Let's Be Clear on Chesapeake

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Chesapeake Energy (NYSE: CHK) came out with a pair of press releases after hours yesterday. Judging by the message board chatter, these announcements weren't crystal clear. Allow me to walk through a few key items.

First is the issue of the non-cash impairment charge of roughly $1.7 billion on oil and gas properties. We met Mr. Ceiling Test two weeks ago, when we were talking about oil patch opinions and elbows. In that piece, I noted that Apache (NYSE: APA) and W&T Offshore (NYSE: WTI) were both talking about price-driven impairments to year-end proven reserve values. I concluded that if these conservative shops were facing writedowns, pretty much everyone else was likely to take a hit, too.

Whereas Rockies dwellers Whiting Petroleum (NYSE: WLL) and Bill Barrett are only looking at minimal impairments on select properties, Petrohawk (NYSE: HK) announced a big anticipated hit, to the tune of $1.1 billion to $1.3 billion. Investors took that one in stride, and the Chesapeake charge should be no different. The non-cash aspect of these impairments is key -- cash flows are what matter here, not accounting earnings.

Part of what's protecting those cash flows through 2009 are Chesapeake's commodity hedges. The firm bumped up its hedges on natural gas to cover 82% of anticipated production -- 42% via swaps and 40% via collars. That's up from 75% just weeks ago. Chesapeake doesn't have the hot hand of XTO Energy (NYSE: XTO) or Pioneer Natural Resources (NYSE: PXD) -- both of whom recently reset some deep in the money hedges, allowing them to reduce debt with the cash proceeds -- but the firm is well secured against ongoing softness in commodity prices.

Finally, let's take a quick look at Chesapeake's half-billion dollar debt offering. The company says it's seeking to raise the funds in order to pay down its bank lines. Petrohawk has done exactly the same thing, with exactly the same stated purpose. You could surmise that these firms are afraid of having their borrowing bases reduced by leery lenders, but it's just as likely that the E&Ps are concerned about dealing with banks that could spontaneously combust.

By issuing senior notes in order to pay down a revolver, Chesapeake isn't increasing its net debt. This is a shift to a more stable funding source. I'm glad to see the shares aren't getting torpedoed in today's trading.