UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q




x  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended March 31, 2009





OR





o   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _____to_____





Commission
file number: 001-07964





NOBLE
ENERGY, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            73-0785597(State
      of incorporation)
            
            (I.R.S.
      employer identification number)100
      Glenborough Drive, Suite 100Houston,
      Texas
            
            77067(Address
      of principal executive offices)
            
            (Zip
      Code)





(281)
872-3100


(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 [X]    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 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes
[  ]    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
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
      accelerated filer [X]
            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 Exchange Act).


Yes
[  ]    No [X]





Number of
shares of common stock outstanding as of April 13, 2009:
173,347,618.














PART
      I.  FINANCIAL INFORMATIONITEM
      1. FINANCIAL STATEMENTSNoble
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Operations(in
      millions, except per share amounts)(unaudited)Three
      Months EndedMarch
      31,2009
                      
                      
                      2008RevenuesOil,
      gas and NGL sales
                      
                      $
                      406
                      
                      
                      $
                      944Income
      from equity method investees
                      
                      
                      11
                      
                      
                      
                      62Other
      revenues
                      
                      
                      24
                      
                      
                      
                      19Total
                      
                      
                      441
                      
                      
                      
                      1,025Costs
      and ExpensesLease
      operating expense
                      
                      
                      100
                      
                      
                      
                      82Production
      and ad valorem taxes
                      
                      
                      18
                      
                      
                      
                      43Transportation
      expense
                      
                      
                      12
                      
                      
                      
                      13Exploration
      expense
                      
                      
                      42
                      
                      
                      
                      40Depreciation,
      depletion and amortization
                      
                      
                      200
                      
                      
                      
                      203General
      and administrative
                      
                      
                      59
                      
                      
                      
                      60Asset
      impairments
                      
                      
                      437
                      
                      
                      
                      -Other
      operating (income) expense, net
                      
                      
                      (6
                      )
                      
                      
                      27Total
                      
                      
                      862
                      
                      
                      
                      468Operating
      Income (Loss)
                      
                      
                      (421
                      )
                      
                      
                      557Other
      (Income) Expense(Gain)
      loss on commodity derivative instruments
                      
                      
                      (73
                      )
                      
                      
                      237Interest,
      net of amount capitalized
                      
                      
                      18
                      
                      
                      
                      17Other
      (income) expense, net
                      
                      
                      8
                      
                      
                      
                      (13
                      )Total
                      
                      
                      (47
                      )
                      
                      
                      241Income
      (Loss) Before Income Taxes
                      
                      
                      (374
                      )
                      
                      
                      316Income
      Tax Provision (Benefit)
                      
                      
                      (186
                      )
                      
                      
                      101Net
      Income (Loss)
                      
                      $
                      (188
                      )
                      
                      $
                      215Earnings
      (Loss) Per ShareBasic
                      
                      $
                      (1.09
                      )
                      
                      $
                      1.25Diluted
                      
                      
                      (1.09
                      )
                      
                      
                      1.20Weighted
      average number of shares outstandingBasic
                      
                      
                      173
                      
                      
                      
                      172Diluted
                      
                      
                      173
                      
                      
                      
                      175The
      accompanying notes are an integral part of these financial
      statements.







2





Noble
      Energy, Inc. and SubsidiariesConsolidated
      Balance Sheets(in
      millions)(unaudited)March
      31,
                                        
                                        December
      31,2009
                                        
                                        
                                        2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                                        
                                        $
                                        1,017
                                        
                                        $
                                        1,140Accounts
      receivable, net
                                        
                                        
                                        493
                                        
                                        
                                        423Commodity
      derivative instruments
                                        
                                        
                                        403
                                        
                                        
                                        437Other
      current assets
                                        
                                        
                                        134
                                        
                                        
                                        158Total
      current assets
                                        
                                        
                                        2,047
                                        
                                        
                                        2,158Property,
      plant and equipmentOil
      and gas properties (successful efforts method of
    accounting)
                                        
                                        
                                        11,921
                                        
                                        
                                        11,963Other
      property, plant and equipment
                                        
                                        
                                        176
                                        
                                        
                                        175Total
      property, plant and equipment
                                        
                                        
                                        12,097
                                        
                                        
                                        12,138Accumulated
      depreciation, depletion and amortization
                                        
                                        
                                        (3,328)
                                        
                                        
                                        (3,134)Total
      property, plant and equipment, net
                                        
                                        
                                        8,769
                                        
                                        
                                        9,004Goodwill
                                        
                                        
                                        757
                                        
                                        
                                        759Other
      noncurrent assets
                                        
                                        
                                        469
                                        
                                        
                                        463Total
      Assets
                                        
                                        $
                                        12,042
                                        
                                        $
                                        12,384LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable - trade
                                        
                                        $
                                        509
                                        
                                        $
                                        579Income
      taxes payable
                                        
                                        
                                        165
                                        
                                        
                                        130Deferred
      income taxes
                                        
                                        
                                        121
                                        
                                        
                                        142Other
      current liabilities
                                        
                                        
                                        354
                                        
                                        
                                        323Total
      current liabilities
                                        
                                        
                                        1,149
                                        
                                        
                                        1,174Long-term
      debt
                                        
                                        
                                        2,357
                                        
                                        
                                        2,241Deferred
      income taxes
                                        
                                        
                                        1,901
                                        
                                        
                                        2,174Other
      noncurrent liabilities
                                        
                                        
                                        510
                                        
                                        
                                        486Total
      Liabilities
                                        
                                        
                                        5,917
                                        
                                        
                                        6,075Commitments
      and ContingenciesShareholders’
      EquityPreferred
      stock - par value $1.00; 4 million shares authorized, none
      issued
                                        
                                        
                                        -
                                        
                                        
                                        -Common stock - par
      value $3.33 1/3; 250 million shares authorized;
                                          193 million and 192 million
      shares issued, respectively
                                        
                                        
                                        645
                                        
                                        
                                        641Capital
      in excess of par value
                                        
                                        
                                        2,215
                                        
                                        
                                        2,193Accumulated
      other comprehensive loss
                                        
                                        
                                        (100)
                                        
                                        
                                        (110)Treasury
      stock, at cost; 19 million shares
                                        
                                        
                                        (615)
                                        
                                        
                                        (614)Retained
      earnings
                                        
                                        
                                        3,980
                                        
                                        
                                        4,199Total
      Shareholders’ Equity
                                        
                                        
                                        6,125
                                        
                                        
                                        6,309Total
      Liabilities and Shareholders’ Equity
                                        
                                        $
                                        12,042
                                        
                                        $
                                        12,384The
      accompanying notes are an integral part of these financial
      statements.







3


Noble
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows(in
      millions)(unaudited)Three
      Months EndedMarch
      31,2009
                                              
                                              
                                              2008Cash
      Flows From Operating ActivitiesNet
      income (loss)
                                              
                                              $
                                              (188
                                              )
                                              
                                              $
                                              215Adjustments to
      reconcile net income (loss) tonet cash provided by operating
      activities:Depreciation,
      depletion and amortization
                                              
                                              
                                              200
                                              
                                              
                                              
                                              203Asset
      impairments
                                              
                                              
                                              437
                                              
                                              
                                              
                                              -Deferred
      income taxes
                                              
                                              
                                              (301
                                              )
                                              
                                              
                                              35Income
      from equity method investees
                                              
                                              
                                              (11
                                              )
                                              
                                              
                                              (62
                                              )Dividends
      from equity method investees
                                              
                                              
                                              -
                                              
                                              
                                              
                                              76Unrealized
      loss on commodity derivative instruments
                                              
                                              
                                              80
                                              
                                              
                                              
                                              218Settlement
      of previously recognized hedge losses
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (62
                                              )Allowance
      for doubtful accounts
                                              
                                              
                                              (40
                                              )
                                              
                                              
                                              3Other
                                              
                                              
                                              24
                                              
                                              
                                              
                                              17Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
                                              
                                              
                                              (34
                                              )
                                              
                                              
                                              (137
                                              )(Increase)
      in other current assets
                                              
                                              
                                              (1
                                              )
                                              
                                              
                                              (5
                                              )(Decrease)
      in accounts payable
                                              
                                              
                                              (35
                                              )
                                              
                                              
                                              (61
                                              )Increase
      in other current liabilities
                                              
                                              
                                              54
                                              
                                              
                                              
                                              66Net
      Cash Provided by Operating Activities
                                              
                                              
                                              185
                                              
                                              
                                              
                                              506Cash
      Flows From Investing ActivitiesAdditions
      to property, plant and equipment
                                              
                                              
                                              (399
                                              )
                                              
                                              
                                              (464
                                              )Proceeds
      from sale of property, plant and equipment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              109Net
      Cash Used in Investing Activities
                                              
                                              
                                              (399
                                              )
                                              
                                              
                                              (355
                                              )Cash
      Flows From Financing ActivitiesExercise
      of stock options
                                              
                                              
                                              11
                                              
                                              
                                              
                                              10Excess
      tax benefits from stock-based awards
                                              
                                              
                                              3
                                              
                                              
                                              
                                              9Cash
      dividends paid
                                              
                                              
                                              (31
                                              )
                                              
                                              
                                              (21
                                              )Purchase
      of treasury stock
                                              
                                              
                                              (1
                                              )
                                              
                                              
                                              (2
                                              )Proceeds
      from credit facilities
                                              
                                              
                                              180
                                              
                                              
                                              
                                              200Repayment
      of credit facilities
                                              
                                              
                                              (1,060
                                              )
                                              
                                              
                                              (200
                                              )Proceeds
      from issuance of 8 1⁄4% senior notes
                                              
                                              
                                              989
                                              
                                              
                                              
                                              -Net
      Cash Provided by (Used in) Financing Activities
                                              
                                              
                                              91
                                              
                                              
                                              
                                              (4
                                              )(Decrease)
      Increase in Cash and Cash Equivalents
                                              
                                              
                                              (123
                                              )
                                              
                                              
                                              147Cash
      and Cash Equivalents at Beginning of Period
                                              
                                              
                                              1,140
                                              
                                              
                                              
                                              660Cash
      and Cash Equivalents at End of Period
                                              
                                              $
                                              1,017
                                              
                                              
                                              $
                                              807The
      accompanying notes are an integral part of these financial
      statements.








4




Noble
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Shareholders' Equity(in
      millions)(unaudited)Three
      Months EndedMarch
      31,2009
                    
                    
                    2008Common
      StockBalance,
      beginning of period
                    
                    $
                    641
                    
                    
                    $
                    636Exercise
      of stock options
                    
                    
                    2
                    
                    
                    
                    2Restricted
      stock awards, net
                    
                    
                    2
                    
                    
                    
                    1Balance,
      end of period
                    
                    
                    645
                    
                    
                    
                    639Capital
      in Excess of Par ValueBalance,
      beginning of period
                    
                    
                    2,193
                    
                    
                    
                    2,106Stock-based
      compensation expense
                    
                    
                    12
                    
                    
                    
                    9Exercise
      of stock options
                    
                    
                    9
                    
                    
                    
                    8Tax
      benefits related to exercise of stock options
                    
                    
                    3
                    
                    
                    
                    9Restricted
      stock awards, net
                    
                    
                    (2
                    )
                    
                    
                    (1
                    )Rabbi
      trust shares sold
                    
                    
                    -
                    
                    
                    
                    2Balance,
      end of period
                    
                    
                    2,215
                    
                    
                    
                    2,133Accumulated
      Other Comprehensive LossBalance,
      beginning of period
                    
                    
                    (110
                    )
                    
                    
                    (284
                    )Oil
      and gas cash flow hedges:Realized
      amounts reclassified into earnings
                    
                    
                    11
                    
                    
                    
                    38Interest
      rate cash flow hedges:Unrealized
      change in fair value
                    
                    
                    -
                    
                    
                    
                    (27
                    )Net
      change in other
                    
                    
                    (1
                    )
                    
                    
                    (1
                    )Balance,
      end of period
                    
                    
                    (100
                    )
                    
                    
                    (274
                    )Treasury
      Stock at CostBalance,
      beginning of period
                    
                    
                    (614
                    )
                    
                    
                    (613
                    )Purchases
      of treasury stock
                    
                    
                    (1
                    )
                    
                    
                    (2
                    )Rabbi
      trust shares sold
                    
                    
                    -
                    
                    
                    
                    2Balance,
      end of period
                    
                    
                    (615
                    )
                    
                    
                    (613
                    )Retained
      EarningsBalance,
      beginning of period
                    
                    
                    4,199
                    
                    
                    
                    2,964Net
      income (loss)
                    
                    
                    (188
                    )
                    
                    
                    215Cash
      dividends ($0.18 per share and $0.12 per share,
    respectively)
                    
                    
                    (31
                    )
                    
                    
                    (21
                    )Balance,
      end of period
                    
                    
                    3,980
                    
                    
                    
                    3,158Total
      Shareholders' Equity
                    
                    $
                    6,125
                    
                    
                    $
                    5,043The
      accompanying notes are an integral part of these financial
      statements.








5





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note 1 – Organization and
Nature of Operations


Noble
Energy, Inc. (Noble Energy, we or us) is an independent energy company
engaged in worldwide crude oil, natural gas and natural gas liquids
(NGL) acquisition, exploration and production. We operate primarily in the
Rocky Mountains, Mid-continent, and deepwater Gulf of Mexico areas in the US,
with key international operations offshore Israel, the North Sea and West
Africa.




Note 2 – Basis of
Presentation


Presentation– The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the US for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by US generally accepted accounting principles (GAAP) for
complete financial statements. The accompanying consolidated financial
statements at March 31, 2009 (unaudited) and December 31, 2008 and for
the three months ended March 31, 2009 and 2008 contain all normally recurring
adjustments considered necessary for a fair presentation of our financial
position, results of operations and cash flows for such periods. Operating
results for the three-month period ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2009. Certain reclassifications of amounts previously reported have been made to
conform to current year presentations. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
accompanying notes included in our annual report on Form 10-K for the year
ended December 31, 2008.




Estimates– The preparation
of consolidated financial statements in conformity with GAAP requires us to make
a number of estimates and assumptions relating to the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Current credit market
conditions combined with volatile commodity prices have resulted in increased
uncertainty inherent in such estimates and assumptions. As future events and
their effects cannot be determined accurately, actual results could differ
significantly from our estimates.




Statements of Operations Information
– Other statements of operations information is as follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Other
      RevenuesElectricity
      sales (1)
                          
                          $
                          20
                          
                          
                          $
                          15Gathering,
      marketing and processing (GMP) revenues
                          
                          
                          4
                          
                          
                          
                          4Total
                          
                          $
                          24
                          
                          
                          $
                          19Other
      Operating (Income) Expense, netElectricity
      generation expense (1)
                          
                          $
                          (30
                          )
                          
                          $
                          15Gathering,
      marketing and processing (GMP) expense
                          
                          
                          6
                          
                          
                          
                          5Other
      operating expense, net
                          
                          
                          18
                          
                          
                          
                          7Total
                          
                          $
                          (6
                          )
                          
                          $
                          27Other
      (Income) Expense, netDeferred
      compensation expense (income)
                          
                          $
                          5
                          
                          
                          $
                          (7
                          )Interest
      income
                          
                          
                          -
                          
                          
                          
                          (6
                          )Other
      expense, net
                          
                          
                          3
                          
                          
                          
                          -Total
                          
                          $
                          8
                          
                          
                          $
                          (13
                          )







6










(1)
            Includes
      amounts related to our 100%-owned Ecuador integrated power project. The
      project includes the Amistad natural gas field, offshore Ecuador, which
      supplies natural gas to fuel the Machala power plant located in Machala,
      Ecuador. Electricity generation expense includes depreciation, depletion
      and amortization expense (DD&A) and changes in the allowance for
      doubtful accounts. We recognized a net decrease of $42 million in the
      Ecuador allowance during first quarter 2009 and a net increase of $3
      million during first quarter 2008. See Allowance for Doubtful Accounts
      below.




Balance Sheet Information
      – Other balance sheet information is as
  follows:




March
      31,
                                  
                                  December
      31,2009
                                  
                                  2008(in
      millions)Other
      Current AssetsInventories
                                  
                                  $
                                  116
                                  
                                  $
                                  105Asset
      held for sale (1)
                                  
                                  
                                  -
                                  
                                  
                                  26Prepaid
      expenses and other current assets
                                  
                                  
                                  18
                                  
                                  
                                  27Total
                                  
                                  $
                                  134
                                  
                                  $
                                  158Other
      Noncurrent AssetsEquity
      method investments
                                  
                                  $
                                  323
                                  
                                  $
                                  311Mutual
      fund investments
                                  
                                  
                                  77
                                  
                                  
                                  84Commodity
      derivative instruments
                                  
                                  
                                  24
                                  
                                  
                                  33Other
      noncurrent assets
                                  
                                  
                                  45
                                  
                                  
                                  35Total
                                  
                                  $
                                  469
                                  
                                  $
                                  463Other
      Current LiabilitiesAccrued
      and other current liabilities
                                  
                                  $
                                  202
                                  
                                  $
                                  215Commodity
      derivative instruments
                                  
                                  
                                  34
                                  
                                  
                                  23Short-term
      borrowings
                                  
                                  
                                  25
                                  
                                  
                                  25Asset
      retirement obligations
                                  
                                  
                                  44
                                  
                                  
                                  27Interest
      payable
                                  
                                  
                                  25
                                  
                                  
                                  9Deferred
      gain on asset sale
                                  
                                  
                                  24
                                  
                                  
                                  24Total
                                  
                                  $
                                  354
                                  
                                  $
                                  323Other
      Noncurrent LiabilitiesDeferred
      compensation liabilities
                                  
                                  $
                                  164
                                  
                                  $
                                  159Asset
      retirement obligations
                                  
                                  
                                  185
                                  
                                  
                                  184Accrued
      benefit costs
                                  
                                  
                                  83
                                  
                                  
                                  81Commodity
      derivative instruments
                                  
                                  
                                  12
                                  
                                  
                                  2Other
      noncurrent liabilities
                                  
                                  
                                  66
                                  
                                  
                                  60Total
                                  
                                  $
                                  510
                                  
                                  $
                                  486




(1)
            See
      Asset Held for
      Sale below.




Asset
Held for Sale –During 2008, we
initiated a process to sell our remaining operated non-core Gulf of Mexico shelf
asset located at Main Pass. Numerous parties expressed an interest in purchasing
the asset. However, due to difficulties in obtaining appropriate insurance,
bonding or financing, none of the potential buyers were able to close on the
sale. As a result, we believe it is no longer probable that a sale of the asset
will be completed within one year of its classification as held-for-sale.
Therefore, the asset has been reclassified as held-and-used.  Due to
significant increases in insurance costs and exposure to further windstorm
damage, our current plans are to abandon the Main Pass asset, and therefore this
property was impaired.  See Note 5 –Fair Value
Measurements.




Allowance for Doubtful Accounts –Through December 31, 2008, we had recorded an allowance for doubtful
accounts of $57 million related to our Ecuador power operations. The allowance
was necessary to cover potentially uncollectible balances, as
certain entities purchasing electricity in Ecuador have been slow to pay
amounts due us. As a result of pursuing various strategies to protect our
interests, including international arbitration and litigation, we reached a
settlement in fourth quarter 2008. In March and April 2009, we received total
payments of $60 million in accordance with the terms of the settlement, against
which a reserve of $46 million had previously been
recorded.  Accordingly, we reduced the allowance for doubtful
accountsby $46
million and included the amount as a reduction in electricity generation
expense. We recorded an additional allowance of $6 million related to current
period commodity and electricity sales.







7





Adoption of FSP SFAS 132(R) –
In December 2008, the FASB issued FSP SFAS 132(R), “Employers’ Disclosures About
Postretirement Benefit Plan Assets” (FSP SFAS 132(R)). FSP SFAS 132(R) requires
employers to make additional disclosures about plan assets for defined benefit
pension and other postretirement benefit plans beginning with annual periods
ending after December 15, 2009. The requirements apply to entities that are
subject to the disclosure requirements of SFAS 132(R). Disclosures are to
provide an understanding of how investment allocation decisions are made, the
major categories of plan assets, the inputs and valuation techniques used to
measure the fair value of plan assets, the effect of fair-value measurements
using significant unobservable inputs on changes in plan assets for the
period, and significant concentrations of risk within plan assets. We adopted
FSP SFAS 132(R) as of January 1, 2009. The statement provides only for enhanced
annual disclosures and does not require additional interim disclosures. Adoption
had no impact on our financial position or results of operations.




Adoption of SFAS 141(R) and SFAS 160
–In 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS
141(R)) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (SFAS 160). These statements require most identifiable assets,
liabilities and noncontrolling interests to be recorded at full fair value and
require noncontrolling interests to be reported as a component of equity. Both
statements are effective for periods beginning on or after December 15, 2008.
SFAS 141(R) will be applied to business combinations occurring after the
effective date and SFAS 160 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date. We adopted SFAS
141(R) and SFAS 160 as of January 1, 2009. There were no non-controlling
interests at adoption date. Adoption had no effect on our financial position or
results of operations.




Adoption of SFAS 157 – SFAS
No. 157, “Fair Value Measurements” (SFAS 157) establishes a single
authoritative definition of fair value based upon the assumptions market
participants would use when pricing an asset or liability and creates a fair
value hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, additional disclosures are required, including
disclosures of fair value measurements by level within the fair value hierarchy.
As of January 1, 2008, we adopted the provisions of SFAS 157 related to our
financial assets and liabilities. As of January 1, 2009, we adopted the
provisions of SFAS 157 related to our nonfinancial assets and liabilities,
including nonfinancial assets and liabilities measured at fair value in a
business combination; impaired property, plant and equipment; goodwill; and
initial recognition of asset retirement obligations. Adoption of SFAS 157 did
not have a significant impact on our consolidated financial statements. See Note
5 – Fair Value Measurements. See also Note 16 – Recently Issued
Pronouncements.




Adoption of SFAS 161 –In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (SFAS 161). SFAS 161 amends and expands the disclosure
requirements of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", and requires qualitative disclosures about objectives
and strategies for using derivative instruments, quantitative disclosures about
fair value amounts of derivative instruments and related gains and losses, and
disclosures about credit risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. We adopted SFAS 161
as of January 1, 2009. The statement provides only for enhanced disclosures.
Therefore, adoption had no impact on our financial position or results of
operations. See Note 4 – Derivative Instruments and Hedging
Activities.




Adoption of EITF 08-06 –In
November 2008, the FASB ratified the consensus reached in EITF 08-06, “Equity
Method Investment Accounting Considerations” (EITF 08-06). EITF 08-06 was issued
to address questions that arose regarding the application of the equity method
subsequent to the issuance of SFAS 141(R). EITF 08-06 concluded that equity
method investments should continue to be recognized using a cost accumulation
model, thus continuing to include transaction costs in the carrying amount of
the equity method investment. In addition, EITF 08-06 clarifies that an
impairment assessment should be applied to the equity method investment as a
whole, rather than to the individual assets underlying the investment. EITF
08-06 is effective for fiscal years beginning on or after December 15, 2008. We
adopted EITF 08-06 as of January 1, 2009. Adoption had no effect on our
financial position or results of operations.




Note 3 – Debt
Issuance


On
February 27, 2009, we closed an offering of $1 billion senior unsecured notes
receiving net proceeds of $989 million, after deducting the discount and
underwriting fees. The notes are due March 1, 2019, and pay interest
semi-annually at 81⁄4%. Debt issuance costs of approximately $2 million were
incurred and are being amortized to expense over the life of the debt issue.
Substantially all of the net proceeds from the offering were used to repay
outstanding indebtedness under our revolving credit facility maturing 2012. The
notes are senior unsecured debt and will rank pari passu with any of our
other senior unsecured indebtedness with respect to the payment of both
principal and interest.







8





Our debt
consists of the following:




March
      31,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008Debt
                                  
                                  
                                  Interest
      Rate
                                  
                                  
                                  Debt
                                  
                                  
                                  Interest
      Rate(in
      millions, except percentages)Credit
      facility
                                  
                                  $
                                  726
                                  
                                  
                                  
                                  0.81
                                  %
                                  
                                  $
                                  1,606
                                  
                                  
                                  
                                  0.80
                                  %5
      1⁄4% Senior Notes, due April 15, 2014
                                  
                                  
                                  200
                                  
                                  
                                  
                                  5.25
                                  %
                                  
                                  
                                  200
                                  
                                  
                                  
                                  5.25
                                  %8
      1⁄4% Senior Notes, due March 1, 2019
                                  
                                  
                                  1,000
                                  
                                  
                                  
                                  8.25
                                  %
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -7
      1⁄4% Notes, due October 15, 2023
                                  
                                  
                                  100
                                  
                                  
                                  
                                  7.25
                                  %
                                  
                                  
                                  100
                                  
                                  
                                  
                                  7.25
                                  %8%
      Senior Notes, due April 1, 2027
                                  
                                  
                                  250
                                  
                                  
                                  
                                  8.00
                                  %
                                  
                                  
                                  250
                                  
                                  
                                  
                                  8.00
                                  %7
      1⁄4% Senior Debentures, due August 1, 2097
                                  
                                  
                                  89
                                  
                                  
                                  
                                  7.25
                                  %
                                  
                                  
                                  89
                                  
                                  
                                  
                                  7.25
                                  %Long-term
      debt
                                  
                                  
                                  2,365
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,245Installment
      payments, due May 11, 2009
                                  
                                  
                                  25
                                  
                                  
                                  
                                  1.76
                                  %
                                  
                                  
                                  25
                                  
                                  
                                  
                                  4.18
                                  %Total
      debt
                                  
                                  
                                  2,390
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,270Unamortized
      discount
                                  
                                  
                                  (8
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (4
                                  )Total
      debt, net of discount
                                  
                                  $
                                  2,382
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  2,266




Note 4 – Derivative
Instruments and Hedging Activities


Objectives and Strategies for Using
Derivative Instruments– We are exposed to certain risks relating to our
ongoing business operations. The primary risk managed by using derivative
instruments is commodity price risk. We use various commodity derivative
instruments in connection with forecasted crude oil and natural gas sales to
minimize the impact of commodity price fluctuations. Such instruments include
variable to fixed price swaps, collars and basis swaps.




We may
also use derivative instruments to manage interest rate risk by entering into
forward contracts or swap agreements to minimize the impact of interest rate
fluctuations associated with fixed or floating rate borrowings. We may designate
these as cash flow hedges.




We
account for derivative instruments and hedging activities in accordance with
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, and all derivative instruments are reflected as either assets or
liabilities at fair value in our consolidated balance sheets. See Note 5 – Fair
Value Measurements for a discussion of methods and assumptions used to estimate
the fair values of our commodity derivative instruments and gross amounts of
commodity derivative assets and liabilities.




Derivative
instruments expose us to counterparty credit risk. Our commodity derivative
instruments are currently with a diversified group of financial institutions, a
majority of which are lenders under our credit facility arrangement. Certain of
these financial institutions have received capital injections and other forms of
support from government sources, and may require additional financial assistance
in the future to remain viable.  Discontinuance of government support to
these institutions could have an adverse impact on the collectibility of our
derivative receivables.  We generally execute commodity derivative
instruments under master agreements which allow us, in the event of default, to
elect early termination of all contracts with the defaulting counterparty. If we
choose to elect early termination, all asset and liability positions with the
defaulting counterparty would be net cash settled at the time of
election.




We
monitor the creditworthiness of our counterparties. However, we are not able to
predict sudden changes in counterparties’ creditworthiness. In addition, even if
such changes are not sudden, we may be limited in our ability to mitigate an
increase in counterparty credit risk. Possible actions would be to transfer our
position to another counterparty or request a voluntary termination of the
derivative contracts resulting in a cash settlement. Should one of these
financial counterparties not perform, we may not realize the benefit of some of
our derivative instruments under lower commodity prices as well as incur a
loss. See also Note 5 – Fair Value Measurements.




Commodity Derivative Instruments– During 2009 and 2008 we accounted for our commodity derivative
instruments using mark-to-market accounting, and we recognize all gains and
losses on such instruments in earnings during the period in which they
occur.  Prior to January 1, 2008, we elected to designate certain of
our commodity derivative instruments as cash flow hedges. Net derivative gains
and losses that were deferred in accumulated other comprehensive loss (AOCL) as
of January 1, 2008, as a result of previous cash flow hedge accounting, are
reclassified to earnings in future periods as the original hedged transactions
occur.  See Derivatives in SFAS 133 Cash Flow Hedging Relationships
table below.





9





As of
March 31, 2009, we had entered into the following crude oil derivative
instruments:




Variable
      to Fixed Price Swaps
                                                    
                                                    
                                                    CollarsWeighted
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    Weighted
                                                    
                                                    WeightedProduction
                                                    
                                                    
                                                    
                                                    
                                                    Bbls
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    Bbls
                                                    
                                                    
                                                    Average
                                                    
                                                    AveragePeriod
                                                    
                                                    Index
                                                    
                                                    
                                                    Per
      Day
                                                    
                                                    
                                                    Fixed
      Price
                                                    
                                                    
                                                    Index
                                                    
                                                    
                                                    Per
      Day
                                                    
                                                    
                                                    Floor
      Price
                                                    
                                                    Ceiling
      Price2009
                                                    
                                                    NYMEX
      WTI
                                                    
                                                    
                                                    9,000
                                                    
                                                    $
                                                    88.43
                                                    
                                                    
                                                    NYMEX
      WTI
                                                    
                                                    
                                                    6,700
                                                    
                                                    $
                                                    79.70
                                                    
                                                    $
                                                    90.602009
                                                    
                                                    Dated
      Brent
                                                    
                                                    
                                                    2,000
                                                    
                                                    
                                                    87.98
                                                    
                                                    
                                                    Dated
      Brent
                                                    
                                                    
                                                    5,074
                                                    
                                                    
                                                    70.62
                                                    
                                                    
                                                    87.932009
      Average
                                                    
                                                    
                                                    
                                                    
                                                    11,000
                                                    
                                                    
                                                    88.35
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    11,774
                                                    
                                                    
                                                    75.79
                                                    
                                                    
                                                    89.452010
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    NYMEX
      WTI
                                                    
                                                    
                                                    10,500
                                                    
                                                    
                                                    61.10
                                                    
                                                    
                                                    76.73


From
April 1, 2009 to April 17, 2009, we entered into additional NYMEX WTI collars
covering 3,000 Bbls per day for calendar year 2010 with weighted average floor
and ceiling prices of $60.00 and $70.00, respectively.




As of
March 31, 2009, we had entered into the following natural gas derivative
instruments:




CollarsMMBtu
                                                                      
                                                                      
                                                                      Weighted
      Average
                                                                      Weighted
      AverageProduction
      Period
                                                                      
                                                                      
                                                                      Index
                                                                      
                                                                      
                                                                      Per
      Day
                                                                      
                                                                      
                                                                      Floor
      Price
                                                                      
                                                                      Ceiling
      Price2009
                                                                      
                                                                      
                                                                      NYMEX
      HH
                                                                      
                                                                      
                                                                      170,000
                                                                      
                                                                      $
                                                                      9.15
                                                                      
                                                                      $
                                                                      10.812009
                                                                      
                                                                      
                                                                      IFERC
      CIG (1)
                                                                      
                                                                      
                                                                      15,000
                                                                      
                                                                      
                                                                      6.00
                                                                      
                                                                      
                                                                      9.902009
      Average
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      185,000
                                                                      
                                                                      
                                                                      8.90
                                                                      
                                                                      
                                                                      10.732010
                                                                      
                                                                      
                                                                      NYMEX
      HH
                                                                      
                                                                      
                                                                      40,000
                                                                      
                                                                      
                                                                      5.88
                                                                      
                                                                      
                                                                      6.502010
                                                                      
                                                                      
                                                                      IFERC
      CIG
                                                                      
                                                                      
                                                                      15,000
                                                                      
                                                                      
                                                                      6.25
                                                                      
                                                                      
                                                                      8.102010
      Average
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      55,000
                                                                      
                                                                      
                                                                      5.98
                                                                      
                                                                      
                                                                      6.94


(1)     
Colorado Interstate Gas – Northern System




From
April 1, 2009 to April 17, 2009, we entered into additional NYMEX HH collars
covering 80,000 MMBtu per day for calendar year 2010 with weighted average
floor and ceiling prices of $5.81 and $6.83, respectively.  We
also entered into additional NYMEX HH collars covering 60,000 MMBtu per day for
calendar year 2011 with weighted average
floor and ceiling prices of $5.83 and $6.94, respectively.




As of
March 31, 2009, we had entered into the following natural gas basis
swaps:




Basis
      SwapsIndex
      Less
                                      
                                      MMBtu
                                      
                                      Weighted
      AverageProduction
      Period
                                      
                                      
                                      Index
                                      
                                      
                                      Differential
                                      
                                      Per
      Day
                                      
                                      Differential2009
                                      
                                      
                                      IFERC
      CIG
                                      
                                      
                                      NYMEX
      HH
                                      
                                      
                                      140,000
                                      
                                      
                                      $
                                      (2.49
                                      )2010
                                      
                                      
                                      IFERC
      CIG
                                      
                                      
                                      NYMEX
      HH
                                      
                                      
                                      80,000
                                      
                                      
                                      
                                      (1.77
                                      )




From
April 1, 2009 to April 17, 2009, we did not enter into any additional basis
swaps.




InterestRate Derivative
Instruments–Changes in
fair value of interest rate swaps or interest rate “locks” designated as cash
flow hedges are reported in AOCL, to the extent the hedge is effective, until
the forecasted transaction occurs, at which time they are recorded as
adjustments to interest expense over the term of the related notes. During first
quarter 2008, we had two interest rate swaps, or interest rate “locks”,
each in the notional amount of $500 million. The locks were based on five and
ten year US Treasury rates of 3.55% and 4.15%, respectively, and were scheduled
to expire in September 2008. The locks were designated as cash flow hedges and
changes in their fair values of $27 million, net of tax, were reported as losses
in AOCL during first quarter 2008. The locks were settled in July 2008 at a cost
of $0.2 million.












10





Fair Value Amounts and Gains and
Losses on Derivative Instruments –The fair values of derivative
instruments in our consolidated balance sheet were as follows:




Derivative
      Instruments Not Designated as Hedging Instruments Under SFAS
      133Asset
      Derivative Instruments
                                                  
                                                  Liability
      Derivative InstrumentsMarch
      31,
                                                  
                                                  December
      31,
                                                  
                                                  March
      31,
                                                  
                                                  December
      31,2009
                                                  
                                                  2008
                                                  
                                                  2009
                                                  
                                                  2008(in
      millions)
                                                  
                                                  Balance
                                                    Sheet
                                                    Location
                                                  
                                                  Fair
      Value
                                                  Balance
                                                    Sheet
                                                    Location
                                                  
                                                  Fair
      Value
                                                  
                                                  Balance
                                                    Sheet
                                                    Location
                                                  
                                                  Fair
      Value
                                                  Balance
                                                    Sheet
                                                    Location
                                                  
                                                  Fair
      ValueCommodity
      derivative instrumentsCurrent
                                                  
                                                  
                                                  
                                                  Current
                                                  
                                                  
                                                  
                                                  Current
                                                  
                                                  
                                                  
                                                  Currentassets
                                                  
                                                  $
                                                  403
                                                  
                                                  assets
                                                  
                                                  $
                                                  437
                                                  
                                                  liabilities
                                                  
                                                  $
                                                  34
                                                  
                                                  liabilities
                                                  
                                                  $
                                                  23Noncurrent
                                                  
                                                  
                                                  
                                                  
                                                  Noncurrent
                                                  
                                                  
                                                  
                                                  
                                                  Noncurrent
                                                  
                                                  
                                                  
                                                  
                                                  Noncurrentassets
                                                  
                                                  
                                                  24
                                                  
                                                  assets
                                                  
                                                  
                                                  33
                                                  
                                                  liabilities
                                                  
                                                  
                                                  12
                                                  
                                                  liabilities
                                                  
                                                  
                                                  2Total
                                                  
                                                  
                                                  
                                                  $
                                                  427
                                                  
                                                  
                                                  
                                                  $
                                                  470
                                                  
                                                  
                                                  
                                                  $
                                                  46
                                                  
                                                  
                                                  
                                                  $
                                                  25




The
effect of derivative instruments on our consolidated statements of operations
was as follows:




Derivative
      Instruments Not Designated as Hedging Instruments Under SFAS
      133Location
      of (Gain) Loss Rcognized in Income
                                                on
      Derivative Instrument
                                              
                                              Amount
      of (Gain) Loss
                                                Recognized
      in Income
                                                on
      Derivative InstrumentThree
      Months EndedMarch
      31,2009
                                              
                                              
                                              2008(in
      millions)Commodity
      derivative instrumentsRealized
      mark-to-market (gain) loss
                                              
                                              (Gain)
      loss on commodity derivative instruments
                                              
                                              $
                                              (153
                                              )
                                              
                                              $
                                              19Unrealized
      mark-to-market loss
                                              
                                              (Gain)
      loss on commodity derivative instruments
                                              
                                              
                                              80
                                              
                                              
                                              
                                              218Total
                                              
                                              
                                              
                                              $
                                              (73
                                              )
                                              
                                              $
                                              237




Derivative
      Instruments in Previously Designated SFAS 133 Cash Flow Hedging
      RelationshipsAmount
      of (Gain) Loss Recognized in OCI on Derivative Instrument
                                                                  
                                                                  Location
      of (Gain) Loss Reclassified from AOCL into Income
                                                                  
                                                                  Amount
      of (Gain) Loss Reclassified from AOCL on Derivative
      InstrumentThree
      Months Ended
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Three
      Months EndedMarch
      31,
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  March
      31,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2009
                                                                  
                                                                  
                                                                  2008(in
      millions)
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (in
      millions)Commodity
      derivative instruments (1)Crude
      oil
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  Oil,
      gas and NGL sales
                                                                  $
                                                                  17
                                                                  
                                                                  $
                                                                  97Natural
      gas
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  Oil,
      gas and NGL sales
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  (37
                                                                  )Treasury
      rate locks
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  43
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -Total
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  $
                                                                  43
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  17
                                                                  
                                                                  $
                                                                  60




(1)
            Includes
      effect of commodity derivative instruments previously accounted for as
      cash flow hedges. Net derivative gains and losses that were deferred in
      AOCL as of January 1, 2008, as a result of previous cash flow hedge
      accounting, are reclassified to earnings in future periods as the original
      hedged transactions occur.





11





AOCL –As of March 31,
      2009, the balance in AOCL included net deferred losses of $38 million
      related to the fair value of commodity derivative instruments previously
      accounted for as cash flow hedges. The net deferred losses are net of
      deferred income tax benefits of $23 million. Approximately $29 million of
      deferred losses (net of tax) related to the fair values of the commodity
      derivative instruments previously designated as cash flow hedges and
      remaining in AOCL at March 31, 2009 will be reclassified to earnings
      during the next 12 months as the forecasted transactions occur, and will
      be recorded as a reduction in oil and gas sales of approximately $46
      million before tax. All forecasted transactions currently being hedged and
      for which amounts remain in AOCL at March 31, 2008, are expected to occur
      by December 2010.




Note 5 – Fair Value
Measurements


SFAS 157
establishes a fair value hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three levels. The fair value
hierarchy gives the highest priority to quoted market prices (unadjusted) in
active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Level 2 inputs are inputs, other
than quoted prices included within Level 1, which are observable for the
asset or liability, either directly or indirectly. We use Level 1 inputs when
available as Level 1 inputs generally provide the most reliable evidence of fair
value.




Assets
and Liabilities Measured at Fair Value on a Recurring Basis


Certain
assets and liabilities are reported at fair value on a recurring basis in our
consolidated balance sheets.  The following methods and assumptions
were used to estimate the fair values:




Mutual Fund Investments – Our
mutual fund investments, which primarily include assets held in a rabbi trust,
consist of various publicly-traded mutual funds that include investments ranging
from equities to money market instruments. The fair values are based on quoted
market prices.




Commodity Derivative Instruments –Our commodity derivative instruments consist of variable to fixed price
commodity swaps, collars and basis swaps. We estimate the fair values of these
instruments based on published forward commodity price curves for the underlying
commodities as of the date of the estimate. The discount rate used in the
discounted cash flow projections is based on published LIBOR rates, Eurodollar
futures rates and interest swap rates. The fair values of commodity derivative
instruments in an asset position include a measure of counterparty credit risk,
and the fair values of commodity derivative instruments in a liability position
include a measure of our own nonperformance risk, each based on the current
published credit default swap rates. In addition, for collars, we estimate the
option value of the contract floors and ceilings using an option pricing model
which takes into account market volatility, market prices and contract
parameters. See Note 4 – Derivative Instruments and Hedging
Activities.




Deferred Compensation Liability- The value is dependant upon the fair values of mutual fund investments
and shares of Noble Energy common stock held in a rabbi trust.See Mutual Fund Investments above.












12





Measurement
information for assets and liabilities that are measured at fair value on a
recurring basis was as follows:





Fair
      Value Measurements UsingQuoted
      Prices in Active Markets
                                                                (Level
      1)
                                                              
                                                              
                                                              Significant
      Other Observable Inputs
                                                                (Level
      2)
                                                              
                                                              
                                                              Significant
      Unobservable Inputs
                                                                (Level
      3)
                                                              
                                                              
                                                              Adjustment
      (1)
                                                              Fair
      Value
                                                                Measurement(in
      millions)As
      of March 31, 2009Financial
      assets:Mutual
      fund investments
                                                              
                                                              $
                                                              77
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              77Commodity
      derivative instruments
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              445
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (18
                                                              )
                                                              
                                                              427Financial
      liabilities:Commodity
      derivative instruments
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (64
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              18
                                                              
                                                              
                                                              (46
                                                              )Liability
      under Patina deferred compensation plan
                                                              
                                                              
                                                              (122
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (122
                                                              )As
      of December 31, 2008Financial
      assets:Mutual
      fund investments
                                                              
                                                              
                                                              84
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              84Commodity
      derivative instruments
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              492
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (22
                                                              )
                                                              
                                                              470Financial
      liabilities:Commodity
      derivative instruments
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (47
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              22
                                                              
                                                              
                                                              (25
                                                              )Liability
      under Patina deferred compensation plan
                                                              
                                                              
                                                              (123
                                                              )
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              (123
                                                              )(1)  
       Amount represents the impact of master netting agreements that allow
      us to net cash settle asset and liability positions with the same
      counterparty.




Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis


Certain
assets and liabilities are reported at fair value on a nonrecurring basis in our
consolidated balance sheets.  The following methods and assumptions
were used to estimate the fair values:




Asset Impairments – In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” we review a proved oil and gas property for
impairment when events and circumstances indicate a possible decline in the
recoverability of the carrying value of such property. We estimate the future
cash flows expected in connection with the property and compare such future cash
flows to the carrying amount of the property to determine if the carrying amount
is recoverable. If the carrying amount of the property exceeds its estimated
undiscounted future cash flows, the carrying amount of the property is reduced
to its estimated fair value. Fair value may be estimated using comparable market
data, a discounted cash flow method, or a combination of the two. In the
discounted  cash flow method, estimated future cash flows are based on
management’s expectations for the future and include estimates of future oil and
gas production, commodity prices based on commodity futures price strips as of
the date of the estimate, operating and development costs, and a risk-adjusted
discount rate.




As a
result of a significant decline in the forward natural gas futures price strip
at March 31, 2009, we reviewed our oil and gas properties that are sensitive to
natural gas price decreases for impairment. We determined that the carrying
amount of Granite Wash, an onshore US area where we have significantly reduced
investments beginning in 2007, was not recoverable from future cash flows and,
therefore, was impaired at March 31, 2009.  We reduced Granite Wash to
its fair value, which was determined using the discounted cash flow method
described above, as comparable market data was not available.  We also
impaired the Main Pass asset which had been reclassified from held-for-sale to
held-and-used. Total pre-tax (non-cash) impairments for first quarter 2009 were
$437 million. The impaired assets, which had a total carrying amount of $753
million, were reduced to their estimated fair value of $316 million. See also
Note 2 – Basis of
Presentation – Asset Held for
Sale.




Asset Retirement Obligations
– We estimate the fair values of asset retirement obligations (AROs)
based on discounted cash flow projections using numerous estimates, assumptions
and judgments regarding such factors as the existence of a legal obligation for
an ARO; estimated probabilities, amounts and timing of settlements; the
credit-adjusted risk-free rate to be used; and inflation rates. See Note 7 –
Asset Retirement Obligations for a summary of changes in AROs.











13




Measurement
information for assets that are measured at fair value on a nonrecurring basis
was as follows:




Fair
      Value Measurements UsingDescription
                                                                  
                                                                  
                                                                  Fair
      Value Measurement
                                                                  
                                                                  Quoted
      Prices in
                                                                    Active
      Markets
                                                                    (Level
      1)
                                                                  
                                                                  
                                                                  Significant
      Other Observable Inputs
                                                                    (Level
      2)
                                                                  Significant
      Unobservable Inputs
                                                                    (Level
      3)
                                                                  
                                                                  
                                                                  Total
                                                                    Impairment
                                                                    Loss(in
      millions)Three
      Months Ended March 31, 2009Impaired
      US oil and gas properties
                                                                  
                                                                  $
                                                                  316
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  $
                                                                  316
                                                                  
                                                                  $
                                                                  (437
                                                                  )Asset retirement
      obligations incurred in current period
                                                                  
                                                                  
                                                                  1
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  1
                                                                  
                                                                  
                                                                  -Three
      Months Ended March 31, 2008Asset retirement
      obligations incurred in current period
                                                                  
                                                                  
                                                                  14
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  14
                                                                  
                                                                  
                                                                  -
  Note 6 – Capitalized
Exploratory Well Costs


Changes
in capitalized exploratory well costs are as follows and exclude amounts that
were capitalized and subsequently expensed in the same period:




Three
      Months EndedMarch
      31, 2009(in
      millions)Capitalized
      exploratory well costs, beginning of period
                      $
                      501Additions
      to capitalized exploratory well costs pending determination of proved
      reserves
                      
                      68Reclassified
      to property, plant and equipment based on determination of proved
      reserves
                      
                      (88
                      )Capitalized
      exploratory well costs charged to expense
                      
                      (4
                      )Capitalized
      exploratory well costs, end of period
                      $
                      477




The
following table provides an aging of capitalized exploratory well costs
(suspended well costs) based on the date the drilling was completed and the
number of projects for which exploratory well costs have been capitalized for a
period greater than one year since the completion of drilling:




March
      31,
                                  
                                  
                                  December
      31,2009
                                  
                                  
                                  2008(in
      millions)Exploratory
      well costs capitalized for a period of one year or less
                                  
                                  $
                                  255
                                  
                                  
                                  $
                                  256Exploratory
      well costs capitalized for a period greater than one year after
      completion of drilling
                                  
                                  
                                  222
                                  
                                  
                                  
                                  245Balance
      at end of period
                                  
                                  $
                                  477
                                  
                                  
                                  $
                                  501Number
      of projects with exploratory well costs that have been capitalized
      for a period greater than one year after completion of
      drilling
                                  
                                  
                                  4
                                  
                                  
                                  
                                  6




The
following table provides a further aging of those exploratory well costs that
have been capitalized for a period greater than one year since the completion of
drilling as of March 31, 2009:




Suspended
      Since2006Total
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          &
      Prior(in
      millions)ProjectWest
      Africa
                          
                          $
                          168
                          
                          
                          $
                          8
                          
                          
                          $
                          140
                          
                          
                          $
                          20Redrock
      (deepwater Gulf of Mexico)
                          
                          
                          17
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          17Flyndre
      (North Sea)
                          
                          
                          15
                          
                          
                          
                          -
                          
                          
                          
                          12
                          
                          
                          
                          3Selkirk
      (North Sea)
                          
                          
                          22
                          
                          
                          
                          -
                          
                          
                          
                          22
                          
                          
                          
                          -Total exploratory
      well costs capitalized for a period greater that one year after
      completion of drilling
                          
                          $
                          222
                          
                          
                          $
                          9
                          
                          
                          $
                          174
                          
                          
                          $
                          40







14





West Africa–The West Africa project
includes Blocks O and I offshore Equatorial Guinea and the YoYo concession
offshore Cameroon. Since drilling the initial well for this project, additional
seismic work has been completed and exploration and appraisal wells have been
drilled to further evaluate our discoveries. The West Africa development team is
proceeding with a program to further define the resources in this area such that
an optimal development program may be designed. Accordingly, a development plan
for the Benita discovery on Block I was submitted to the Equatorial Guinean
government in December 2008, and we await its approval. In addition to the
exploratory well costs that have been capitalized for a period greater than one
year for the West Africa project, we have incurred $113 million in suspended
costs related to additional drilling activity in West Africa through March 31,
2009.




Redrock (deepwater Gulf of Mexico)– Redrock (Mississippi Canyon Block 204) was a 2006 natural
gas/condensate discovery and is currently considered a co-development candidate
to the completed sidetrack well at Raton South (Mississippi Canyon Block 292).
Tie-back of Redrock is anticipated to occur following the tie-back of Raton
South.




Flyndre (North Sea)– The
Flyndre project is located in the UK sector of the North Sea and we successfully
completed an exploratory appraisal well in 2007.  We are currently
working with the project operator and other partners to finalize the field
development plan and relevant operating agreements.




Selkirk (North Sea) – The
Selkirk project is also located in the UK sector of the North Sea. Capitalized
costs to date primarily consist of the cost of drilling an appraisal well which
was then sidetracked to the original discovery well location, to ensure presence
of effective reservoir, and suspended as a future producer. We are currently
working with our non-operating partners on an alternative host and with the
supply chain to reduce costs.




Note 7 – Asset Retirement
Obligations


Asset
retirement obligations consist primarily of estimated costs of dismantlement,
removal, site reclamation and similar activities associated with our oil and gas
properties. See Note 5 – Fair Value Measurements for a discussion of the methods
and assumptions used to estimate the fair values of asset retirement
obligations. Changes in asset retirement obligations were as
follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Asset
      retirement obligations, beginning of period
                          
                          $
                          211
                          
                          
                          $
                          144Liabilities
      incurred in current period
                          
                          
                          1
                          
                          
                          
                          14Liabilities
      settled in current period
                          
                          
                          (2
                          )
                          
                          
                          (4
                          )Revisions
                          
                          
                          16
                          
                          
                          
                          3Accretion
      expense
                          
                          
                          3
                          
                          
                          
                          2Asset
      retirement obligations, end of period
                          
                          $
                          229
                          
                          
                          $
                          159




Revisions
relate primarily to our remaining Main Pass asset. Accretion expense is included
in DD&Aexpense
in the consolidated statements ofoperations.





15





Note
8 – Employee Benefit Plans


We have a
noncontributory, tax-qualified defined benefit pension plan covering employees
who were hired prior to May 1, 2006. We also have an unfunded, nonqualified
restoration plan that provides the pension plan formula benefits that cannot be
provided by the qualified pension plan because of pay deferrals and the
compensation and benefit limitations imposed on the pension plan by the Internal
Revenue Code of 1986, as amended. Net periodic benefit cost related to the
retirement and restoration plans was as follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Service
      cost
                          
                          $
                          3
                          
                          
                          $
                          3Interest
      cost
                          
                          
                          3
                          
                          
                          
                          3Expected
      return on plan assets
                          
                          
                          (3
                          )
                          
                          
                          (3
                          )Other
                          
                          
                          1
                          
                          
                          
                          -Net
      periodic benefit cost
                          
                          $
                          4
                          
                          
                          $
                          3




Note 9 – Stock-Based
Compensation


We
recognized stock-based compensation expense as follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Stock-based
      compensation expense
                          
                          $
                          12
                          
                          
                          $
                          9Tax
      benefit recognized
                          
                          
                          (4
                          )
                          
                          
                          (3
                          )




During
the three months ended March 31, 2009, we granted 1.5 million stock options with
a weighted-average grant-date fair value of $18.75 per share and awarded 0.6
million shares of restricted stock subject to service conditions with a
weighted-average grant-date fair value of $50.21 per share.  In 2009, we
began making grants of restricted stock under the Noble Energy, Inc. 1992 Stock
Option and Restricted Stock Plan that time-vest 20% after year one, an
additional 30% after year two and the remaining 50% after year
three.




Note 10 – Basic and Diluted
Earnings (Loss) Per Share


Basic
earnings (loss) per share of common stock is computed using the weighted average
number of shares of common stock outstanding during each period. The diluted
earnings per share of common stock may include the effect of Noble Energy shares
held in a rabbi trust, outstanding stock options or shares of restricted stock,
except in periods in which there is a net loss. The following table summarizes
the calculation of basic and diluted earnings (loss) per share:




Three
      Months Ended March 31,2009
                                  
                                  
                                  2008Weighted
                                  
                                  
                                  
                                  
                                  WeightedNet
                                  
                                  
                                  Average
                                  
                                  
                                  Net
                                  
                                  
                                  Average(Loss)
                                  
                                  
                                  Shares
                                  
                                  
                                  Income
                                  
                                  
                                  Shares(in
      millions, except per share amounts)Net
      income (loss)
                                  
                                  $
                                  (188
                                  )
                                  
                                  
                                  173
                                  
                                  
                                  $
                                  215
                                  
                                  
                                  
                                  172Basic
      Earnings (Loss) Per Share
                                  
                                  $
                                  (1.09
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1.25Net
      income (loss)
                                  
                                  $
                                  (188
                                  )
                                  
                                  
                                  173
                                  
                                  
                                  $
                                  215
                                  
                                  
                                  
                                  172Plus
      incremental shares from assumed conversions:Dilutive
      options, restricted stock awards and shares
                                    of
      common stock in rabbi trust
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4
                                  )
                                  
                                  
                                  3Net
      income (loss) available to common shareholders
                                  
                                  $
                                  (188
                                  )
                                  
                                  
                                  173
                                  
                                  
                                  $
                                  211
                                  
                                  
                                  
                                  175Diluted
      Earnings (Loss) Per Share
                                  
                                  $
                                  (1.09
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1.20






16





The
effect of stock options and unvested restricted stock outstanding has not been
included in the calculation of weighted average shares outstanding for diluted
EPS for the three months ended March 31, 2009 as their effect would have been
antidilutive. Had we recognized net income for this period, incremental shares
attributable to the assumed exercise of outstanding options and restricted stock
would have increased diluted weighted average shares outstanding by 1.6 million
shares for the three months ended March 31, 2009.




A total
of 4.6 million weighted average stock options, restricted shares and common
shares held in a rabbi trust were antidilutive for first quarter 2009 and were
excluded from the calculation of diluted earnings per share.  A total
of 1.2 million weighted average stock options and restricted shares were
antidilutive for first quarter 2008 and were excluded from the calculation of
diluted earnings per share.




Note 11 – Income
Taxes


The
income tax provision (benefit) consists of the following:





Three
      Months EndedMarch
      31,2009
                      
                      
                      2008(in
      millions)Current
                      
                      $
                      115
                      
                      
                      $
                      66Deferred
                      
                      
                      (301
                      )
                      
                      
                      35Total
      income tax provision (benefit)
                      
                      $
                      (186
                      )
                      
                      $
                      101




The deferred tax benefit for the three months ended March 31,
2009 was due primarily to the fact that most of the deferred tax liability
recorded in 2008 with respect to unrealized mark-to-market gains reverses in
2009.  In addition, we recorded a deferred tax asset with respect to
impairment losses on our US oil and gas properties.




Our
effective tax rate increased to 50% for first quarter 2009 as compared with 32%
for first quarter 2008 due primarily to the fact that the 2009 rate represents a
tax benefit divided by a pre-tax loss.  In that case, our favorable
permanent differences, such as income from equity method investees, have the
effect of increasing the tax benefit which, in turn, increases the effective
rate.




During first quarter 2009,we repatriated $180 million of accumulated earnings of foreign
subsidiaries and used the proceeds for debt repayment and general corporate
purposes. The repatriation increased US current tax expense by $11
million.  In addition, we reversed a $9 million US deferred tax
liability that had been recorded in 2008 with respect to the repatriated
earnings.  Repatriation of additional
earnings in the future could result in a decrease in our net income and cash
flows.




Unrecognized Tax Positions–We do not have
significant unrecognized tax benefits as of March 31, 2009. Our policy is to
recognize any interest and penalties related to unrecognized tax benefits in
income tax expense. We did not accrue interest or penalties at March 31, 2009,
because the jurisdiction in which we have unrecognized tax benefits does not
currently impose interest on underpayments of tax, and we believe that we are
below the minimum statutory threshold for imposition of penalties.




In our
major tax jurisdictions, the earliest years remaining open to examination are as
follows: US – 2005, Equatorial Guinea – 2006, China – 2006, Israel – 2000, UK –
2006 and the Netherlands – 2005.







17


Note 12 – Comprehensive
Income (Loss)
 Comprehensive
income (loss) includes net income (loss) and certain items recorded directly to
shareholders’ equity and classified as AOCL. Comprehensive income (loss) was
calculated as follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Net
      income (loss)
                          
                          $
                          (188
                          )
                          
                          $
                          215Other
      items of comprehensive income (loss)Oil
      and gas cash flow hedgesRealized
      amounts reclassified into earnings
                          
                          
                          17
                          
                          
                          
                          60Less
      tax provision
                          
                          
                          (6
                          )
                          
                          
                          (22
                          )Interest
      rate cash flow hedgesUnrealized
      change in fair value
                          
                          
                          -
                          
                          
                          
                          (43
                          )Less
      tax provision
                          
                          
                          -
                          
                          
                          
                          16Net
      change in other
                          
                          
                          (1
                          )
                          
                          
                          (1
                          )Other
      comprehensive income
                          
                          
                          10
                          
                          
                          
                          10Comprehensive
      income (loss)
                          
                          $
                          (178
                          )
                          
                          $
                          225





Note 13 – Segment
Information


We have
operations throughout the world and manage our operations by country. The
following information is grouped into five components that are all primarily in
the business of crude oil and natural gas acquisition, exploration and
production:  the United States; West Africa; the North Sea; Israel;
and Other International, Corporate and Marketing. Other International
includes primarily Argentina (through February 2008), China, Ecuador and
Suriname. The following data was prepared on the same basis as our
consolidated financial statements and excludes the effects of income
taxes.




Other
      Int'l,United
                  
                  
                  West
                  
                  
                  North
                  
                  
                  
                  
                  
                  Corporate,Consolidated
                  
                  
                  States
                  
                  
                  Africa
                  
                  
                  Sea
                  
                  
                  Israel
                  
                  
                  Marketing(in
      millions)Three
      Months Ended March 31, 2009Revenues
      from third parties
                  
                  $
                  447
                  
                  
                  $
                  237
                  
                  
                  $
                  58
                  
                  
                  $
                  34
                  
                  
                  $
                  28
                  
                  
                  $
                  90Reclassification
      from AOCL (1)
                  
                  
                  (17
                  )
                  
                  
                  (9
                  )
                  
                  
                  (8
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Intersegment
      revenue
                  
                  
                  -
                  
                  
                  
                  52
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (52
                  )Income
      from equity method
      investees
                  
                  
                  11
                  
                  
                  
                  -
                  
                  
                  
                  11
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Revenues
                  
                  
                  441
                  
                  
                  
                  280
                  
                  
                  
                  61
                  
                  
                  
                  34
                  
                  
                  
                  28
                  
                  
                  
                  38DD&A
                  
                  
                  200
                  
                  
                  
                  169
                  
                  
                  
                  9
                  
                  
                  
                  9
                  
                  
                  
                  5
                  
                  
                  
                  8Asset
      impairments
                  
                  
                  437
                  
                  
                  
                  437
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Gain
      on commodity derivative instruments
                  
                  
                  (73
                  )
                  
                  
                  (67
                  )
                  
                  
                  (6
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Income
      (loss) before income taxes
                  
                  
                  (374
                  )
                  
                  
                  (409
                  )
                  
                  
                  42
                  
                  
                  
                  11
                  
                  
                  
                  21
                  
                  
                  
                  (39
                  )Three
      Months Ended March 31, 2008Revenues
      from third parties
                  
                  
                  1,023
                  
                  
                  $
                  577
                  
                  
                  $
                  141
                  
                  
                  $
                  92
                  
                  
                  $
                  40
                  
                  
                  $
                  173Reclassification
      from AOCL (1)
                  
                  
                  (60
                  )
                  
                  
                  (48
                  )
                  
                  
                  (12
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Intersegment
      revenue
                  
                  
                  -
                  
                  
                  
                  116
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (116
                  )Income
      from equity method
      investees
                  
                  
                  62
                  
                  
                  
                  -
                  
                  
                  
                  62
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Revenues
                  
                  
                  1,025
                  
                  
                  
                  645
                  
                  
                  
                  191
                  
                  
                  
                  92
                  
                  
                  
                  40
                  
                  
                  
                  57DD&A
                  
                  
                  203
                  
                  
                  
                  164
                  
                  
                  
                  9
                  
                  
                  
                  16
                  
                  
                  
                  6
                  
                  
                  
                  8Loss
      on commodity derivative instruments
                  
                  
                  237
                  
                  
                  
                  209
                  
                  
                  
                  28
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Income
      (loss) before income taxes
                  
                  
                  316
                  
                  
                  
                  145
                  
                  
                  
                  150
                  
                  
                  
                  55
                  
                  
                  
                  31
                  
                  
                  
                  (65
                  )Total
      assets at March 31, 2009(2)
                  
                  $
                  12,042
                  
                  
                  $
                  9,008
                  
                  
                  $
                  1,590
                  
                  
                  $
                  581
                  
                  
                  $
                  407
                  
                  
                  $
                  456Total
      assets at December 31, 2008 (2)
                  
                  
                  12,384
                  
                  
                  
                  9,212
                  
                  
                  
                  1,614
                  
                  
                  
                  775
                  
                  
                  
                  366
                  
                  
                  
                  417




(1)
            Revenues
      include decreases resulting from hedging activities. The decreases
      resulted from hedge gains and losses that were deferred in AOCL, as a
      result of previous cash flow hedge accounting, and subsequently
      reclassified to revenues.


(2)
            The
      US reporting unit includes goodwill of $757 million at March 31, 2009 and
      $759 million at December 31, 2008.







18





Note 14 – Commitments and
Contingencies


Purchaser Bankruptcy–We have an exposure
from crude oil sales for the months of June and July 2008 to SemCrude, L.P.
(SemCrude), a subsidiary of SemGroup, L.P. (SemGroup).  On July 22,
2008, SemGroup, including SemCrude, filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code under Case Number
08-11525 (BLS) in the United States Bankruptcy Court for the District of
Delaware.




We have a
receivable of approximately $70 million from SemCrude. During 2008, we
determined that it was probable that a portion of the receivable was
uncollectible and reduced the carrying value of the SemCrude receivable by $38
million for the probable loss. We are pursuing various legal remedies to protect
our interests. We believe that ultimate disposition of this matter will not have
a material adverse affect on our financial position, results of operations,
or cash flows.




Legal Proceedings – We are
among a group of 18 defendants named in a lawsuit filed August 23, 2002 by Dore
Energy Corporation under Docket Number 10-16202 in the 38th Judicial District
Court, Cameron Parish, Louisiana.  The lawsuit alleges damage to
property owned by Dore resulting from oil and gas activities dating to the
1930’s.  Our predecessor, Samedan Oil Corporation, operated on a portion of the property from 1989 to
1999.  Dore has delivered documents alleging approximately $140
million in damages. Dore has obtained judgment or settlement with certain
defendants, and trial involving Dore’s claims against us, which began on
April 27, 2009, and is ongoing.  We intend to vigorously defend
against these allegations and believe that our share of damages, if any, will
not have a material adverse effect on our financial position, results of
operations, or cash flows.




We are
involved in various other legal proceedings in the ordinary course of
business.  These proceedings are subject to the uncertainties inherent
in any litigation.  We are defending ourselves vigorously in all such
matters and we believe that the ultimate disposition of such proceedings will
not have a material adverse effect on our financial position, results of
operations or cash flows.




Note 15 – Recently Issued
Pronouncements


Recent
FASB Staff Positions–In April 2009,
the FASB issued three related staff positions to clarify the application of SFAS
157 to fair value measurements in the current economic environment, modify the
recognition of other-than-temporary impairments of debt securities, and require
companies to disclose the fair value of financial instruments in interim
periods. The final staff positions are effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009, if all three staff positions or both the fair value
measurements and other-than-temporary impairment staff positions are adopted
simultaneously.







·
            FSP
      SFAS 157-4 –FASB Staff Position No. 157-4,
      “Determining Fair Value When the Volume and Level of Activity for the
      Asset or Liability has Significantly Decreased and Identifying
      Transactions That Are Not Orderly” provides guidance on how to determine
      the fair value of assets and liabilities under SFAS 157 in the current
      economic environment and reemphasizes that the objective of a fair value
      measurement remains the price that would be received to sell an asset or
      paid to transfer a liability at the measurement
      date.




·
            FSP SFAS 115-2 and SFAS 124-2– FASB Staff Position No. 115-2 and 124-2, “Recognition and
      Presentation of Other-Than-Temporary Impairments” modifies the
      requirements for recognizing other-than-temporarily impaired debt
      securities and significantly changes the existing impairment model for
      such securities. It also modifies the presentation of other-than-temporary
      impairment losses and increases the frequency of and expands already
      required disclosures about other-than-temporary impairment for debt and
      equity securities.




·
            FSP
      SFAS 107-1 and APB 28-1– FASB Staff Position No. 107-1 and APB
      28-1, “Interim Disclosures about Fair Value of Financial Instruments”
      requires disclosures of the fair value of financial instruments within the
      scope of SFAS 107 in interim financial statements, adding to the current
      requirement to make those disclosures in annual financial statements. The
      staff position also requires that companies disclose the method or methods
      and significant assumptions used to estimate the fair value of financial
      instruments and a discussion of changes, if any, in the method or methods
      and significant assumptions during the
period.




We will
adopt the new staff positions as of July 1, 2009. We are currently evaluating
the provisions of the staff positions and assessing the impact, if any, they may
have on our financial position and results of operations.









19


Recent SEC Rule-Making Activity– In December 2008, the SEC announced that it had approved revisions
designed to modernize the oil and gas company reserve reporting requirements.
The most significant amendments to the requirements include the
following:




·
            Commodity
      Prices – Economic producibility of reserves and discounted cash flows will
      be based on a 12-month average commodity price unless contractual
      arrangements designate the price to be
  used.


·
              Disclosure
      of Unproved Reserves – Probable and possible reserves may be disclosed
      separately on a voluntary
basis.


·
            Proved
      Undeveloped Reserve Guidelines – Reserves may be classified as proved
      undeveloped if there is a high degree of confidence that the quantities
      will be recovered.


·
            Reserve
      Estimation Using New Technologies – Reserves may be estimated through the
      use of reliable technology in addition to flow tests and production
      history.


·
            Reserve
      Personnel and Estimation Process – Additional disclosure is required
      regarding the qualifications of the chief technical person who oversees
      our reserves estimation process.  We will also be required to
      provide a general discussion of our internal controls used to assure the
      objectivity of the reserves
estimate.


·
            Disclosure
      by Geographic Area – Reserves in foreign countries or continents must be
      presented separately if they represent more than 15% of our total oil and
      gas proved reserves.


·
            Non-Traditional
      Resources–The
      definition of oil and gas producing activities will expand and focus on
      the marketable product rather than the method of
    extraction.




The rules
are effective for fiscal years ending on or after December 31, 2009, and early
adoption is not permitted.  We are currently evaluating the new rules
and assessing the impact they will have on our reported oil and gas
reserves.  The SEC is coordinating with the Financial Accounting
Standards Board to obtain the revisions necessary to SFAS 19, “Financial
Accounting and Reporting by Oil and Gas Producing Companies”, and SFAS 69,
"Disclosures About Oil and Gas Producing Activities", to provide
consistency with the new rules. In the event that consistency is not achieved in
time for companies to comply with the new rules, the SEC has indicated that it
will consider delaying the compliance date.







20





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION


AND
RESULTS OF OPERATIONS





EXECUTIVE
OVERVIEW




We are an
independent energy company engaged in worldwide crude oil, natural gas and NGL
exploration and production. We operate primarily in the Rocky Mountains,
Mid-continent, and deepwater Gulf of Mexico areas in the US, with key
international operations offshore Israel, the North Sea and West
Africa.




Our
accompanying consolidated financial statements, including the notes thereto,
contain detailed information that should be referred to in conjunction with the
following discussion.




Our
financial results for first quarter 2009 included:




·      net
loss of $188 million, as compared with $215 million net income for first quarter
2008;


·
            $437
      million of asset impairment
charges;


·
            collection
      of Ecuador power receivable, resulting in a $46 million reversal of the
      allowance for doubtful accounts;


·
            diluted
      loss per share of $1.09, as compared with diluted earnings per share of
      $1.20 for first quarter 2008;


·
            cash
      flow provided by operating activities of $185 million, as compared with
      $506 million for first quarter
2008;


·
            issuance
      of $1 billion in 10-year unsecured notes;
and


·
            repatriation
      of $180 million of earnings from foreign
  subsidiaries.





Significant
operational highlights for first quarter 2009 included:




·
            exploration
      success offshore Israel at Tamar, our largest discovery to date;


·
            additional
      natural gas discovery offshore Israel at
Dalit;


·
            our
      first oil discovery on Block O offshore Equatorial Guinea at the Carmen
      prospect;


·
            successful
      high bidder on 24 deepwater blocks in Central Gulf of Mexico lease sale
      208; and


·
            deepwater
      Gulf of Mexico discovery at Santa
Cruz.





Impact of Recession and Current
Credit and Commodity Markets– During first quarter 2009, we took
initiatives to strengthen our liquidity and lengthen our weighted average debt
maturities in response to ongoing uncertainty in the credit
markets.  In February we issued $1 billion of 81⁄4% senior notes due
2019 and used substantially all of the net proceeds to repay outstanding
indebtedness under our credit facility.  As a result, the amount
available under our credit facility increased to almost $1.4 billion at March
31, 2009. In addition, we repatriated $180 million of accumulated earnings of
foreign subsidiaries and used the proceeds for debt repayment and general
corporate purposes. See Liquidity and Capital Resources below.




As noted
in our 2008 Annual Report on Form 10-K (Item 1A. Risk
Factors),  significant decreases in crude oil and natural gas prices
could result in a reduction of the carrying values of our oil and gas
properties.  The commodity price decreases that began during the
second half of 2008 required us to record asset impairment charges during fourth
quarter 2008.  Further declines in natural gas prices during first
quarter 2009 led us to review those properties that, at year-end 2008, were
susceptible to impairment should commodity prices continue to decline
appreciably.  As a result of this review, we determined that
additional properties were impaired as of March 31, 2009. Total pre-tax
(non-cash) impairments for first quarter 2009 were $437 million and were
predominately related to Granite Wash, an onshore US area in which we have
significantly reduced investments beginning in 2007. The decrease in the natural
gas futures price strip that occurred during first quarter 2009 was the primary
factor that required an impairment of Granite Wash.  See Item 1.
Financial Statements – Note 5 – Fair Value Measurements. Further declines in
commodity prices could result in additional impairment of our oil and gas
properties, other long-lived assets or goodwill.


Continued lower commodity
prices will reduce our cash flows from operations. To mitigate the impact of
lower commodity prices on our cash flows, we have entered into crude oil
commodity contracts for 2009 and 2010and natural gas commodity contracts
for 2009, 2010 and 2011. Depending on the length of the current recession,
commodity prices may stay depressed or decline further, thereby causing a
prolonged downturn, which would further reduce our cash flows from
operations.  This could cause us to alter our business plans including
reducing or delaying our exploration and development program spending and other
cost reduction initiatives.  See 2009 Budget
below.




We are
closely monitoring costs and have implemented several cost savings initiatives,
including continued reduction of well costs through drilling and completion
efficiencies and comprehensive review of oil and gas operating
costs.  We are also beginning to see reductions in third party
drilling costs and operating supplies and services.







21





OUTLOOK




Our
expected crude oil, natural gas and NGL production for the remainder of 2009 may
be impacted by several factors including:




·
            overall
      level and timing of capital expenditures, as discussed below, which,
      dependent upon our drilling success, are expected to result in near-term
      production growth;


·
            natural
      field decline in the deepwater Gulf of Mexico, Gulf Coast and
      Mid-continent areas of our US operations and the North
  Sea;


·
            higher
      sales of natural gas from the Alba field in Equatorial
    Guinea;


·
            potential
      hurricane-related volume curtailments in the Gulf of Mexico and Gulf Coast
      areas of our US operations as occurred with Hurricanes Gustav and Ike in
      2008;


·
            the
      restoration of pipeline and facilities necessary to increase our Gulf of
      Mexico production;


·
            potential
      winter storm-related volume curtailments in the Northern region of our US
      operations;


·
            potential
      pipeline and processing facility capacity constraints in the Rocky
      Mountains area of our US operations and timing of start-up of a new
      interstate crude oil transportation pipeline system which will run from
      Weld County, Colorado to Cushing,
Oklahoma;


·
            growth
      in demand for natural gas in
Israel;


·
            Israeli
      seasonal demand;


·
            competing
      natural gas deliveries in Israel from Egypt, which could lower our sales
      volumes;


·
            potential
      downtime at the methanol, LPG and/or LNG plants in Equatorial
      Guinea;


·
            seasonal
      variations in rainfall in Ecuador that affect our natural gas-to-power
      project; and


·
            timing
      of significant project completion and initial
  production.





2009 Budget– Due to the uncertain
economic and commodity price environment, we have designed a flexible capital
spending program that will be responsive to conditions that develop during
2009.  Our revised capital program for 2009 accommodates an investment
level of $1.6 billion, with the ability to adjust up or down by approximately
15%. Currently we are managing towards an investment level of $1.4 billion, the
lower end of this range.




Approximately
40% of the 2009 budget is committed to longer-term projects that will provide
considerable production growth several years in the future. The remainder is
allocated toward maintaining and strengthening the existing property
base.  Development spending will focus on our international and
deepwater Gulf of Mexico assets as well as certain higher return opportunities
onshore in the US including the Wattenberg field.  The exploration
budget will center on significant resource potential in Israel, West Africa and
the deepwater Gulf of Mexico.  International expenditures are
estimated to represent 30% of the total capital program.




The 2009
budget does not include the impact of possible asset purchases. We expect that
the remaining 2009 budget will be funded primarily from cash flows from
operations, cash on hand, and borrowings under our revolving credit facility. We
will evaluate the level of capital spending throughout the remainder of the year
based on drilling results, commodity prices, cash flows from operations and
property acquisitions and divestitures.




Recently Issued
Pronouncements–
See Item 1. Financial Statements – Note 15 – Recently Issued
Pronouncements.







22





RESULTS
OF OPERATIONS




Oil,
Gas and NGL Sales


Revenues
from sales of commodities were as follows:




Three
      Months EndedMarch
      31,2009
                      
                      
                      2008(in
      millions)Crude
      oil and condensate sales
                      
                      $
                      202
                      
                      
                      $
                      527Natural
      gas sales
                      
                      
                      183
                      
                      
                      
                      371NGL
      sales
                      
                      
                      21
                      
                      
                      
                      46Total
                      
                      $
                      406
                      
                      
                      $
                      944




Average
daily sales volumes and average realized sales prices were as
follows:




Sales
      Volumes
                  
                  
                  
                  
                  
                  Average
      Realized Sales PricesCrude
      Oil &
                  
                  
                  Natural
                  
                  
                  
                  
                  
                  Crude
      Oil &
                  
                  
                  NaturalCondensate
                  
                  
                  Gas
                  
                  
                  NGLs
                  
                  
                  Condensate
                  
                  
                  Gas
                  
                  
                  NGLs(MBopd)
                  
                  
                  (MMcfpd)
                  
                  
                  (MBpd)
                  
                  
                  (Per
      Bbl)
                  
                  
                  (Per
      Mcf)
                  
                  
                  (Per
      Bbl)Three
      Months Ended March 31, 2009United
      States (1)
                  
                  
                  35
                  
                  
                  
                  411
                  
                  
                  
                  9
                  
                  
                  $
                  35.65
                  
                  
                  $
                  3.93
                  
                  
                  $
                  24.74West
      Africa (2)
      (3)
                  
                  
                  13
                  
                  
                  
                  243
                  
                  
                  
                  -
                  
                  
                  
                  39.41
                  
                  
                  
                  0.27
                  
                  
                  
                  -North
      Sea
                  
                  
                  7
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  45.91
                  
                  
                  
                  8.17
                  
                  
                  
                  -Israel
                  
                  
                  -
                  
                  
                  
                  112
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2.81
                  
                  
                  
                  -Ecuador
      (4)
                  
                  
                  -
                  
                  
                  
                  30
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      International
                  
                  
                  4
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  36.89
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Consolidated Operations
                  
                  
                  59
                  
                  
                  
                  801
                  
                  
                  
                  9
                  
                  
                  
                  37.81
                  
                  
                  
                  2.64
                  
                  
                  
                  24.74Equity
      Investees (5)
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  7
                  
                  
                  
                  41.76
                  
                  
                  
                  -
                  
                  
                  
                  26.89Total
                  
                  
                  61
                  
                  
                  
                  801
                  
                  
                  
                  16
                  
                  
                  $
                  37.91
                  
                  
                  $
                  2.64
                  
                  
                  $
                  25.62Three
      Months Ended March 31, 2008United
      States (1)
                  
                  
                  43
                  
                  
                  
                  393
                  
                  
                  
                  9
                  
                  
                  $
                  71.33
                  
                  
                  $
                  8.97
                  
                  
                  $
                  55.15West
      Africa (2)
      (3)
                  
                  
                  15
                  
                  
                  
                  220
                  
                  
                  
                  -
                  
                  
                  
                  88.79
                  
                  
                  
                  0.27
                  
                  
                  
                  -North
      Sea
                  
                  
                  9
                  
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  100.46
                  
                  
                  
                  9.65
                  
                  
                  
                  -Israel
                  
                  
                  -
                  
                  
                  
                  145
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3.04
                  
                  
                  
                  -Ecuador
      (4)
                  
                  
                  -
                  
                  
                  
                  23
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      International
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  73.37
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Consolidated Operations
                  
                  
                  73
                  
                  
                  
                  787
                  
                  
                  
                  9
                  
                  
                  
                  78.89
                  
                  
                  
                  5.34
                  
                  
                  
                  55.15Equity
      Investees (5)
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  6
                  
                  
                  
                  98.55
                  
                  
                  
                  -
                  
                  
                  
                  60.78Total
                  
                  
                  75
                  
                  
                  
                  787
                  
                  
                  
                  15
                  
                  
                  $
                  79.43
                  
                  
                  $
                  5.34
                  
                  
                  $
                  57.47




(1)
            Average
      realized crude oil and condensate prices reflect reductions of $2.70 per
      Bbl for first quarter 2009 and $21.81 per Bbl for first quarter 2008 from
      hedging activities. Average realized natural gas prices reflect a
      reduction of $0.01 for first quarter 2009 and an increase of $1.05 per Mcf
      for first quarter 2008 from hedging activities.  The price
      reductions and increase resulted from hedge gains and losses that were
      previously deferred in AOCL.


(2)
            Average
      realized crude oil and condensate prices reflect reductions of $7.08 per
      Bbl for first quarter 2009 and $8.62 per Bbl for first quarter 2008 from
      hedging activities.  The price reductions resulted from hedge
      losses that were previously deferred in
AOCL.


(3)
            Natural
      gas from the Alba field in Equatorial Guinea is under contract for
      $0.25 per MMBtu to a methanol plant, an LPG plant and an LNG plant. The
      methanol and LPG plants are owned by affiliated entities accounted for
      under the equity method of
      accounting.  Natural gas volumes sold to the LNG plant totaled
      188 MMcfpd during first quarter 2009 and 173 MMcfpd during first quarter
      2008.





23








(4)
            The
      natural gas-to-power project in Ecuador is 100% owned by our subsidiaries
      and intercompany natural gas sales are eliminated for accounting purposes.
      Electricity sales are included in other revenues. See Item 1. Financial
      Statements – Note 2 – Basis of
Presentation.


(5)
            Volumes
      represent sales of condensate and LPG from the Alba plant in Equatorial
      Guinea. See Equity Method Investees
below.




Crude oil
and condensate sales volumes in the table above differ from actual production
volumes due to the timing of liquid hydrocarbon tanker liftings. Crude oil and
condensate production volumes were as follows:




Three
      Months Ended March 31,2009
                        
                        
                        2008(MBopd)United
      States
                        
                        
                        35
                        
                        
                        
                        43West
      Africa
                        
                        
                        15
                        
                        
                        
                        15North
      Sea
                        
                        
                        8
                        
                        
                        
                        11Other
      International
                        
                        
                        4
                        
                        
                        
                        6Total
      Consolidated Operations
                        
                        
                        62
                        
                        
                        
                        75Equity
      Investees
                        
                        
                        2
                        
                        
                        
                        2Total
                        
                        
                        64
                        
                        
                        
                        77




If the
realized gains and losses on commodity derivative instruments, which are
included in (gain) loss on commodity derivative instruments, had been included
in oil and gas revenues, average realized prices would have been as
follows:




Three
      Months Ended March 31,2009
                                                
                                                
                                                2008Crude
      Oil &
                                                
                                                
                                                Natural
                                                
                                                
                                                Crude
      Oil &
                                                
                                                
                                                NaturalCondensate
                                                
                                                
                                                Gas
                                                
                                                
                                                Condensate
                                                
                                                
                                                Gas(Per
      Bbl)
                                                
                                                
                                                (Per
      Mcf)
                                                
                                                
                                                (Per
      Bbl)
                                                
                                                
                                                (Per
      Mcf)United
      States
                                                
                                                $
                                                56.78
                                                
                                                
                                                $
                                                5.51
                                                
                                                
                                                $
                                                70.02
                                                
                                                
                                                $
                                                8.63West
      Africa
                                                
                                                
                                                64.21
                                                
                                                
                                                
                                                0.27
                                                
                                                
                                                
                                                87.39
                                                
                                                
                                                
                                                0.27Total
      Consolidated Operations
                                                
                                                
                                                55.65
                                                
                                                
                                                
                                                3.48
                                                
                                                
                                                
                                                77.83
                                                
                                                
                                                
                                                5.16Total
                                                
                                                
                                                55.32
                                                
                                                
                                                
                                                3.48
                                                
                                                
                                                
                                                78.40
                                                
                                                
                                                
                                                5.16




Crude Oil and Condensate Sales –Crude oil and condensate sales decreased during first quarter 2009 as
compared with first quarter 2008 due to the significant decrease in average
realized prices combined with a decline in sales volumes. The decrease in sales
volumes was due to continued Hurricane Ike-related shut-ins of certain deepwater
Gulf of Mexico assets, the timing of liftings in Equatorial Guinea and the North
Sea and natural field decline in the North Sea.




Revenues
for first quarter 2009 and 2008 included deferred losses of $17 million and $97
million, respectively, reclassified from AOCL and related to commodity
derivative instruments previously accounted for as cash flow
hedges.




Natural Gas Sales –Natural gas sales
decreased during first quarter 2009 as compared with first quarter 2008 due to
the significant decrease in average realized prices. The effect of the price
decreases was partially offset by an overall increase in sales volumes due to
the following:




·
            increase
      in production from the Wattenberg, Piceance and Tri-state areas of our
      North America operations; and


·
            increase
      in volumes sold to the LNG plant in Equatorial
  Guinea;


and partially
offset by:





·
            decrease
      in Israel sales volumes due to power plant downtime and milder weather
      conditions; and


·
            continued
      Hurricane Ike-related shut-ins of certain deepwater Gulf of Mexico
      assets.





Revenues
for first quarter 2008 included a deferred gain of $37 million reclassified from
AOCL and related to commodity derivative instruments previously accounted for as
cash flow hedges. Revenues for first quarter 2009 included a de minimis amount
reclassified from AOCL and related to commodity derivative instruments
previously accounted for as cash flow hedges.







24





NGL Sales – Most of our US
NGL production is from the Wattenberg field and deepwater Gulf of Mexico. NGL
sales decreased during first quarter 2009 as compared with first quarter 2008
due to a 55% decrease in average realized NGL prices.




Equity
Method Investees


Our share
of operations of equity method investees, Atlantic Methanol Production Company,
LLC (AMPCO) and Alba Plant LLC (Alba Plant), was as follows:




Three
      Months EndedMarch
      31,2009
                      
                      
                      2008Net
      income (in millions):AMPCO
      and affiliates
                      
                      $
                      -
                      
                      
                      $
                      28Alba
      Plant
                      
                      
                      11
                      
                      
                      
                      34Distributions/dividends
      (in millions):AMPCO
      and affiliates
                      
                      $
                      -
                      
                      
                      $
                      34Alba
      Plant
                      
                      
                      -
                      
                      
                      
                      42Production
      volumes:Methanol
      (MMgal)
                      
                      
                      40
                      
                      
                      
                      34Condensate
      (MBopd)
                      
                      
                      2
                      
                      
                      
                      2LPG
      (MBpd)
                      
                      
                      6
                      
                      
                      
                      6Sales
      volumes:Methanol
      (MMgal)
                      
                      
                      35
                      
                      
                      
                      34Condensate
      (MBopd)
                      
                      
                      2
                      
                      
                      
                      2LPG
      (MBpd)
                      
                      
                      7
                      
                      
                      
                      6Average
      realized prices:Methanol
      (per gallon)
                      
                      $
                      0.46
                      
                      
                      $
                      1.63Condensate
      (per Bbl)
                      
                      
                      41.76
                      
                      
                      
                      98.55LPG
      (per Bbl)
                      
                      
                      26.89
                      
                      
                      
                      60.78




The
decrease in net income for each of the equity method investees for first quarter
2009 as compared with first quarter 2008 was due to significant decreases in
average realized prices.  No distributions were made during first
quarter 2009 due to the decreases in net income and in anticipation of planned
tax payments.




Other
Revenues


Other
revenues include electricity sales and GMP revenues. See Item 1. Financial
Statements – Note 2 – Basis of Presentation.







25





Costs
and Expenses


Production Costs –Production
costs were as follows:





United
                                        
                                        
                                        West
                                        
                                        
                                        North
                                        
                                        
                                        
                                        
                                        Other
      Int'l,Total
                                        
                                        
                                        States
                                        
                                        
                                        Africa
                                        
                                        
                                        Sea
                                        
                                        
                                        Israel
                                        
                                        Corporate(1)(in
      millions)Three
      Months Ended March 31, 2009Oil
      and gas operating costs (2)
                                        
                                        $
                                        93
                                        
                                        
                                        $
                                        71
                                        
                                        
                                        $
                                        9
                                        
                                        
                                        $
                                        9
                                        
                                        
                                        $
                                        1
                                        
                                        
                                        $
                                        3Workover
      and repair expense
                                        
                                        
                                        7
                                        
                                        
                                        
                                        6
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Lease
      operating expense
                                        
                                        
                                        100
                                        
                                        
                                        
                                        77
                                        
                                        
                                        
                                        9
                                        
                                        
                                        
                                        10
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        3Production
      and ad valorem taxes
                                        
                                        
                                        18
                                        
                                        
                                        
                                        18
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Transportation
      expense
                                        
                                        
                                        12
                                        
                                        
                                        
                                        10
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1Total
      production costs
                                        
                                        
                                        130
                                        
                                        
                                        
                                        105
                                        
                                        
                                        
                                        9
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        4Three
      Months Ended March 31, 2008Oil
      and gas operating costs (2)
                                        
                                        
                                        76
                                        
                                        
                                        
                                        49
                                        
                                        
                                        
                                        9
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        5Workover
      and repair expense
                                        
                                        
                                        6
                                        
                                        
                                        
                                        6
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Lease
      operating expense
                                        
                                        
                                        82
                                        
                                        
                                        
                                        55
                                        
                                        
                                        
                                        9
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        5Production
      and ad valorem taxes
                                        
                                        
                                        43
                                        
                                        
                                        
                                        33
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        10Transportation
      expense
                                        
                                        
                                        13
                                        
                                        
                                        
                                        11
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
      production costs
                                        
                                        $
                                        138
                                        
                                        
                                        $
                                        99
                                        
                                        
                                        $
                                        9
                                        
                                        
                                        $
                                        13
                                        
                                        
                                        $
                                        2
                                        
                                        
                                        $
                                        15




(1)
              Other
      international includes Ecuador, China, and Argentina (through February
      2008).


(2)
              Oil
      and gas operating costs include labor, fuel, repairs, replacements,
      saltwater disposal and other related lifting
  costs.




Total
production costs decreased first quarter 2009 as compared with first quarter
2008 primarily due to a decrease in production and ad valorem taxes offset by an
increase in oil and gas operating costs. Production and ad valorem taxes in the
US decreased primarily due to lower commodity prices.  Other
International production taxes were de minimis for first quarter 2009 due to
lower commodity prices in China and the sale of our oil and gas interests in
Argentina.  US oil and gas operating costs increased primarily due to
an increase in well counts, production volumes and water disposal costs in the
Northern region, and were partially offset by a decrease in International
operating costs.




Selected
expenses on a per BOE basis were as follows:




Three
      Months EndedMarch
      31,2009
                            
                            
                            2008Oil
      and gas operating costs
                            
                            $
                            5.09
                            
                            
                            $
                            3.88Workover
      and repair expense
                            
                            
                            0.41
                            
                            
                            
                            0.33Lease
      operating expense
                            
                            
                            5.50
                            
                            
                            
                            4.21Production
      and ad valorem taxes
                            
                            
                            1.00
                            
                            
                            
                            2.23Transportation
      expense
                            
                            
                            0.63
                            
                            
                            
                            0.68Total
      production costs (1)
      (2)
                            
                            $
                            7.13
                            
                            
                            $
                            7.12




(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees. Sales volumes include natural gas sales to an LNG plant in
      Equatorial Guinea. The inclusion of these volumes reduced the unit rate by
      $1.30 per BOE for first quarter 2009 and $1.11 per BOE for first quarter
      2008.


(2)    
Natural gas is converted on the basis of six Mcf of gas per one barrel of oil
equivalent.

























26






Oil and Gas Exploration Expense –Oil and gas exploration expense was as follows:




United
                      
                      
                      West
                      
                      
                      North
                      
                      
                      
                      
                      
                      Other
      Int'l/Total
                      
                      
                      States
                      
                      
                      Africa
                      
                      
                      Sea
                      
                      
                      Israel
                      
                      
                      Corporate
      (1)(in
      millions)Three
      Months Ended March 31, 2009Dry
      hole expense
                      
                      $
                      2
                      
                      
                      $
                      (1
                      )
                      
                      $
                      4
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      (1
                      )Seismic
                      
                      
                      23
                      
                      
                      
                      23
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Staff
      expense
                      
                      
                      15
                      
                      
                      
                      4
                      
                      
                      
                      3
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      7Other
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      exploration expense
                      
                      $
                      42
                      
                      
                      $
                      28
                      
                      
                      $
                      7
                      
                      
                      $
                      1
                      
                      
                      $
                      -
                      
                      
                      $
                      6Three
      Months Ended March 31, 2008Dry
      hole expense
                      
                      $
                      7
                      
                      
                      $
                      (1
                      )
                      
                      $
                      -
                      
                      
                      $
                      8
                      
                      
                      $
                      -
                      
                      
                      $
                      -Seismic
                      
                      
                      13
                      
                      
                      
                      13
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Staff
      expense
                      
                      
                      16
                      
                      
                      
                      11
                      
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      3Other
                      
                      
                      4
                      
                      
                      
                      4
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      exploration expense
                      
                      $
                      40
                      
                      
                      $
                      27
                      
                      
                      $
                      -
                      
                      
                      $
                      9
                      
                      
                      $
                      1
                      
                      
                      $
                      3




(1)    
Other international includes amounts spent in support of various international
new ventures.




Oil and
gas exploration expense for first quarter 2009 includes an increase in US
seismic expense in support of the central Gulf of Mexico lease sale. Exploration
expense also includes stock-based compensation expense of $2 million for first
quarter 2009 and less than $1 million for first quarter 2008.




Depreciation, Depletion and
Amortization –DD&A expense was as follows:




Three
      Months EndedMarch
      31,2009
                      
                      
                      2008(in
      millions, except unit rate)DD&A
      expense
                      
                      $
                      197
                      
                      
                      $
                      201Accretion
      of discount on asset retirement obligations
                      
                      
                      3
                      
                      
                      
                      2Total
      DD&A expense
                      
                      $
                      200
                      
                      
                      $
                      203Unit
      rate per BOE(1)
                      
                      $
                      11.01
                      
                      
                      $
                      10.42




(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees. Sales volumes include natural gas sales to an LNG plant in
      Equatorial Guinea. The inclusion of these volumes reduced the unit rate by
      $1.67 per BOE for first quarter 2009 and $1.32 per BOE for first quarter
      2008.




Total
DD&A expense for first quarter 2009 remained flat as compared with first
quarter 2008.  DD&A expense was higher in the US due to an
increase in Northern region production (primarily in Piceance and Wattenberg),
offset somewhat by decreased production in the Gulf of Mexico. DD&A expense
also included $4 million of abandoned asset expense in first quarter
2009.




The higher DD&A unit rate resulted
from the change in our mix of production, including lower volumes in Israel, and
was also impacted by negative reserve revisions related to lower year-end 2008
commodity prices.











27




General
and Administrative Expense – General and administrative expense (G&A)
was as follows:




Three
      Months EndedMarch
      31,2009
                        
                        
                        2008G&A
      expense (in millions)
                        
                        $
                        59
                        
                        
                        $
                        60Unit
      rate per BOE (1)
                        
                        $
                        3.23
                        
                        
                        $
                        3.09




(1)
            Consolidated
      unit rates exclude sales volumes and costs attributable to equity method
      investees. Sales volumes include natural gas sales to an LNG plant in
      Equatorial Guinea. The inclusion of these volumes reduced the unit rate by
      $0.59 per BOE for first quarter 2009 and $0.48 per BOE for first quarter
      2008.




G&A
expense during first quarter 2009 remained flat as compared with first
quarter 2008. G&A expense included stock-based compensation expense of $9
million in each of first quarter 2009 and 2008, respectively.




Asset Impairments –During
first quarter 2009 we recorded total pre-tax (non-cash) impairment charges of
$437 million on certain US oil and gas properties, primarily due to lower
natural gas prices. In determining the fair values of the impaired properties,
we applied the fair value definition of SFAS 157. SFAS 157 requires that fair
values be determined from the perspective of a market participant considering,
among other things, appropriate discount rates, multiple valuation techniques,
the most advantageous market and assumptions around the highest and best use of
the assets. Due to the absence of comparable market data for the impaired
properties, we estimated the fair values using a discounted cash flow method.
Estimated future cash flows were based on management’s expectations for the
future and included management’s estimates of future oil and gas production,
commodity prices based on commodity futures price strips as of March 31, 2009,
operating and development costs, as well as appropriate discount rates. Due to
the use of significant unobservable inputs, the fair values of the impaired
properties were classified as Level 3 measurements in the fair value hierarchy.
A change in any of the assumptions used, such as a significant increase or
decreased in estimated commodity prices or production, could have had a
significant impact on the amount of the impairment loss recognized. See Item 1.
Financial Statements – Note 5 – Fair Value Measurements.




Other Operating Expense, Net –Other operating expense, net includes electricity generation expense and
GMP expense. See Item 1. Financial Statements – Note 2 – Basis of
Presentation.




(Gain) Loss on Commodity Derivative
Instruments– See Item 1. Financial Statements – Note 4 – Derivative
Instruments and Hedging Activities and Note 5 – Fair Value
Measurements.




Interest Expense and Capitalized
Interest – Interest expense and capitalized interest were as
follows:




Three
      Months EndedMarch
      31,2009
                        
                        
                        2008(in
      millions)Interest
      expense
                        
                        $
                        24
                        
                        
                        $
                        27Capitalized
      interest
                        
                        
                        (6
                        )
                        
                        
                        (10
                        )Interest
      expense, net
                        
                        $
                        18
                        
                        
                        $
                        17




Interest
expense decreased during first quarter 2009, as compared with first quarter 2008
due to a declining rate of interest applicable to our credit facility from 2.99%
at March 31, 2008 to 0.81% at March 31, 2009, offset by a higher rate of
interest related to the issuance of $1 billion 10-year unsecured notes on
February 27, 2009.  The amount of interest capitalized decreased
primarily due to a lower average interest rate applicable to our long-term
debt.




Other (Income) Expense, Net –See Item 1. Financial Statements – Note 2 – Basis of
Presentation.




Income Tax Provision (Benefit) –The income tax provision (benefit) was as follows:




Three
      Months EndedMarch
      31,2009
                      
                      
                      2008Income
      tax provision (benefit) (in millions)
                      
                      $
                      (186
                      )
                      
                      $
                      101Effective
      rate
                      
                      
                      50
                      %
                      
                      
                      32
                      %




Our
effective tax rate increased during first quarter 2009 as compared with first
quarter 2008 due primarily to the fact that the 2009 rate represents a tax
benefit divided by a pre-tax loss.  In that case, our favorable
permanent differences, such as income from equity method investees, have the
effect of increasing the tax benefit which, in turn, increases the effective
rate.






28







LIQUIDITY
AND CAPITAL RESOURCES




Overview


Our
primary cash needs are to fund operating expenses and capital expenditures
related to the acquisition, exploration and development of crude oil and natural
gas properties, to repay outstanding borrowings and associated interest payments
and other contractual commitments and to pay dividends. Traditional sources of
our liquidity are cash on hand, cash flows from operations and available
borrowing capacity under credit facilities. Occasional sales of non-strategic
crude oil and natural gas properties may also generate cash.




The
ongoing disruption in the credit markets has had a significant adverse impact on
a number of financial institutions. We have reviewed the creditworthiness of the
banks and financial institutions with which we maintain our investments as well
as the securities underlying our investments. Thus far, our liquidity and
financial position have not been materially impacted. However, further
deterioration in the credit markets could adversely affect our results of
operations and cash flows. See Executive Overview – Impact of Recession and Current
Credit and Commodity Markets.




Cash and Cash Equivalents –
We had $1.0 billion in cash and cash equivalents at March 31, 2009. Our cash is
denominated in US dollars and is invested in US Treasury securities and
short-term deposits with major financial institutions. In response to the credit
market crisis, we shortened the duration of our investment maturities and
increased our investments in US Treasury securities.




A
majority of this cash is attributable to our foreign subsidiaries and most would
be subject to US income taxes if repatriated. We currently intend to use a
majority of our international cash to fund international projects, including the
development of West Africa and Israel.




During
fourth quarter 2008, we performed an analysis of projected short-term working
capital needs as well as long-term capital requirements for our US and foreign
operations. As a result, we repatriated $180 million of the accumulated earnings
of foreign subsidiaries during first quarter 2009. We used the proceeds for debt
repayment and general corporate purposes. See Item 1. Financial Statements –
Note 4 – Income Taxes for a discussion of the related tax effects.




Commodity Derivative Instruments– We use various derivative instruments in connection with anticipated
crude oil and natural gas sales to minimize the impact of product price
fluctuations. Such instruments include variable to fixed commodity price swaps,
collars and basis swaps. Current period settlements on commodity derivative
instruments impact our liquidity, since we are either paying cash to, or
receiving cash from, our counterparties. If actual commodity prices are higher
than the fixed or ceiling prices in our derivative instruments, our cash flows
will be lower than if we had no derivative instruments. Conversely, if actual
commodity prices are lower than the fixed or floor prices in our derivative
instruments, our cash flows will be higher than if we had no derivative
instruments. Except for certain minor derivative contracts that are entered into
from time to time by our marketing subsidiary, none of our counterparty
agreements contain margin requirements.




Commodity
derivative instruments are recorded at fair value in our consolidated balance
sheets, and changes in fair value are recorded in earnings in the period in
which the change occurs. As of March 31, 2009, the fair value of our commodity
derivative assets was $427 million and the fair value of our commodity
derivative liabilities was $46 million (after consideration of netting
agreements). See Item 1. Financial Statements – Note 4 – Derivative Instruments
and Hedging Activities for a discussion of counterparty credit risk and Note 5 –
Fair Value Measurements for a description of the methods we use to estimate the
fair values of commodity derivative instruments.




Contractual
Obligations


In
February 2009, we completed an underwritten public offering of $1 billion of 81⁄4%
senior unsecured notes due March 1, 2019. See Financing Activities below.
As a result, our future debt principal payments as of March 31, 2009 consist of
the following: $25 million for the remainder of 2009; $726 million for 2012; and
$1.6 billion for 2014 and beyond for a total of $2.4 billion. Based on the total
debt balance, scheduled maturities and interest rates in effect at March 31,
2009, our cash payments for interest would be $88 million for the remainder of
2009; $133 million in 2010; $133 million in 2011; $132 million in 2012; $127
million in 2013; and $1.3 billion for the remaining years for a total of $2.0
billion. See Item 1. Financial Statements – Note 3 – Debt Issuance.







29





Cash
Flows


Cash flow
information is as follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Total
      cash provided by (used in):Operating
      activities
                          
                          $
                          185
                          
                          
                          $
                          506Investing
      activities
                          
                          
                          (399
                          )
                          
                          
                          (355
                          )Financing
      activities
                          
                          
                          91
                          
                          
                          
                          (4
                          )Increase
      (decrease) in cash and cash equivalents
                          
                          $
                          (123
                          )
                          
                          $
                          147




Operating Activities – Net
cash provided by operating activities for first quarter 2009 decreased as
compared with first quarter 2008 due primarily to decreases in commodity
prices.




Investing Activities –Our
investing activities include capital spending for oil and gas properties, which
may be offset by proceeds from property sales. Net cash used in investing
activities increased during first quarter 2009 as compared with first quarter
2008 and consisted only of capital spending. First quarter 2008 activity
included capital spending of $464 million, which was partially offset by net
proceeds of $109 million from asset sales. See Acquisition, Capital and Exploration
Expenditures below.




Financing Activities – Our
financing activities include the issuance or repurchase of our common stock,
payment of cash dividends on our common stock, the borrowing of cash and the
repayment of borrowings. During first quarter 2009, we received $989 million net
proceeds from the issuance of our 81⁄4% senior notes. Funds were also provided by
cash proceeds from, and tax benefits related to, the exercise of stock options
($14 million). We used cash for net repayments of amounts outstanding under our
revolving credit facility ($880 million), to pay dividends on our common stock
($31 million), and to repurchase shares of our common stock ($1
million).




In
comparison, during first quarter 2008, funds were provided by cash proceeds
from, and tax benefits related to, the exercise of stock options ($19 million)
and we used cash to pay dividends on our common stock ($21 million) and
repurchase shares of our common stock ($2 million). There were no net changes in
outstanding debt.




Investing
Activities


Acquisition, Capital and Exploration
Expenditures– Information for investing activities (on an accrual basis)
is as follows:




Three
      Months EndedMarch
      31,2009
                          
                          
                          2008(in
      millions)Acquisition,
      Capital and Exploration ExpendituresUnproved
      property acquisition
                          
                          $
                          16
                          
                          
                          $
                          176Exploration
                          
                          
                          95
                          
                          
                          
                          45Development
                          
                          
                          231
                          
                          
                          
                          246Corporate
      and other
                          
                          
                          44
                          
                          
                          
                          19Total
                          
                          $
                          386
                          
                          
                          $
                          486




Unproved
property acquisition costs for first quarter 2009 and 2008 include primarily
lease bonuses on deepwater lease blocks acquired in central Gulf of Mexico lease
sales.




Property Sales–In February 2008,
effective July 1, 2007, we sold our interest in Argentina for a sales price of
$117.5 million.




Financing
Activities


Long-Term Debt –Our
principal source of liquidity is an unsecured revolving credit facility that
matures December 9, 2012. The commitment is $2.1 billion until December 9, 2011
at which time the commitment reduces to $1.8 billion. The credit facility (i)
provides for credit facility fee rates that range from 5 basis points to 15
basis points per year depending upon our credit rating, (ii) makes available
short-term loans up to an aggregate amount of $300 million
and (iii) provides for interest rates that are based upon the Eurodollar rate
plus a margin that ranges from 20 basis points to 70 basis points depending upon
ourcredit rating and utilization of the credit facility. The credit facility is
with certain commercial lending institutions and is available for general
corporate purposes.







30





In order
to provide increased liquidity and lengthen our weighted average
debt maturity, on February 27, 2009 we completed an underwritten public offering
of $1 billion of 81⁄4% senior unsecured notes due March 1, 2019, receiving
net proceeds of $989 million.  We used substantially all of the net
proceeds from the offering to repay outstanding indebtedness under the revolving
credit facility.




As a
result, at March 31, 2009, borrowings outstanding under the credit
facility totaled $726 million, leaving almost $1.4 billion available for use.
The weighted average interest rate applicable to borrowings under the credit
facility at March 31, 2009 was 0.81%.




Our
outstanding fixed-rate debt, including the new 81⁄4% senior unsecured notes
discussed above, totaled $1.6 billion at March 31, 2009. The weighted average
interest rate on fixed-rate debt was 7.73%, with maturities ranging from 2014 to
2097.




Our ratio
of debt-to-book capital was 28% at March 31, 2009 as compared with 26% at
December 31, 2008. We define our ratio of debt-to-book capital as total debt
(which includes both long-term debt, excluding unamortized discount, and
short-term borrowings) divided by the sum of total debt plus shareholders’
equity.




Short-Term Borrowings –
We owe $25 million in the form of an installment payment to the seller of
properties we purchased in 2007. The amount is due May 11, 2009 and is included
in short-term borrowings in the consolidated balance sheets. Interest on the
unpaid amount is due quarterly and accrues at a LIBOR rate plus .30%. The
interest rate was 1.76% at March 31, 2009.




Our
committed credit facility has been supplemented by short-term borrowings under
various uncommitted credit lines used for working capital purposes. Uncommitted
credit lines may be offered by certain banks from time to time at rates
negotiated at the time of borrowing. There were no amounts outstanding under
uncommitted credit lines at March 31, 2009 or December 31, 2008. Depending upon
future credit market conditions, these sources may or may not be available.
However, we are not dependent on them to fund our day-to-day
operations.




Dividends
–We paid a quarterly cash dividend of 18.0 cents per share of common
stock during first quarter 2009 and 12.0 cents per share of common stock during
first quarter 2008. On April 27, 2009, our Board of Directors declared a
quarterly cash dividend of 18.0 cents per common share, payable May 26, 2009 to
shareholders of record on May 11, 2009. The amount of future dividends will be
determined on a quarterly basis at the discretion of our Board of Directors and
will depend on earnings, financial condition, capital requirements and other
factors.




Exercise of Stock Options –We received cash proceeds of $11 million from the exercise of stock
options during first quarter 2009 as compared with $10 million during first
quarter 2008.




Common Stock Repurchases –We
receive shares of common stock from employees for the payment of withholding
taxes due on the vesting of restricted shares issued under stock-based
compensation plans. We received 17,510 shares with a value of $1 million during
first quarter 2009 and 24,380 shares with a value of $2 million during first
quarter 2008.







31





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES


ABOUT
MARKET RISK




Commodity
Price Risk


Derivative Instruments Held for
Non-Trading Purposes–We areexposed to market risk
in the normal course of business operations, and the uncertainty of crude oil
and natural gas prices continues to impact the oil and gas industry. Due to the
volatility of crude oil and natural gas prices, we continue to use derivative
instruments as a means of managing our exposure to price changes.




At
March 31, 2009, we had entered into variable to fixed price commodity
swaps, collars and basis swaps related to crude oil and natural gas sales. Our
open commodity derivative instruments were in a net receivable position with a
fair value of $381 million. Based on the March 31, 2009 published forward
commodity price curves for the underlying commodities, a price increase of $1.00
per Bbl for crude oil would decrease the fair value of our net commodity
derivative receivable by approximately $9 million. A price increase of $0.10 per
MMBtu for natural gas would decrease the fair value of our net commodity
derivative receivable by approximately $8 million.  Our derivative
instruments are executed under master agreements which allow us, in the event of
default, to elect early termination of all contracts with the defaulting
counterparty. If we choose to elect early termination, all asset and liability
positions with the defaulting counterparty would be net cash settled at the time
of election. See Item 1. Financial Statements –
Note 4 –
Derivative Instruments and Hedging Activities.




Interest
      Rate Risk


Changes
in interest rates affect the amount of interest we pay on borrowings under our
revolving credit facility and other variable-rate debt and the amount of
interest we earn on our short-term investments.




At
March 31, 2009, we had $2.4 billion (excluding unamortized discount)
of long-term debt outstanding. Of this amount, $1.6 billion was fixed-rate debt
with a weighted average interest rate of 7.73%. Although near term changes in
interest rates may affect the fair value of our fixed-rate debt, they do not
expose us to the risk of earnings or cash flow loss.




The
remainder of our long-term debt, $726 million at March 31, 2009, was
variable-rate debt drawn under our credit facility. We also had $25 million of
short-term variable-rate debt at March 31, 2009. Variable-rate debt exposes us
to the risk of earnings or cash flow loss due to increases in market interest
rates. We estimate that a hypothetical 25 basis point change in the floating
interest rates applicable to the March 31, 2009 balance of our
variable-rate debt would result in a change in annual interest expense of
approximately $2 million.




We
occasionally enter into forward contracts or swap agreements to hedge exposure
to interest rate risk. Changes in fair value of interest rate swaps or interest
rate “locks” used as cash flow hedges are reported in AOCL, to the extent the
hedge is effective, until the forecasted transaction occurs, at which time they
are recorded as adjustments to interest expense. At March 31, 2009,
AOCL included $2 million, net of tax, related to interest rate locks. This
amount is currently being reclassified into earnings as adjustments to interest
expense over the term of our 51⁄4% Senior Notes due April 2014.




We are
also exposed to interest rate risk related to our short-term investments. As of
March 31, 2009, approximately 46% of our cash was invested in US Treasury
securities. A hypothetical 25 basis point change in the floating interest rates
applicable to the March 31, 2009 balance would result in a change in annual
interest income of approximately $1 million.




Foreign
      Currency Risk


We have
not entered into foreign currency derivative instruments. The US dollar is
considered the functional currency for each of our international operations.
Transactions that are completed in a foreign currency are remeasured into US
dollars and recorded in the financial statements at prevailing currency exchange
rates. We do not have any significant monetary assets or liabilities denominated
in a foreign currency other than our foreign deferred tax liabilities in certain
foreign tax jurisdictions. An increase in exchange rates between the US dollar
and the currency of the foreign tax jurisdiction in which these liabilities are
located could result in the use of additional cash to settle these liabilities.
However, transaction gains or losses were not material in any of the periods
presented and we do not believe we are currently exposed to any material risk of
loss on this basis. Such gains or losses are included in other (income) expense,
net in the consolidated statements of operations.












32




DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
 This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements give our
current expectations or forecasts of future events. These forward-looking
statements include, among others, the following:
  
 ·
              the extent
      and effect of any hedging activities engaged in by
  us;


·
              our
      growth strategies;


·
            our
      ability to successfully and economically explore for and develop crude oil
      and natural gas resources;


·
            anticipated
      trends in our business;


·
            our
      future results of operations;


·
            effect
      of current volatility in the credit
markets;


·
            our
      liquidity and ability to finance our exploration and development
      activities;


·
            market
      conditions in the oil and gas
industry;


·
            our
      ability to make and integrate acquisitions;
and


·
            the
      impact of governmental regulation.





Forward-looking
statements are typically identified by use of terms such as “may,” “will,”
“expect,” “anticipate,” “estimate” and similar words, although some
forward-looking statements may be expressed differently. These forward-looking
statements are made based upon our current plans, expectations, estimates,
assumptions and beliefs concerning future events impacting us and therefore
involve a number of risks and uncertainties. We caution that forward-looking
statements are not guarantees and that actual results could differ materially
from those expressed or implied in the forward-looking statements. You should
consider carefully the statements under Item 1A. Risk Factors included herein,
if any, and included in our 2008 annual report on Form 10-K, which describe
factors that could cause our actual results to differ from those set forth in
the forward-looking statements.  Our 2008 annual report on Form 10-K
is available on our website at www.nobleenergyinc.com.





ITEM
4.  CONTROLS AND PROCEDURES




Based on
the evaluation of our disclosure controls and procedures by Charles D. Davidson,
our principal executive officer, and Chris Tong, our principal financial
officer, as of the end of the period covered by this quarterly report, each of
them has concluded that our disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, are
effective. There were no changes in internal control over financial reporting
that occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.












33





PART
II. OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS




See Item
I. Financial Statements –Note 14 – Commitments and Contingencies.





ITEM
1A.  RISK FACTORS




There
have been no material changes from the risk factors disclosed in Item 1A. Risk
Factors of our annual report on Form 10-K for the year ended December 31,
2008, other than the following:




The
proposed United States federal budget for fiscal year 2010 includes certain
provisions that, if passed as originally submitted, will have an adverse effect
on our financial position, results of operations, and cash flows.




On
February 26, 2009, the Office of Management and Budget released a summary of the
President’s proposed federal budget for fiscal year 2010.  The
proposed budget repeals many tax incentives and deductions that are currently
used by US oil and gas companies and imposes new taxes. The provisions include:
elimination of the ability to fully deduct intangible drilling costs in the year
incurred; increases in the taxation of foreign source income; levy of an excise
tax on Gulf of Mexico oil and gas production; repeal of the manufacturing tax
deduction for oil and gas companies; increase in the geological and geophysical
amortization period for independent producers; and implementation of a fee on
non-producing leases located on federal lands.




Should
some or all of these provisions become law our taxes will increase, potentially
significantly, which would have a negative impact on our net income and cash
flows. This could also reduce our drilling activities. Since none of these
proposals have yet to be voted on or become law, we do not know the ultimate
impact these proposed changes may have on our business.




ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Period
                                                
                                                Total
      Number
                                                  of
      Shares
                                                  Purchased
      (1)
                                                
                                                
                                                Average
      Price
                                                  Paid
                                                  Per
      Share
                                                
                                                
                                                Total
      Number of
                                                  Shares
      Purchased
                                                  as
      Part of Publicly Announced Plans
                                                  or
      Programs
                                                
                                                
                                                Approximate
      Dollar
                                                  Value
      of Shares that
                                                  May
      Yet Be
                                                  Purchased
      Under the
                                                  Plans
      or Programs(in
      thousands)01/01/09
      - 01/31/09
                                                
                                                
                                                786
                                                
                                                
                                                $
                                                51.02
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -02/01/09
      - 02/28/09
                                                
                                                
                                                16,724
                                                
                                                
                                                
                                                50.21
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -03/01/09
      - 03/31/09
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Total
                                                
                                                
                                                17,510
                                                
                                                
                                                $
                                                50.24
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -




(1)
            Stock
      repurchases during the period related to stock received by us from
      employees for the payment of withholding taxes due on shares issued under
      stock-based compensation plans.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.




ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
  HOLDERS




None.




ITEM
5.  OTHER INFORMATION




None.




ITEM
6.  EXHIBITS




The
information required by this Item 6 is set forth in the Index to Exhibits
accompanying this quarterly report on Form 10-Q.







34








SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934 as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.








NOBLE
      ENERGY, INC.(Registrant)














Date
                April
      30, 2009
                
                /s/
      CHRIS TONGCHRIS
      TONG
                  Senior
      Vice President and Chief Financial Officer














35











INDEX TO
EXHIBITS





Exhibit


Number                 Exhibit











31.1
            Certification
      of the Company’s Chief Executive Officer Pursuant To Section 302 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  7241).





31.2
            Certification
      of the Company’s Chief Financial Officer Pursuant To Section 302 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  7241).





32.1
            Certification
      of the Company’s Chief Executive Officer Pursuant To Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  1350).





32.2
            Certification
      of the Company’s Chief Financial Officer Pursuant To Section 906 of the
      Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
  1350).




















36