SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarterly Period Ended September 30, 2004

OR

For the Transition Period from                      to                     .

Commission File Number: 1-12534

NEWFIELD EXPLORATION COMPANY

363 North Sam Houston Parkway East
Suite 2020
Houston, Texas 77060
(Address and Zip Code of principal executive offices)

(281) 847-6000
(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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes þ No o

     As of November 4, 2004, there were 62,265,200 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

PART I

ii

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)

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

1

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)

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

2

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

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

3

NEWFIELD EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

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

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NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies:

 Organization and Principles of Consolidation

     We are an independent oil and gas company engaged in the exploration, development and acquisition of crude oil and natural gas properties. Our company was founded in 1989. Our initial focus area was the Gulf of Mexico. In the mid-1990s, we began to expand our operations to other select areas. Our areas of operation now also include the U.S. onshore Gulf Coast, the Anadarko and Arkoma Basins in the Mid-Continent, the Uinta Basin in the Rocky Mountains, China’s Bohai Bay, the North Sea and Malaysia.

     Our financial statements include the accounts of Newfield Exploration Company, a Delaware corporation, and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Unless otherwise specified or the context otherwise requires, all references in these notes to “Newfield,” “we,” “us” or “our” are to Newfield Exploration Company and its subsidiaries.

     These unaudited consolidated financial statements reflect, in the opinion of our management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly our financial position as of, and results of operations for, the periods presented. These financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Interim period results are not necessarily indicative of results of operations or cash flows for a full year.

     These financial statements and notes should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our annual report for the year ended December 31, 2003.

     On September 5, 2003, we sold Newfield Exploration Australia Ltd., the holding company for all of our Australian assets. As a result of the sale, the historical results of our Australian operations are reflected in our consolidated financial statements as “discontinued operations.” See Note 2, “Discontinued Operations.” Except where noted and for pro forma earnings per share, discussions in these notes relate to our continuing activities only.

     During the second and third quarters of 2004, we made several acquisitions that impact our 2004 results of operations and cash flows (see Note 11, “Acquisitions”).

 Dependence on Oil and Gas Prices

     As an independent oil and gas producer, our revenue, profitability and future rate of growth are substantially dependent on prevailing prices for natural gas and oil, which are dependent upon numerous factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. The energy markets have historically been very volatile, and there can be no assurance that oil and gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil or gas prices could have a material adverse effect on our financial position, results of operations, cash flows and access to capital and on the quantities of oil and gas reserves that we may economically produce.

 Use of Estimates

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of our assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, the reported amounts of revenues and expenses during the reporting period and the reported amounts of proved oil and gas reserves. Actual results could differ from these estimates. Our most significant financial estimates are based on remaining proved oil and gas reserves.

 Inventories

     Inventories include international oil produced but not sold. Crude oil from our operations located offshore Malaysia is produced into a floating production, storage and off-loading vessel and sold periodically as a barge quantity is accumulated. The product inventory at September 30, 2004 consisted of approximately 163,000 barrels of crude oil valued at $2.4 million and is carried at the lower of average cost or market. Also included in inventories are materials and supplies, which also are stated at the lower of average cost or market.

5

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 Foreign Currency

     The functional currency for the United Kingdom is the British pound and the functional currency for Malaysia is the Malaysian ringgit. The functional currency for all other foreign operations is the U.S. dollar. Translation adjustments resulting from translating our United Kingdom subsidiaries’ British pound financial statements and our Malaysian subsidiaries’ Malaysian ringgit financial statements into U.S. dollars are included as other comprehensive income on our consolidated balance sheet and statement of stockholders’ equity. Gains and losses incurred on currency transactions in other than a country’s functional currency are included on our consolidated statement of income.

 Reclassifications

     Certain reclassifications have been made to prior year’s reported amounts in order to conform with the current period presentation. These reclassifications, including those related to our discontinued operations (see Note 2, “Discontinued Operations”), did not impact our net income or stockholders’ equity.

 Oil and Gas Properties

     We use the full cost method of accounting. Under this method, all costs incurred in the acquisition, exploration and development of oil and gas properties, including salaries, benefits and other internal costs directly attributable to these activities, are capitalized into cost centers that are established on a country-by-country basis. Interest expense related to unproved properties and properties under development are also capitalized to oil and gas properties. Such capitalized costs and estimated future development and dismantlement costs are amortized on a unit-of-production method based on proved reserves. For each cost center, the net capitalized costs of oil and gas properties are limited to the lower of the unamortized cost or the cost center ceiling, defined as the sum of the present value (10% per annum discount rate) of estimated future net revenues from proved reserves based on end of period oil and gas prices as adjusted for location and quality differences and the effects of hedging; plus the cost of properties not being amortized, if any; plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less related income tax effects.

     On November 4, 2004, we announced that our Cumbria Prospect in the U.K. Southern Gas Basin was a dry hole. Because the results of the well became known prior to the filing of this report, full cost accounting rules require that the costs accrued to drill the well through September 30, 2004 ($7.7 million) be included in our U.K. cost pool, subject to the ceiling or limit on such pool. Because the unamortized costs (including the accrued costs associated with Cumbria) exceeded the full cost ceiling, we were required to recognize a ceiling test write down of $6.7 million ($5.0 million after tax) at September 30, 2004.

      Subject to the results of planned drilling during the remainder of 2004, the remaining costs to drill the Cumbria Prospect will likely result in a further ceiling test write down in the fourth quarter of 2004. The Cumbria well was drilling under a turnkey contract for approximately $13.2 million.

 Accounting for Asset Retirement Obligations

     We adopted Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” as of January 1, 2003. This statement changes the method of accounting for expected future costs associated with our obligation to perform site reclamation, dismantle facilities and plug and abandon wells. Prior to January 1, 2003, we recognized the undiscounted estimated cost to abandon our oil and gas properties over their estimated productive lives on a unit-of-production basis as a component of depreciation, depletion and amortization expense and no liabilities or capitalized costs associated with such abandonment were recorded on our consolidated balance sheet. If a reasonable estimate of the fair value of an abandonment obligation can be made, SFAS No. 143 requires us to record a liability (an “asset retirement obligation” or “ARO”) on our consolidated balance sheet and to capitalize the asset retirement cost in oil and gas properties in the period in which the retirement obligation is incurred.

     In general, the amount of an ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date, which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for our company. After recording these amounts, the ARO will be accreted to its future estimated value using the same assumed cost of funds and the additional capitalized costs will be depreciated on a unit-of-production basis over the productive life of the related properties. Both the accretion and the depreciation are included in depreciation, depletion and amortization on our consolidated statement of income.

     At adoption of SFAS No. 143, a cumulative effect of change in accounting principle was required in order to recognize:

	•		an initial ARO as a liability on our consolidated balance sheet;
	•		an increase in oil and gas properties for the cost to abandon our oil and gas properties;
	•		cumulative accretion of the ARO from the period incurred up to the January 1, 2003 adoption date; and
	•		cumulative depreciation on the additional capitalized costs included in oil and gas properties up to the January 1, 2003 adoption date.

6

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     As a result of our adoption of SFAS No. 143, we recorded a $134.8 million increase in the net capitalized costs of our oil and gas properties and an initial ARO of $128.5 million. Additionally, we recognized an after-tax gain of $5.6 million (the after-tax amount by which additional capitalized costs, net of accumulated depreciation, exceeded the initial ARO, including in each case discontinued operations) as the cumulative effect of change in accounting principle.

     The change in our ARO for the nine months ended September 30, 2004 is set forth below (in thousands):

 Goodwill

     Of the $66.0 million recorded as goodwill on our consolidated balance sheet at September 30, 2004, $16.4 million relates to our 2003 acquisition of Primary Natural Resources and $49.6 million relates to our August 2004 acquisition of Inland Resources Inc. (see Note 11, “Acquisitions”). Goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired less the liabilities assumed.

     Goodwill is tested for impairment on an annual basis, or more frequently if an event occurs or circumstances change that have an adverse effect on the fair value of the reporting unit such that the fair value could be less than the book value of such unit. The impairment test requires the allocation of goodwill and all other assets and liabilities to reporting units. The fair value of each reporting unit is determined and compared to the book value of that reporting unit. If the fair value of the reporting unit is less than the book value (including goodwill) then goodwill is reduced to its implied fair value and the amount of the writedown is charged to earnings.

     We perform our goodwill impairment test annually on December 31, or more frequently if there is an indication of potential impairment. The fair value of the reporting unit is based on our estimates of future net cash flows from proved reserves and from future exploration for and development of unproved reserves. Downward revisions of estimated reserves or production, increases in estimated future costs or decreases in oil and gas prices could lead to an impairment of all or a portion of this goodwill in future periods.

 Stock-Based Compensation

     We account for our employee stock options using the intrinsic value method prescribed by APB Opinion No. 25.

     If the fair value based method of accounting under SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied using a Black-Scholes option pricing model, our net income and earnings per common share for the three and nine months ended September 30, 2004 and 2003 would have approximated the pro forma amounts below:

7

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 Recent Accounting Developments

     In September 2004, the SEC issued Staff Accounting Bulletin (SAB) No. 106. This pronouncement will require companies that use the full cost method of accounting for oil and gas producing activities to include an estimate of future asset retirement costs to be incurred as a result of future development activities on proved reserves in their calculation of depreciation, depletion and amortization. It will also require full cost companies to exclude any cash outflows associated with settling asset retirement liabilities from their full cost ceiling test calculation. This pronouncement will also require specific disclosures regarding the impact of asset retirement obligations on oil and gas producing activities, ceiling test calculations and depreciation, depletion and amortization calculations. We will adopt the provisions of this pronouncement in the first quarter of 2005. We are currently evaluating the impact of SAB No. 106 on our financial statements.

2. Discontinued Operations:

     On September 5, 2003, we sold our wholly owned subsidiary, Newfield Exploration Australia Ltd., the holding company for all of our Australian assets. The historical results of our Australian operations are reflected in our consolidated financial statements as “discontinued operations” and are summarized as follows:

8

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Earnings Per Share:

     Basic earnings per share (EPS) is calculated by dividing net income (the numerator) by the weighted average number of shares of common stock (other than unvested restricted stock) outstanding during the period (the denominator). Diluted earnings per share incorporates the dilutive impact of outstanding stock options (using the treasury stock method), unvested restricted stock awards to officers and employees and the assumed conversion of our trust preferred securities as if exercise or conversion to common stock had occurred at the beginning of the accounting period. Net income also has been increased for any accrued distributions with respect to our trust preferred securities accrued during any of the periods presented. We redeemed all of our outstanding trust preferred securities in June 2003.

     The following is the calculation of basic and diluted weighted average shares outstanding and EPS for the three and nine month periods ended September 30, 2004 and 2003:

     The calculation of shares outstanding for diluted EPS does not include the effect of outstanding stock options to purchase 210,500 and 601,650 shares for the three months ended September 30, 2004 and 2003, respectively, and 373,500 and 874,050 shares for the nine months ended September 30, 2004 and 2003, respectively, because to do so would have been antidilutive.

9

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Oil and Gas Properties:

     Oil and gas properties consisted of the following at the indicated dates:

     A portion of incurred (if not previously included in the amortization base) and future development costs associated with qualifying major development projects may be temporarily excluded from amortization. To qualify, a project must require significant costs to ascertain the quantities of proved reserves attributable to the properties under development (e.g., the installation of an offshore production platform from which development wells are to be drilled). Incurred and future costs are allocated between completed and future work. Any temporarily excluded costs are included in the amortization base upon the earlier of when the associated reserves are determined to be proved or impairment is indicated.

     As of September 30, 2004 and December 31, 2003, we excluded from the amortization base $25.7 million (which is included in costs not subject to amortization in the table above) associated with development costs for our deepwater Gulf of Mexico project known as “Glider,” located at Green Canyon 247/248.

     Our 2004 capital costs not subject to amortization include $344 million related to our acquisition of Inland Resources Inc. (see Note 11, “Acquisitions”). Due to the significant size of the field, this amount will require several years to be evaluated. We believe that substantially all other costs not currently subject to amortization will be evaluated within four years.

10

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Debt:

     As of the indicated dates, our long-term debt consisted of the following:

     At September 30, 2004 and December 31, 2003, the interest rate was 3.13% and 2.50%, respectively, for the LIBOR based loans under our credit facility. At December 31, 2003, the interest rate was 3.00% for the loans outstanding under our money market lines of credit.

 New Senior Subordinated Notes

     On August 12, 2004, we issued $325 million aggregate principal amount of our 6 5/8% Senior Subordinated Notes due 2014. The net proceeds of $322.6 million were used together with the net proceeds of our concurrent stock offering (see Note 10, “Common Stock Activity”) to fund the acquisition of Inland Resources Inc. (see Note 11, “Acquisitions”).

     The notes are unsecured senior subordinated obligations that rank junior in right of payment to all of our present and future senior indebtedness, equally in right of payment to our outstanding 8 3/8% Senior Subordinated Notes due 2012, and senior to all of our future indebtedness that is expressly subordinated to the notes. We may redeem some or all of the notes at any time on or after September 1, 2009 at a redemption price stated in the indenture governing the notes. Prior to September 1, 2009, we may redeem all, but not part, of the notes at a redemption price based on a make-whole amount plus accrued and unpaid interest to the date of redemption. In addition, before September 1, 2009, we may redeem up to 35% of the original principal amount of the notes with the net cash proceeds of certain sales of our common stock at 106.625% of the principal amount plus accrued and unpaid interest to the date of redemption. The indenture governing the notes may limit our ability under certain circumstances to incur additional debt, make restricted payments, pay dividends on or redeem our capital stock, make certain investments, create liens, make certain dispositions of assets, engage in transactions with affiliates and engage in mergers, consolidations and certain sales of assets.

11

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 New Credit Facility

     On March 16, 2004, we entered into a new reserve-based revolving credit facility with JPMorgan Chase Bank, as agent. The banks participating in the new facility have committed to lend us up to $600 million. The amount available under the facility is subject to a calculated borrowing base determined by banks holding 75% of the aggregate commitments, which is reduced by the principal amount of any outstanding senior notes ($300 million at September 30, 2004) and 30% of the principal amount of any outstanding senior subordinated notes (a reduction of $172.5 million at September 30, 2004). The borrowing base is redetermined at least semi-annually and, after all required adjustments, was $402.5 million at September 30, 2004. The facility contains restrictions on the payment of dividends and the incurrence of debt as well as other customary covenants and restrictions. The facility matures on March 14, 2008. At September 30, 2004, we had $207.5 million available under our credit facility and had outstanding borrowings of $195 million.

 Interest Rate Swaps

     During September 2003, we entered into interest rate swap agreements to take advantage of low interest rates and to obtain what we viewed as a more desirable proportion of variable and fixed rate debt. We hedged $50 million principal amount of our 7.45% Senior Notes due 2007 and $50 million principal amount of our 7 5/8% Senior Notes due 2011. These swap agreements provide for us to pay variable and receive fixed interest payments and are designated as fair value hedges of a portion of our outstanding senior notes.

     Pursuant to SFAS No. 133, changes in the fair value of derivatives designated as fair value hedges are recognized as offsets to the changes in fair value of the exposure being hedged. As a result, the fair value of our interest rate swap agreements is reflected within our derivative assets on our consolidated balance sheet and changes in their fair value are recorded as an adjustment to the carrying value of the associated long-term debt. Receipts and payments related to our interest rate swaps are reflected in interest expense.

 Gas Sales Obligation Settlement

     We acquired EEX Corporation in November 2002. Pursuant to a gas forward sales contract entered into in 1999, EEX committed to deliver approximately 50 Bcf of production to Bob West Treasure L.L.C. (BWT) in exchange for proceeds of $105 million. As of the date of our acquisition of EEX, we recorded a liability of approximately $62 million, which represented the then current market value of approximately 16 Bcf of reserves remaining under the gas sales contract. We accounted for the obligation under the gas sales contract as debt on our consolidated balance sheet.

     On March 31, 2003, pursuant to a settlement agreement with BWT and the other parties to related transactions, the gas sales contract, the swaps entered into by BWT in connection with the gas sales contract and all other agreements related to the gas sales contract, including the guarantee and all liens and other security interests on EEX’s properties, were terminated in exchange for a payment by us of approximately $73 million. In connection with the settlement, we recognized a loss of $10 million under the caption “Gas sales obligation settlement and redemption of securities” on our consolidated statement of income.

6. Redemption of Trust Preferred Securities:

     We redeemed all of the outstanding 6 1/2% Cumulative Quarterly Income Convertible Preferred Securities of Newfield Financial Trust I on June 27, 2003 for an aggregate redemption price of approximately $148.4 million, or $38.31 on a per share of underlying common stock basis (excluding in each case accrued but unpaid distributions). The holders of only a small number of the securities elected to convert their securities into shares of our common stock prior to the redemption date (a total of 48,076 shares of common stock were issued). Included in the aggregate redemption price is $6.5 million of optional redemption premium. Upon redemption, this premium and $4.0 million of unamortized offering costs (which were being amortized over the 30-year life of the securities) were expensed under the caption “Gas sales obligation settlement and redemption of securities” on our consolidated statement of income.

     We financed the redemption with the net proceeds from the issuance and sale of 3.5 million shares of our common stock on May 27, 2003 (approximately $131.2 million, or $37.49 per share) and borrowings under our credit arrangements.

7. Contingencies:

     We have been named as a defendant in a number of lawsuits arising in the ordinary course of our business. While the outcome of these lawsuits cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, cash flows or results of operations.

12

NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. Geographic Information:

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NEWFIELD EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)