The fair value is presumably for open positions and represents unrealized losses. …but because it does utilize hedge accounting, reported earnings are more volatile if there are large derivative gains or losses in a reporting period.Īs of March 31, 2022, the fair value of CHK's oil and natural gas derivatives was $3.022 billion. Therefore, the objective of hedge accounting is to match the timing of income statement recognition of the effects of the hedging instrument with the timing of recognition of the hedged risk."Ĭhesapeake claims that its hedging "Reduces Risk, Protects Returns," as indicated in the presentation slide below…
If hedge accounting is not applied, changes in the fair values of derivative instruments are recognized in earnings in each reporting period, which may or may not match the period in which the risks that are being hedged affect earnings. For such circumstances, ASC 815 allows entities to use a specialized hedge accounting for qualified hedging relationships. Some entities mitigate certain risks by entering into separate contracts that meet the definition of a derivative instrument. Therefore, there was a mismatch between the hedge impacts and the items being hedged. However, in its 2021 Annual Report, Chesapeake explained that "None of our open oil and natural gas derivative instruments were designated for hedge accounting as of Decemand 2020."
That was despite the fact that average sales prices for natural gas were $4.54/Mcf and crude sales prices averaged $95.02/bbl in 1Q22, up an estimated 68 % and 65 %, respectively, from 1Q21 (Predecessor/Successor).Īs a basic principle of hedging, the hedge impact should not exceed the total impact on income of changes in the prices of the items being hedged. Once operating costs were factored in, CHK made a loss of $764 million, as compared to Net Income of about $5.7 billion in 1Q21. Net total revenues were just $935 million, mainly from marketing. In fact, Revenues from oil, natural gas and NGL amounted to $1.9 billion in 1Q22, and CHK lost $2.1 billion in oil and natural gas derivatives. However, as of December 31, 2021, CHK had hedged 1,112 billion cubic feet of natural gas, primarily through fixed-price swaps and collars.Ĭhesapeake explained its derivatives/hedging activities in its 2021 Annual Report.ĬHK underperformed UNL because Chesapeake hedged its energy price risk. SP500TR ( SP500TR) lost 11% over the same period. Over the past year, CHK rose by 59 %, whereas UNL rose by 137 %, as of the snapshot of the performance below. As a result, I compared the stock performance of CHK to the United States 12 Month Natural Gas Fund, LP ETF ( UNL), since UNL is a portfolio of 12 natural gas futures contracts. Chesapeake currently does not produce liquified natural gas ("LNG") but is planning to expand into the LNG export market.Ībout 70 % of its 1Q22 sales came from natural gas and natural gas liquids. Chesapeake Energy Corporation ( NASDAQ: CHK) is an oil and gas producer, which sells crude oil, natural gas and natural gas liquids ("NGLs").
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