Note 3. Acquisitions and Divestitures

Marcellus Shale Joint Venture Partnership On September 30, 2011, we closed an agreement with a subsidiary of CONSOL Energy Inc. (CONSOL) for the development of Marcellus shale properties in southwest Pennsylvania and northwest West Virginia. Under the agreement, we acquired 50% interests in 628,000 net undeveloped acres, existing Marcellus production, and existing infrastructure for approximately $1.2 billion. We and CONSOL formed CONE Gathering LLC, which we will account for using the equity method, to own and operate existing and future infrastructure.

We paid a total of $592 million in cash at the closing of the above transaction, funded with available cash and amounts drawn under our credit facility. In addition, we will make two additional installment payments of $328 million each, which will be paid September 30, 2012 and 2013.

In addition, we have agreed to fund one-third of CONSOL's 50% working interest share of future drilling and completion costs, up to approximately $2.1 billion (CONSOL Carried Cost Obligation). The CONSOL Carried Cost Obligation is expected to extend over an eight-year period. It is capped at $400 million in each calendar year and will be suspended if average Henry Hub natural gas prices fall and remain below $4.00 per MMBtu in any three consecutive month period and will remain suspended until average Henry Hub natural gas prices are above $4.00 per MMBtu for three consecutive months. Therefore, specific payment dates for the funding of the CONSOL Carried Cost Obligation cannot be determined at this time. Amounts paid pursuant to the CONSOL Carried Cost Obligation will be recorded as increases in property, plant and equipment in our consolidated balance sheets and as investing activities in our consolidated statements of cash flows.

As a result of the transaction, we recorded the following:

	September 30,
	2011
(millions)
Unproved Oil and Gas Properties	$	790
Proved Oil and Gas Properties		370
Investment in CONE Gathering LLC		73
Total Assets Acquired (1)	$	1,233

(1)	Total reflects impact of discount on remaining installment payments. See Note 5. Debt.

To estimate the fair value of the proved oil and gas properties as of the acquisition date, we used an income approach. We utilized a discounted cash flow model which took into account the following inputs to arrive at estimates of future net cash flows:

estimated quantities of crude oil and natural gas prepared by our qualified petroleum engineers;

management's estimates of future commodity prices based on NYMEX Henry Hub natural gas futures prices and adjusted for estimated location and quality differentials;

estimated future production rates based on our experience with similar properties which we operate; and

estimated timing and amounts of future operating and development costs based on our experience with similar properties which we operate.

We discounted the resulting future net cash flows using a market-based weighted average cost of capital rate determined appropriate at the acquisition date. The fair value of the proved producing properties is considered a Level 3 fair value measurement.

Certain data necessary to complete the final purchase price allocation is not yet available, and includes, but is not limited to, final appraisals of assets acquired and liabilities assumed. We expect to complete the final purchase price allocation during the 12-month period following the acquisition date, during which time the preliminary allocation may be revised.

See Note 5. Debt and Note 7. Fair Value Measurements and Disclosures.

Gas Gathering Agreement with CONE Gathering LLC On September 30, 2011, in connection with the Marcellus shale joint venture arrangement described above, we entered into a 50-year gathering and marketing agreement with CONE Gathering LLC. Under the terms of the gathering and marketing agreement, we will pay CONE Gathering LLC a minimum annual revenue commitment (MARC). The fee will be adjusted annually based on projected gathering volumes, operating expenses, capital expenditures, and other factors. We expect the MARC to total approximately $3 million in 2011 and $23 million in 2012. Amounts to be paid under the MARC for years beyond 2012 have not yet been determined.

We also have agreed to fund an annual work program for the construction of additional pipeline assets to receive and deliver production from future wells. Amounts to be contributed in future years to fund our proportionate share of the annual work program will be dependent upon anticipated production locations, volumes and other factors. We will account for our 50% interest in CONE Gathering LLC using the equity method; therefore, our share of income will be reported as income from equity method investees in our consolidated statements of operations. Our investment in CONE Gathering LLC will be reported as investment in equity method investee in our consolidated balance sheets and will reflect our cash contributions to the entity.

Divestitures In May 2011, we transferred our assets in Ecuador to the Ecuadorian government. We received cash proceeds of $73 million for the transfer of our offshore Amistad field assets and Block 3 production sharing contract (PSC), which was terminated by the government of Ecuador on November 25, 2010, and the assignment of the Machala Power Electricity concession and its associated assets. Our net book value for the assets had been reduced due to previous impairment charges, resulting in a gain of $26 million before tax. We did not consider the property disposition material for discontinued operations presentation.

In August 2010, we closed the sale of certain non-core assets in the Mid-Continent and Illinois Basin areas. Information regarding the sale is as follows:

	Nine Months Ended September 30,
	2010
(millions)
Cash Proceeds	$	552
Less
Net Book Value of Assets Sold		(394	)
Goodwill Allocated to Assets Sold		(61	)
Asset Retirement Obligations Associated with Assets Sold		10
Other Closing Adjustments		7
Gain on Asset Sale	$	114