Chesapeake Energy 1998 Annual Report Download - page 84

Download and view the complete annual report

Please find page 84 of the 1998 Chesapeake Energy annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 105

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105

Hedging Activities
Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future oil and gas
production. These strategies include (i) swap arrangements that establish an index-related price above which the
Company pays the counterparty and below which the Company is paid by the counterparty, (ii) the purchase of
index-related puts that provide for a 'floor" price below which the counterparty pays the Company the amount by
which the price of the commodity is below the contracted floor, (iii) the sale of index-related calls that provide for a
"ceiling" price above which the Company pays the counterparty the amount by which the price of the commodity is
above the contracted ceiling, and (iv) basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points. Results from commodity hedging transactions are
reflected in oil and gas sales to the extent related to the Company's oil and gas production. The Company only
enters into commodity hedging transactions related to the Company's oil and gas production volumes or CEMI's
physical purchase or sale commitments. Gains or losses on crude oil and natural gas hedging transactions are
recognized as price adjustments in the months of related production.
As of December 31, 1998, the Company had the following natural gas swap arrangements designed to hedge a
portion of the Company's domestic gas production for periods after December 1998:
NYMEX-Index
Volume Strike Price
Months (MMBtu) (per MMBtu)
February 1999 4,300,000 $1.968
March 1999 4,600,000 1.968
April 1999 4,500,000 1.968
May 1999 4,600,000 1.968
June 1999 1,200,000 1.950
July 1999 1,240,000 1.950
August 1999 1,240,000 1.950
September 1999 1,200,000 1.950
During 1998, the Company has closed transactions for natural gas previously hedged for the period April 1999
through November 1999 for net proceeds of $0.5 million
Subsequent to December 31, 1998, the Company entered into additional natural gas swap arrangements for
6,100,000 MMBtU at a strike price of $ 1.875 for the period from June 1999 through September 1999. Such swap
arrangements, along with those listed above and other miscellaneous transactions, were closed as of March '15,
1999, resulting in net proceeds of $4 7 million (unrealized gain of $0.8 million at Decçmber 31,, 1998).
As of December 31, 1998, the Company had the following natural gas swap arrangements designed to hedge a
portion of the Company's Canadian gas production for periods after December 1998:
Volume Index Strike Price
Months (MMBtu) (per MMBtu)
January1999 589,000 $ 1.60
February 1999 532,000 1.60
March 1999 589,000 1.60
April1999 570,000 1.60
May 1999 589,000 1.60
June 1999 ,570,O00 1.60
July 1999 589,000 1.60
August 1999 589,000 1.60
September 1999 570,000' 1.60
If the swap arrangements listed above had been settled on December 31, 1998, the Company. would have
incurred a loss of $0.8 million.
64