Chesapeake: When Hedging Pays Off (CHK)

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Predictably, as prices for crude oil and natural gas have fallen over the past two months or so, commodity hedges that were once underwater have popped to the surface again. Chesapeake Energy Corp. (NYSE:CHK) offered a prime example in its third quarter report issued after the market closed yesterday.

Chesapeake reported net income of $3.282 billion (EPS of $5.61) onrevenues of $7.491 billion. Income included a non-cash, mark-to-marketgain on commodity hedges of $2.846 billion. Excluding that and certainother items, the company’s net income totaled $486 million (EPS of$0.85). Analysts had expected EPS of $0.89 on revenues of $2.57 billion.

Natural gas production was essentially flat sequentially, and theaverage realized gas price per thousand cubic feet dropped by $0.16compared with the previous quarter, but increased $0.61 year-over-year.Crude oil production was also flat and pricing also followed the samepattern.

During the third quarter, Chesapeake sold about $7.5 billion worth ofits assets, and grew its cash on hand from $1 million to nearly $2billion. The company reduced its natural gas production projections forthe current quarter and noted that it expects to sell assets valued atabout $2.7 billion in each of 2009 and 2010.

Chesapeake’s share price closed at $22.07 yesterday, down about 70%from its 52-week high. Maybe piling up cash will improve the priceenough to put some of the company’s stock back into the hands of itsCEO.

Shares are indicated up almost 2% at $22.49 right before the open.

Paul Ausick
October 31, 2008