Chesapeake Energy 2012 Annual Report Download - page 84
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74
in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions
and other factors. See Note 12 of the notes to our consolidated financial statements included in Item 8 of this report
for further discussion of the fair value measurements associated with our derivatives.
As of December 31, 2012, our natural gas and oil derivative instruments consisted of the following:
• Swaps: Chesapeake receives a fixed price and pays a floating market price to the counterparty for the
hedged commodity.
• Options: Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of
settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty
such excess on sold call options, and Chesapeake receives such excess on bought call options. If the market
price settles below the fixed price of the call options, no payment is due from either party.
• Swaptions: Chesapeake sells call swaptions to counterparties that allow them, on a specific date, to extend
an existing fixed-price swap for a certain period of time.
• Basis protection Swaps: These instruments are arrangements that guarantee a price differential to NYMEX
from a specified delivery point. Our natural gas basis protection swaps typically have negative differentials
to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is greater than
the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms
of the contract. Our oil basis protection swaps typically have positive differentials to NYMEX. Chesapeake
receives a payment from the counterparty if the price differential is less than the stated terms of the contract
and pays the counterparty if the price differential is greater than the stated terms of the contract.