2. Basis of Presentation

Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the US (US GAAP) 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 GAAP for complete financial statements. The accompanying consolidated financial statements at September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016 contain all normally recurring adjustments considered necessary for a fair presentation of our financial position, results of operations, cash flows and shareholders’ equity for such periods. For the periods presented, activity within other comprehensive income or loss was de minimis; therefore, net income or loss is materially consistent with comprehensive income or loss.

In Note 11. Segment Information, we report a new Midstream segment, established second quarter 2017, and present prior period amounts on a comparable basis. Certain other prior-period amounts have been reclassified to conform to the current period presentation.

Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

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, 2016.

Consolidation Our consolidated financial statements include our accounts, the accounts of subsidiaries which Noble Energy wholly owns, and the accounts of a variable interest entity (VIE) for which Noble Energy is the primary beneficiary. In addition, we use the equity method of accounting for investments in entities that we do not control, but over which we exert significant influence. All significant intercompany balances and transactions have been eliminated upon consolidation.

Consolidated VIE Noble Energy has determined that the partners with equity at risk in Noble Midstream Partners LP (NYSE: NBLX) (Noble Midstream Partners) lack the authority, through voting rights or similar rights, to direct the activities that most significantly impact Noble Midstream Partners' economic performance; therefore, Noble Midstream Partners is considered a VIE. Through Noble Energy's ownership interest in Noble Midstream GP LLC (the General Partner to Noble Midstream Partners), Noble Energy has the authority to direct the activities that most significantly affect economic performance and the obligation to absorb losses or the right to receive benefits that could be potentially significant to Noble Midstream Partners. Therefore, Noble Energy is considered the primary beneficiary and consolidates Noble Midstream Partners.

Goodwill As of September 30, 2017, our consolidated balance sheet includes goodwill of $1.3 billion. This goodwill resulted from the acquisition (Clayton Williams Energy Acquisition) of Clayton Williams Energy, Inc. (Clayton Williams Energy) completed on April 24, 2017, and represents the excess of the consideration paid for Clayton Williams Energy over the net amounts assigned to identifiable assets acquired and liabilities assumed. All of our recorded goodwill is assigned to the Texas reporting unit. See Note 3. Clayton Williams Energy Acquisition.

Goodwill is not amortized to earnings but is qualitatively assessed for impairment. We assess goodwill for impairment annually during the third quarter, or more frequently as circumstances require, at the reporting unit level. If, based on our qualitative procedures, it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform the two-step goodwill impairment test. The two-step goodwill impairment test is also performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. It is possible that goodwill could become impaired in the future if commodity prices or other economic factors decline. See Recently Issued Accounting Standards – Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, below, for newly issued accounting guidance regarding future goodwill impairment testing.

We conducted a qualitative goodwill impairment assessment as of September 30, 2017 by examining relevant events and circumstances which could have a negative impact on our goodwill such as: macroeconomic conditions as pertinent to current and expected regulations, industry and market conditions, including overall global and regional supply and demand and impact of such on commodity prices; as well as microeconomic factors relevant to the enterprise such as cost factors that have a negative effect on earnings and cash flows, overall financial performance, reporting unit dispositions, acquisitions, portfolio restructuring and other decisions / circumstances specific to the entity and the reporting unit containing goodwill. Certain negative indicators included the current commodity price environment (driven by several macroeconomic factors) coupled with onshore service cost inflation resulting in pressure on operating margins impacting our financial results associated with the Texas reporting unit and our stock price. However, we in turn also noted positive indicators such as our current and future drilling and development plans for our Texas assets, synergies we expect from the Clayton Williams Energy Acquisition driven by our unconventional expertise and position in the adjacent properties which further increase opportunities to drill longer lateral wells on our combined acreage positions, which would contribute to profitability. Furthermore, we see value creation to be derived from expected midstream build-out opportunities for the gathering, processing and servicing of future production in the Delaware basin. Having assessed the totality of such events and circumstances described above, we determined that while there exist certain negative factors, the overall qualitative assessment did not indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. However, regardless of the outcome of the qualitative review, we decided to proceed with the conduct of Step 1 of the impairment test as part of our annual review.

As such, we performed Step 1 of the goodwill impairment test, used to identify potential impairment. The result of the Step 1 test indicated that the fair value of the Texas reporting unit exceeded its carrying value, including goodwill, by approximately 6% and therefore, the Texas reporting unit goodwill was not considered to be impaired as of September 30, 2017.

If, in the future, we dispose of a reporting unit or a portion of a reporting unit that constitutes a business, we will include goodwill associated with that business in the carrying amount of the business in order to determine the gain or loss on disposal. The amount of goodwill allocated to the carrying amount of a business can significantly impact the amount of gain or loss recognized on the sale of that business. The amount of goodwill to be included in that carrying amount will be based on the relative fair value of the business to be disposed of and the portion of the reporting unit that will be retained.

Exit Costs We recognize the fair value of a liability for an exit cost in the period in which a liability is incurred. Our exit costs in 2017 relate primarily to estimated costs associated with a retained Marcellus Shale firm transportation contract, for which we accrued an exit liability at June 30, 2017.

The recognition and fair value estimation of a liability requires that management take into account certain estimates and assumptions such as: the determination of whether a cease-use date has occurred (defined as the date the entity ceases using the right conveyed by the contract, for example, the right to use a leased property or to receive future goods or services); the amount, if any, of economic benefit that is expected to be obtained from a contract through partial use or release; and our estimate of costs that will continue to be incurred under the contract. We record the liability at estimated fair value, based on expected future cash outflows required to satisfy the obligation, net of estimated recoveries, and discounted. Exit costs, and associated accretion expense, are included in operating expense in our consolidated statements of operations. See Note 4. Acquisitions and Divestitures and Note 12. Commitments and Contingencies.

Estimates The preparation of consolidated financial statements in conformity with US 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. Actual results could differ significantly from those estimates. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment.

Reserves Estimates Estimated quantities of crude oil, natural gas and natural gas liquids (NGL) reserves are the most significant of our estimates. There are numerous uncertainties inherent in estimating quantities of proved crude oil, natural gas and NGL reserves. The accuracy of any reserves estimate is a function of the quality of available engineering and geoscience information and also interpretation of the provided data. As a result, reserves estimates may be different from the quantities of crude oil, natural gas and NGLs that are ultimately recovered.

During the first nine months of 2017, we recorded the following significant changes in our proved reserves estimates:


•	Leviathan Field In second quarter 2017, we recorded proved undeveloped reserves of 551 MMBoe, net, for the Leviathan field, offshore Israel, upon approval and sanction of the first phase of development, and are expecting to initiate natural gas production by the end of 2019.


•	Tamar Field In third quarter 2017, we completed additional reservoir modeling reflecting integration of the Tamar 8 well results into our geologic modeling across the reservoir and, as a result, we added one Tcfe, gross, or 48 MMBoe, net, for the Tamar Field, offshore Israel, of proved developed natural gas reserves as of September 30, 2017.


•	Delaware Basin We recorded net proved reserves of approximately 86 MMBoe, of which approximately 17 MMBoe are proved developed reserves and 69 MMBoe are proved undeveloped reserves as of June 30, 2017 related to the Clayton Williams Energy Acquisition.


•	Marcellus Shale The Marcellus Shale upstream divestiture resulted in a decrease in net proved reserves of approximately 241 MMBoe as of June 30, 2017, of which approximately 190 MMBoe were proved developed reserves and 51 MMBoe were proved undeveloped reserves.

Recently Issued Accounting Standards

Revenue Recognition In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), which creates Topic 606, Revenue from Contracts with Customers. In summary, revenue recognition would occur upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU 2014-09 requires enhanced financial statement disclosures over revenue recognition.

We continue to evaluate the impact of the ASU on our accounting policies, internal controls, and consolidated financial statements and related disclosures. We are performing a review of contracts for each of our revenue streams and developing accounting policies to address the provisions of the ASU. Currently, we do not have any contracts that would require a change from the entitlements method, historically used for certain domestic natural gas sales, to the sales method of accounting. The ASU also includes provisions regarding future revenues and expenses under a gross-versus-net presentation. We are evaluating the impact, if any, on the presentation of our future revenues and expenses under this gross-versus-net presentation guidance. Based upon assessments performed to date, we do not expect the ASU to have a material effect on the timing of revenue recognition or our financial position. The standard is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with a cumulative adjustment to retained earnings on the opening balance sheet. We will adopt the new standard on January 1, 2018, using the modified retrospective approach with a cumulative adjustment to retained earnings as necessary.

Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (ASU 2017-09) Compensation – Stock Compensation (Topic 718). The purpose of this update is to provide clarity as to which modifications of awards require modification accounting under Topic 718, whereas previously issued guidance frequently resulted in varying interpretations and a diversity of practice. An entity should employ modification accounting unless the following are met: (1) the fair value of the award is the same immediately before and after the award is modified; (2) the vesting conditions are the same under both the modified award and the original award; and (3) the classification of the modified award is the same as the original award, either equity or liability. Regardless of whether modification accounting is utilized, award disclosure requirements under Topic 718 remain unchanged. ASU 2017-09 will be effective for annual or any interim periods beginning after December 15, 2017. We do not believe adoption of ASU 2017-09 will have a material impact on our financial statements. We will adopt the new standard on the effective date of January 1, 2018.

Business Combinations: Clarifying the Definition of a Business In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01): Business Combinations – Clarifying the Definition of a Business, that assists in determining whether certain transactions should be accounted for as acquisitions or dispositions of assets or businesses. The amendment provides a screen to be applied to the fair value of an acquisition or disposal to evaluate whether the assets in question are simply assets or if they meet the requirements of a business. If the screen is not met, no further evaluation is needed. If the screen is met, certain steps are subsequently taken to make the determination. This ASU is designed to reduce the number of transactions to be accounted for as business transactions, which take more time and cost more to analyze than asset transactions. This ASU is effective for annual and interim periods beginning after December 15, 2017 and is required to be applied prospectively. Our current Clayton Williams Energy Acquisition is not impacted by this guidance and we will apply the new guidance to applicable and qualifying transactions after our adoption on January 1, 2018.

Statement of Cash Flows: Restricted Cash In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (ASU 2016-18): Statement of Cash Flows – Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This ASU will be effective for annual and interim periods beginning after December 15, 2017, with earlier application permitted. We do not believe adoption of ASU 2016-18 will have a material impact on our statement of cash flows and related disclosures. We will adopt the new standard on the effective date of January 1, 2018.

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued Accounting Standards Update No. 2016-15 (ASU 2016-15): Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, to clarify how eight specific cash receipt and cash payment transactions should be presented in the statement of cash flows. ASU 2016-15 will be effective for annual and interim periods beginning after December 15, 2017, with earlier application permitted. We do not believe adoption of ASU 2016-15 will have a material impact on our statement of cash flows and related disclosures as this update pertains to classification of items and is not a change in accounting principle. We will adopt the new standard on the effective date of January 1, 2018.

Leases In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 (ASU 2016-02): Leases. The guidance requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases with terms of more than 12 months. This ASU also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The standard will be effective for annual and interim periods beginning after December 15, 2018, with earlier application permitted.

In the normal course of business, we enter into capital and operating lease agreements to support our exploration and development operations and lease assets such as drilling rigs, platforms, storage facilities, field services and well equipment, pipeline capacity, office space and other assets. At this time, we cannot reasonably estimate the financial impact this ASU will have on our financial statements; however, we believe adoption and implementation of this ASU will have a material impact on our balance sheet resulting from an increase in both assets and liabilities relating to our leasing activities. As part of our assessment to date, we have formed an implementation work team, prepared educational and training materials pertinent to this ASU and have begun contract review and documentation. We will adopt the new standard on the effective date of January 1, 2019.

Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04): Intangibles – Goodwill and Other – Simplifying the Test for Goodwill Impairment, to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new guidance, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, with an impairment charge being recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the provisions of ASU 2017-04 and have not yet determined if we will early adopt.

Financial Instruments: Credit Losses In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13): Financial Instruments – Credit Losses, which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on our consolidated financial statements and related disclosures. We will adopt the new standard on the effective date of January 1, 2020.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
(millions)	2017			2016			2017			2016
Production Expense
Lease Operating Expense	$	151		$	131		$	414		$	412
Production and Ad Valorem Taxes	36			30			119			73
Gathering, Transportation and Processing Expense ⁽¹⁾	93			121			333			354
Total	$	280		$	282		$	866		$	839
Exploration Expense
Leasehold Impairment and Amortization ⁽²⁾	$	33		$	96		$	51		$	127
Dry Hole Cost ⁽³⁾	2			5			2			105
Seismic, Geological and Geophysical	7			15			20			47
Staff Expense	11			15			40			53
Other	11			(6		)	23			44
Total	$	64		$	125		$	136		$	376
Loss on Marcellus Shale Upstream Divestiture ⁽⁴⁾
Loss on Sale	$	—		$	—		$	2,270		$	—
Firm Transportation Commitment ⁽⁵⁾	—			—			41			—
Other ⁽⁶⁾	4			—			15			—
Total	$	4		$	—		$	2,326		$	—
Other Operating Expense, Net ⁽⁷⁾
Marketing Expense ^{(1) (8)}	$	6		$	12		$	39		$	39
Clayton Williams Energy Acquisition Expenses ⁽⁹⁾	4			—			98			—
Loss on Asset Due to Terminated Contract ⁽¹⁰⁾	—			—			—			47
North Sea Remediation Project Revision ⁽¹¹⁾	(42		)	—			(42		)	—
Other, Net	17			25			37			41
Total	$	(15	)	$	37		$	132		$	127

⁽¹⁾

Certain of our gathering and processing expenses were historically presented as components of other operating expense, net, in our consolidated statements of operations. Beginning in 2017, we have changed our presentation to reflect these as components of production expense. These costs are now included within gathering, transportation and processing expense. For the three and nine months ended September 30, 2017, these costs totaled $12 million and $17 million, respectively. For the three and nine months ended September 30, 2016, these costs totaled $8 million and $19 million, respectively, and have been reclassified from marketing expense to conform to the current presentation.


⁽²⁾	See Note 8. Capitalized Exploratory Well Costs and Undeveloped Leasehold Costs.


⁽³⁾	For the nine months ended September 30, 2016, amount related primarily to the Silvergate exploratory well, Gulf of Mexico, and the Dolphin 1 natural gas discovery, offshore Israel.


⁽⁴⁾	See Note 4. Acquisitions and Divestitures.


⁽⁵⁾	Amount represents expense related to an unutilized firm transportation commitment associated with a Marcellus Shale firm transportation contract. See Note 12. Commitments and Contingencies.


⁽⁶⁾	Amount includes costs for legal and advisory services and employee severance charges.


⁽⁷⁾	(Gain)/Loss on debt extinguishment was historically presented as a component of other operating expense, net in our consolidated statements of operations. Beginning with third quarter 2017, we have changed our presentation to reflect these as a separate line item within other expense (income) below operating loss. The prior periods have been reclassified to conform to that presentation.


⁽⁸⁾	Amounts represent expense for unutilized firm transportation and shortfalls in delivering or transporting minimum volumes under certain commitments.


⁽⁹⁾	See Note 3. Clayton Williams Energy Acquisition.


⁽¹⁰⁾	Amounts relate to the termination and final settlement of a rig contract for offshore Falkland Islands as a result of a supplier's non-performance.


⁽¹¹⁾	See Note 9. Asset Retirement Obligations.

Balance Sheet Information Other balance sheet information is as follows:



(millions)	September 30, 2017			December 31, 2016
Accounts Receivable, Net
Commodity Sales	$	403		$	403
Joint Interest Billings	183			106
Proceeds Receivable ⁽¹⁾	—			40
Other	106			86
Allowance for Doubtful Accounts	(17		)	(20		)
Total	$	675		$	615
Other Current Assets
Inventories, Materials and Supplies	$	61		$	71
Inventories, Crude Oil	17			18
Assets Held for Sale⁽²⁾	180			18
Restricted Cash ⁽³⁾	—			30
Prepaid Expenses and Other Current Assets	45			23
Total	$	303		$	160
Other Noncurrent Assets
Equity Method Investments	$	286		$	400
Mutual Fund Investments	70			71
Other Assets, Noncurrent	60			37
Total	$	416		$	508
Other Current Liabilities
Production and Ad Valorem Taxes	$	118		$	115
Commodity Derivative Liabilities	4			102
Income Taxes Payable	13			53
Asset Retirement Obligations ⁽⁴⁾	50			160
Interest Payable	82			76
Current Portion of Capital Lease Obligations	65			63
Foreign Sales Tax Payable	29			14
Compensation and Benefits Payable	87			110
Theoretical Withdrawal Premium	25			18
Other Liabilities, Current ⁽⁵⁾	26			31
Total	$	499		$	742
Other Noncurrent Liabilities
Deferred Compensation Liabilities	$	216		$	218
Asset Retirement Obligations ⁽⁴⁾	894			775
Marcellus Shale Firm Transportation Commitment ⁽⁶⁾	31			—
Production and Ad Valorem Taxes	49			47
Other Liabilities, Noncurrent	55			63
Total	$	1,245		$	1,103


⁽¹⁾	Balance at December 31, 2016 related to the farm-out of a 35% interest in Block 12 offshore Cyprus; proceeds were received in January 2017. See Note 4. Acquisitions and Divestitures.


⁽²⁾	Balance at September 30, 2017 primarily includes our equity investment in CONE Gathering, LLC. See Note 4. Acquisitions and Divestitures.


⁽³⁾	Balance at December 31, 2016 represented amount held in escrow for the purchase of certain Delaware Basin properties. The transaction closed in first quarter 2017. See Note 4. Acquisitions and Divestitures.


⁽⁴⁾	Reclassification from current to noncurrent is driven primarily by a change in expected timing of abandonment activities in the Gulf of Mexico. See Note 9. Asset Retirement Obligations.


⁽⁵⁾	Balance at September 30, 2017 includes $8 million associated with the current portion of the Marcellus Shale firm transportation commitment. See Note 12. Commitments and Contingencies.


⁽⁶⁾	See Note 12. Commitments and Contingencies.