Apparently, natural gas prices collapsed in the third quarter. You'd hardly know it from Chesapeake Energy's
Natural gas price realizations -- industry jargon for the effective sales price -- came in at $8.02/mcfe (per thousand cubic feet) for the third quarter. That's down 2% from the June quarter. Production levels were also roughly the same, resulting in operating cash flow of $1.4 billion, compared to $1.44 billion previously.
Confused? Well, the secret sauce is called a swap. Swaps and collars are derivatives employed by E&Ps to hedge their cash flow in case commodities suddenly crash. Practically everyone, from Anadarko Petroleum
The giveaway that something went sour in the quarter is the mark-to-market gain of over $2.8 billion on unrealized hedges -- the ones that are still being carried on the books. This non-cash gain pumped up Chesapeake's net income figure, which, as a result, is pretty much useless for analytical purposes. This is why we generally pay closer attention to cash flow rather than earnings in E&P land.
So hedges are one thing protecting Chesapeake's caboose. Monetization is another maneuver available to muddle through this morose period. In the third quarter, the company completed about $7.5 billion transactions, from BP's
These monetizations might smack of deleveraging desperation were they not so darn lucrative. Through the first nine months of this year, Chesapeake sold undeveloped leasehold for $3.6 billion. That's nearly five times the firm's cost basis. There's something to be said for the long-term cash stream that a drilling program provides, but as with respectable ATP Oil & Gas