Chesapeake Energy, the second-largest natural-gas driller in the U.S. and an active user of derivatives for hedging against the ebbs and flows of its core business, removed most of its 2012 derivatives positions, leaving the company naked to big dips in natural-gas futures prices just as they were headed for a ten-year low.
Late last year, the company removed most of its gas and oil hedges for 2012 and 2013, according to documents and people familiar with the matter, believing that prices were at or near a bottom.
At that time, natural-gas futures were trading just under $4. Monday morning, however, prices plummeted to roughly $2.06 per million British thermal units, their lowest level since February 2002. So far this year, Chesapeake shares are off roughly 3 percent, currently trading at about $22.
Chesapeake “is unhedged for natural gas in 2012 because we believe little further downside exists,” wrote the company in an April investor presentation. In a statement, a company spokesman added that “we are confident the market will use price to balance supply and demand for natural gas in the U.S.”
Still, going so-called naked to the strip, or having few or no hedges against where a market is currently trading, is a sharp turnaround for a company that brags in investor materials of being “the best in the industry” at natural-gas hedging.
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