Chesapeake’s Billion-Dollar Hedge and the Bankruptcy Question
(Bloomberg) -- Chesapeake Energy Corp. had almost $1 billion in hedges 10 weeks before executives were said to start prepping for a bankruptcy filing. The question now is how many are left and what will the cash-strapped shale driller do with them?
Chesapeake’s natural gas and oil derivatives as of March 31, according to a filing, were equivalent to 481 billion cubic feet of gas and 41 million barrels of oil. What’s unclear, though, is whether it has, or intends to, liquidate the positions prior to seeking Chapter 11 protection, said Ilia Bouchouev, a partner at Pentathlon Investments.
In a typical Chapter 11, dealers have the right to liquidate hedges immediately, said Bouchouev, a former head of derivatives at Koch Supply and Trading. However, some of Chesapeake’s 11 hedging counterparties also are lenders involved in its revolving credit line.
That may give Chesapeake leverage in negotiating to keep at least part of whatever hedges are still intact. Gordon Pennoyer, a spokesman for Chesapeake, declined to comment.
To be sure, the $1-billion valuation refers to the portfolio’s mark-to-market value, an accounting figure that fluctuates. According to their filing, Chesapeake holds the equivalent of 20,000 contracts in crude oil swaps and 20,000 contracts in gas swaps. Each contract represents 1,000 barrels and 10,000 million British thermal units, respectively.
“It’s possible also that Chesapeake might decide to pro-actively liquidate some, say, few days prior to filing to avoid forced liquidation,” Bouchouev said. “At least in this case, they control the price themselves rather than letting dealers lift the offers.”
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