Source: Chesapeake Energy Corporation.  

Chesapeake Energy (NYSE:CHK) announced its second-quarter results on Aug. 6. The Oklahoma-based independent oil and gas producer reported a profit of just $191 million, or $0.22 per share, which was 67% below last year's second quarter. Adjusted net income of $0.36 per share was down 29% from last year and below the $0.44 per share that analysts expected.

Why the miss?
Operationally, Chesapeake Energy had a pretty solid quarter. Production, adjusted for asset sales, was up 13% over last year's second quarter. Meanwhile, higher-margin oil production rose 12% year over year. Furthermore, the company's expenses were lower on a barrel of oil equivalent basis from last year's second quarter: Production expenses were down 5%, G&A expenses dropped 17%, and capital spending fell 27%.

The problem is that the prices Chesapeake realized for oil, natural gas liquids, and natural gas were also lower in the quarter, as indicated on the following chart.

Source: Chesapeake Energy's Second-Quarter Results Press Release. 

What's interesting is that Chesapeake Energy was largely alone in experiencing weaker commodity price realizations for the quarter. Check out the following chart of some of Chesapeake Energy's closest peers.

Source: Company Press Releases. 

As that chart illustrates, Pioneer Natural Resources (NYSE:PXD) and EOG Resources (NYSE:EOG) both enjoyed much higher realized oil prices than Chesapeake Energy. While Devon Energy's (NYSE:DVN) realized oil prices were lower, that involved an unhappy situation in Canada, where Devon Energy realized just $65.28 per barrel even as its U.S. oil production realized $91.54 per barrel.

The price realization difference was even greater when it came to natural gas. Chesapeake Energy, which is still America's second-largest gas producer, only realized $2.45 per Mcf this quarter, well below the more than $4 per Mcf realized by its peers. Chesapeake's natural gas liquids price realizations were also much lower than its peers, which really hurt as the company's NGL production surged 72% over last year's second quarter. 

Chesapeake Energy was bitten by its oil and gas hedges in the quarter. While those hedges smooth out volatility, that works both ways as the company isn't able to earn as much when oil and gas prices head higher. It's a risk Chesapeake has chosen to manage by using more hedges than many of its peers.

Slowly making progress
Chesapeake Energy can only do so much to control its exposure to commodity prices. That's why the company is focusing most of its attention on areas it can control: costs and production. The company did a good job keeping a lid on costs in the second quarter and plans to continue to reduce expenses wherever possible. Meanwhile, production continues to grow; Chesapeake even raised the midpoint of its 2014 production guidance by 1.5%. This is slow and steady progress that will make a difference over the long term. 

Investor takeaway
Commodity prices will always have an impact on Chesapeake Energy. While its hedging practices do put a lid on profits, it's a risk the company is willing to take to protect itself from a real plunge in prices. That said, the tables could someday turn, and the company's rivals will realize weaker commodity prices while Chesapeake Energy is rewarded for taking on less risk.