Chesapeake Energy, one of the country’s largest gas producers, boasts that its “offensive” hedging strategies have created more than $5 billion in gains in the last decade. But as it piles on longer-dated bets on gas prices, juicing short-term cash supplies and potentially curbing future profits from rising prices, some analysts and investors have grown concerned.
During the prior three quarters, through June 30, Chesapeake
sold more than 70,000 long-dated call options in a bet that natural-gas prices would remain below about $8 between the years 2013 and 2020, according to company filings. During the same period, natural gas prices sank from just under $5 to the current levels of about $3.90 after briefly rallying to about $6 in January.
The Oklahoma City based Chesapeake, run by chairman and CEO Aubrey McClendon, is one of the most active hedgers in the oil and gas business. Commodities traders say that in recent months, it has also been perhaps the most active seller of long-dated gas calls, doing business with almost any firm that’s willing to bet that gas won’t rise above about $8 in the coming years. Citing the difficulty of predicting future prices, many oil and gas companies limit their hedging activities to a much shorter time frame of one or two years into the future, analysts say.
Chesapeake's rationale is simple: if gas prices remain below $8, it keeps the price the options sold for and never pays additional money to its counterparty. If gas prices soar past the $8 mark, it must pay the difference to its counterparties, but at the same time, it will benefit from the sale of more expensive gas to the broader market.