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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
119
11. Derivative and Hedging Activities
Chesapeake uses commodity derivative instruments to secure attractive pricing and margins on its share of
expected 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 its exposure to interest rate and foreign currency exchange rate fluctuations. All of our commodity
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.
Oil and Natural Gas Derivatives
As of December 31, 2015 and 2014, our oil and natural gas 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. In exchange for higher fixed prices on certain of our swap trades, we granted options that allow
the counterparty to double the notional amount.
• 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
the excess on sold call options and Chesapeake receives the 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.
• Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to
NYMEX from a specified delivery point. Chesapeake receives the fixed price differential and pays the floating
market price differential to the counterparty for the hedged commodity.
The estimated fair values of our oil and natural gas derivative instrument assets (liabilities) as of
December 31, 2015 and 2014 are provided below.
December 31, 2015 December 31, 2014
Volume Fair Value Volume Fair Value
($ in millions) ($ in millions)
Oil (mmbbl):
Fixed-price swaps ................................. 13.5 $ 144 12.5 $ 471
Three-way collars.................................. — — 4.4 40
Call options ........................................... 19.2 (7) 35.8 (89)
Basis protection swaps ......................... — — — —
Total oil.............................................. 32.7 137 52.7 422
Natural gas (tbtu):
Fixed-price swaps ................................. 500 $ 229 275 $ 281
Three-way collars.................................. — — 207 165
Call options ........................................... 295 (99) 193 (170)
Basis protection swaps ......................... 57 — 60 23
Total natural gas................................ 852 130 735 299
Total estimated fair value.............. $ 267 $ 721
We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges
for which the hedged production is still expected to occur. See further discussion below under Effect of Derivative
Instruments – Accumulated Other Comprehensive Income (Loss).