
11

 
$
(62
)
 
$

 



13

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


The amount of gain (loss) recognized in “Commodity derivative income (expense)” in our consolidated statement of operations related to our derivative financial instruments follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In millions)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Realized gain (loss) on natural gas positions
 
$
(2
)
 
$
19

 
$
(36
)
 
$
51

Realized gain (loss) on oil positions
 
(18
)
 
(12
)
 
(70
)
 
(9
)
Total realized gain (loss)
 
(20
)
 
7

 
(106
)
 
42

Unrealized gain (loss) on natural gas positions
 
38

 
(6
)
 
30

 
(24
)
Unrealized gain (loss) on oil positions
 
285

 
(100
)
 
109

 
(84
)
Total unrealized gain (loss)
 
323

 
(106
)
 
139

 
(108
)
Total
 
$
303

 
$
(99
)
 
$
33

 
$
(66
)

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, 2014, 10 of our 16 counterparties accounted for approximately 85% of our contracted volumes, with no single counterparty accounting for more than 15%.

A portion of our derivative instruments are with 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:

Accounts receivable consisted of the following:

 
 
September 30, 
 2014
 
December 31, 
 2013
 
 
(In millions)
Revenue
 
$
176

 
$
294

Joint interest
 
183

 
156

Other
 
37

 
25

Reserve for doubtful accounts
 
(1
)
 
(1
)
Total accounts receivable
 
$
395

 
$
474

















14

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


7.    Accrued Liabilities:

Accrued liabilities consisted of the following:
 
 
September 30, 
 2014
 
December 31, 
 2013
 
 
(In millions)
Revenue payable
 
$
179

 
$
175

Accrued capital costs
 
449

 
458

Accrued lease operating expenses
 
27

 
71

Employee incentive expense
 
49

 
64

Accrued interest on debt
 
48

 
72

Taxes payable
 
28

 
93

Other
 
47

 
45

Total accrued liabilities
 
$
827

 
$
978



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 are 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 fixed-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). Level 3 instruments primarily include derivative instruments, such as commodity options (i.e., price collars, sold puts or swaptions) and other financial investments.
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.

Our valuation model for the Stockholder Value Appreciation Program (SVAP) is a Monte Carlo simulation that is based on a probability model and considers various inputs including: (a) the measurement date stock price, (b) time value and (c) historical and implied volatility. See Note 11, “Stock-Based Compensation,” for a description of the SVAP.

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.





15

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


Recurring Fair Value Measurements

The following table summarizes the valuation of our assets and liabilities that are measured at fair value on a recurring basis.
 
 
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, 2013:
 
 
 
 
 
 
 
 
Money market fund investments
 
$
2

 
$

 
$

 
$
2

Deferred compensation plan assets
 
8

 

 

 
8

Investments available-for-sale:
 
 

 
 

 
 

 
 

Equity securities
 
8

 

 

 
8

Auction rate securities
 

 

 
39

 
39

Oil and gas derivative swap contracts
 

 
(28
)
 

 
(28
)
Oil and gas derivative option contracts
 

 

 
(8
)
 
(8
)
Stock-based compensation liability awards
 
(11
)
 

 
(5
)
 
(16
)
Total
 
$
7

 
$
(28
)
 
$
26

 
$
5

 
 
 

 
 

 
 

 
 

As of September 30, 2014:
 
 

 
 

 
 

 
 

Money market fund investments
 
$
365

 
$

 
$

 
$
365

Deferred compensation plan assets
 
9

 

 

 
9

Equity securities available-for-sale
 
9

 

 

 
9

Oil and gas derivative swap contracts
 

 
104

 

 
104

Oil and gas derivative option contracts
 

 

 
(1
)
 
(1
)
Stock-based compensation liability awards
 
(13
)
 

 
(7
)
 
(20
)
Total
 
$
370

 
$
104

 
$
(8
)
 
$
466


The determination of the fair values above incorporates various factors, which include not only the impact of our non-performance risk on our derivative 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 December 31, 2013, we held $39 million of auction rate securities, which were classified as a Level 3 fair value measurement. During the first quarter of 2014, all auction rate securities were sold for $39 million.















16

Table of Contents
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)


Level 3 Fair Value Measurements

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
 
Stock-Based Compensation
 
Total
 
 
(In millions)
Balance at January 1, 2013
 
$
36

 
$
115

 
$

 
$
151

Realized or unrealized gains (losses):
 
 

 
 

 
 

 
 

Included in earnings
 

 
(59
)
 
(8
)
 
(67
)
Included in other comprehensive income (loss)
 
4

 

 

 
4

Purchases, issuances, sales and settlements:
 
 

 
 

 
 

 
 

Settlements
 
(1
)
 
(46
)
 

 
(47
)
Transfers in to Level 3
 

 

 

 

Transfers out of Level 3
 

 

 

 

Balance at September 30, 2013
 
$
39

 
$
10

 
$
(8
)
 
$
41

 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses included in earnings relating to Level 3 instruments still held at September 30, 2013
 
$

 
$
(8
)
 
$
(8
)
 
$
(16
)
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
$
39

 
$
(8
)
 
$
(5
)
 
$
26

Realized or unrealized gains (losses) included in earnings
 

 

 
(42
)
 
(42
)
Purchases, issuances, sales and settlements:
 
 

 
 

 
 

 
 

Sales
 
(39
)
 

 

 
(39
)
Settlements
 

 
4

 
40

 
44

Transfers in to Level 3
 

 

 

 

Transfers out of Level 3(1)
 

 
3

 

 
3

Balance at September 30, 2014
 
$

 
$
(1
)
 
$
(7
)
 
$
(8
)
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses included in earnings relating to Level 3 instruments still held at September 30, 2014
 
$

 
$
20

 
$
(3
)
 
$
17

________
(1)
During the second quarter of 2014, we transferred $3 million of derivative option contracts out of the Level 3 hierarchy. The transfer was a result of our Level 3 swaptions being exercised by the counterparties as swaps on May 30, 2014.