Chesapeake Energy 2013 Annual Report Download - page 122

Download and view the complete annual report

Please find page 122 of the 2013 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 180

  • 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
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
114
11. Derivative and Hedging Activities
Chesapeake uses commodity derivative instruments to secure attractive pricing and margins on production, to
reduce its exposure to fluctuations in future commodity prices and to protect its expected operating cash flow against
significant market movements or volatility. Chesapeake also uses derivative instruments to mitigate a portion of our
exposure to interest rate and foreign currency exchange rate fluctuations. All of our derivative instruments are net
settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net
amount due to or from the counterparty.
Natural Gas and Oil Derivatives
As of December 31, 2013 and 2012, our natural gas and oil derivative instruments consisted of the following
types of instruments:
• Swaps: Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged
commodity.
• Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds
the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the market
price. If the market price is between the put and the call strike prices, no payments are due from either party.
Three-way collars include an additional put option in exchange for a more favorable strike price on the call
option. This eliminates the counterparty’s downside exposure below the second put option strike price.
• 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 option, no payment is due from either party.
• Swaptions: Chesapeake sells call swaptions in exchange for a premium that allows a counterparty, on a
specific date, to enter into a 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.
The estimated fair values of our natural gas and oil derivative instrument assets (liabilities) as of December 31,
2013 and 2012 are provided below.
December 31, 2013 December 31, 2012
Volume Fair Value Volume Fair Value
($ in millions) ($ in millions)
Natural gas (tbtu):
Fixed-price swaps....................................... 448 $ (23) 49 $ 24
Three-way collars ....................................... 288 (7) — —
Call options................................................. 193 (210) 193 (240)
Call swaptions ............................................ 12 — — —
Basis protection swaps............................... 68 3 111 (15)
Total natural gas..................................... 1,009 (237) 353 (231)
Oil (mmbbl):
Fixed-price swaps....................................... 25.3 (50) 28.1 68
Call options................................................. 42.5 (265) 73.8 (748)
Call swaptions ............................................ — — 5.3 (13)
Basis protection swaps............................... 0.4 1 5.5 —
Total oil................................................... 68.2 (314) 112.7 (693)
Total estimated fair value................... $ (551) $ (924)