Chesapeake's (CHK) decision last October to sell its hedges against low gas prices has...


Chesapeake's (CHK) decision last October to sell its hedges against low gas prices has exacerbated the company's cash crunch, left it largely unprotected against low gas prices this year and WSJ calculates losses of around $750M-900M on the positions. Chesapeake has generally been successful with these kinds of levered bets, but acting more like a hedge fund than an exploration company can clearly backfire.

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  • User 353732
    , contributor
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    High leverage always forces capital intensive companies to adopt complex business models where financial engineering becomes as important as operating excellence.
    As a result inherent corporate risk increases well above those of peer group companies. When the returns to compensate for this risk are garnered the company is praised for brilliance and when these returns turn to vapor the company is condemned for bad governance and reckless behavior.

     

    It is a very rare company that can sustain such a complex business model and consistently deliver risk adjusted returns that satisfy investors.
    Debt can certainly generate rapid growth when prices are favorable but it can also consume net worth with unforgiving speed when the inevitable cyclical low in prices has to be endured.
    4 Jun 2012, 05:46 AM Reply Like
  • MadAsHellAnd
    , contributor
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    I don't know the WSJ time frame. How much has CHK recovered on the NG bounce up? How much do they stand to recover, relative to the WSJ time event? Did the WSJ measurement cover solely the worst performing period?

     

    I don't know, but I'm wary of hindsight-driven proclamations, where strict credence to it can be nearly tantamount to, "The price is now zero, so sell everything now." This seems to be the big question for CHK: to ride it out, and flourish if/when prices and demand resume, or die trying. That seems to be the essential strategy. Like it or not, it's better than selling out at zero (ish).
    4 Jun 2012, 12:49 PM Reply Like
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