Chesapeake’s Smart Move

28 Sep

Today Chesapeake Energy (CHK) announced the reduction of about 6% of its daily production volume that is unhedged because of low natural gas prices.

It’s not often that you see a company sacrifice short-term numbers for the benefit of long-term wealth creation. With NYMEX natural gas prices hitting $4.20 (front month) Wednesday, CHK would still realize an over 100% cash operating margin (given cash costs are only about $2/mcfe). Yet management knows NG prices are on the low-end and that Mr. Market is likely to provide them with higher prices in the near future.

Meanwhile, today’s press release updated us on their hedging position, which is even better than reported at year-end:

“The Oklahoma City-based company has locked-in prices averaging $9.24 per thousand cubic feet for about 92 percent of its expected production in the second half of the year. About 80 percent of Chesapeake’s anticipated 2007 production is hedged at $9.92, and about 60 percent of 2008 production is contracted at $9.44.” An enviable position to be in.

Great company. Buy it; the CEO has been doing so at prices higher than today’s.

Disclosure: The author owns shares for clients as well as personally.


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