Chesapeake Energy 1997 Annual Report Download - page 24

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Chesapeake Energy Marketing, Inc., ("CEMI") a wholly-owned subsidiary, provides oil and natural gas
marketing services including commodity price structuring, contract administration and nomination services for
the Company, its partners and other oil and natural gas producers in the geographical areas in which the
Company is active.
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 (1) 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, (2) 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, (3) 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 (4) basis protection swaps.
Results from hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil
and gas production. The Company has not entered into hedging transactions unrelated to the Company's oil
and gas production or physical purchase or sale commitments.
As of June 30, 1997, the Company had the following oil swap arrangements for periods after June 1997:
The Company entered into oil swap arrangements to cancel the effect of the above swaps for the months
of August through December at an average price of $21.07 per Bbl.
As of June 30, 1997, the Company had the following gas swap arrangements for periods after June 1997:
Houston Ship Channel
Index Strike Price
Months Volume (MMBtu) (per MMBtU)
The Company entered into gas swap arrangements to cancel the effect of the swaps for the months of
July through October at an average price of $2133 per MMBtu.
The Company entered into a curve lock for approximately 4.9 Bcf of gas which allows the Company the
option to hedge April 1999 through November 1999 gas based upon a negative $0.285 differential to
December 1998 gas any time between the strike date and December 1998.
The Company estimates that had all of the crude oil and natural gas swap agreements in effect for
production periods beginning July 1, 1997 terminated on June 30, 1997, based on the closing prices for
NYMEX futures contracts as of that date, the Company would have paid the various counterparties a net
amount of approximately $185,000, which would have represented the "fair value" at that date. These
agreements were not terminated.
7
Month Volume (Bbls)
NYMEX-Index
Strike Price
(per Bbl)
July 1997 31,000 $ 18.60
August 1997 31,000 $ 18.43
September 1997 30,000 $ 18.30
October 1997 31,000 $ 18.19
November 1997 30,000 $ 18.13
December 1997 31,000 $ 18.08
January through June 1998 724,000 $ 19.82
July 1997 1,240,000 $2.313
August 1997 1,240,000 $2.30l
September 1997 1,200,000 $2.285
October 1997 1,240,000 $2.300