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Chesapeake Hedges 71% of 2006 Gas at $9.43/MMBtu

February 20, 2006
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When you can lock in nearly three-quarters of your production at $9.43/MMBtu, that's a pretty good deal, particularly when a mere three years ago you hedged 39% of your production at an average of $4.33/Mcf. Chesapeake Energy Corp. over the past month increased its hedge position, locking in an average Nymex price of $9.49/MMBtu for 721 Bcf of natural gas production over the next three years.

As of Feb. 10 Oklahoma City-based Chesapeake has now hedged 71%, 36% and 22% of its anticipated 2006, 2007 and 2008 gas production through Nymex swaps at $9.43/MMBtu, $9.85/MMBtu and $9.10/MMBtu, respectively.

"The hedging positions that Chesapeake has entered into for 2006, 2007 and 2008 have a current positive mark-to-market value of approximately $725 million," said CEO Aubrey McClendon. "In addition, the mark-to-market liability of the hedges assumed in the CNR [Columbia Natural Resources LLC] acquisition have declined by almost $100 million since the date of the acquisition on Nov. 14, 2005."

Previously, as of Jan. 17, Chesapeake's natural gas was 58% hedged for 2006 at $9.38/MMBtu, 23% hedged for 2007 at $9.72, and 13% hedged for 2008 at $8.82.

Additionally, as of Feb. 10, Chesapeake has now hedged approximately 7.665 million bbls of oil during the next three years at an average Nymex price of $61.97/bbl.

Flashback three years ago. "During the past year, our study of evolving supply/demand fundamentals in the natural gas industry has enabled Chesapeake to assume a bullish stance on natural gas prices for 2003," McClendon said at the time. "We are now seeing natural gas markets reflect the impact of an ongoing decline in North American gas supply, a trend that we believe is unlikely to be reversed in 2003" (see NGI, Jan. 13, 2003).

Chesapeake acquired Columbia Natural Resources from Triana Energy Holdings LLC in a $2.95 billion deal ($2.2 billion cash and $0.75 billion liabilities) (see NGI, Nov. 21, 2005).

In other news, Chesapeake announced the resignation of co-founder Tom Ward, president and COO, effective Feb. 10. Ward said that he plans to pursue other business ventures and philanthropic interests, Reuters reported. Steven Dixon, senior vice president of production, was named to succeed Ward as COO.

Chesapeake will report fourth quarter and full-year 2005 results Feb. 23.

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