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Chesapeake Energy Goes Naked as Gas Hits a Decade Low
09 Apr 2012 EDT - CNBC.com
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Since 2006, Chesapeake has made an estimated $8.4 billion through derivatives trading, according to company literature. In this case, the company lifted off a batch of swap positions it had, pocketing the difference between the gas levels the swap had been pegged to and the price they were trading at last fall.

Exiting the trades was profitable, says someone familiar with the matter, even though doing so left Chesapeake without any downside protection against prices this winter.

Looking out on 2012, other natural-gas companies, like Linn Energy , Venoco , and Range Resources , have taken an opposite tack, hedging at least 75 percent of their 2012 production.

“If you go back to the very early days, there were very few companies that really hedged,” says Range investor-relations head Rodney Waller. “You weren’t a man if you hedged, you kind of wimped out,” was the perception then, he added. Now, says Waller, it’s an essential part of doing business.

For Chesapeake, removing the 2012 hedges was risky because the price of gas futures is now very likely below what it costs the company to drill for physical gas – meaning the company has no speculative hedges that will pay out as it takes what is probably a loss on its physical production.

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