Excerpt from our Wall Street Breakfast, a one-page summary of this morning's key market-moving and stock-moving stories:
On a Roller Coaster, One Energy Firm Tries Hedging Bets [Wall Street Journal]
Summary: Chesapeake Energy is on a roll. So far in 2006, it has made $2.53 billion worth of gas sales and a profit of $1.53 billion. The secret of CHK's success? The financial hedge. Chesapeake sells gas futures contracts as a way of protecting its revenue stream from the volatility of the energy market, in general, and the natural gas market in particular. Chesapeake reaped $833 million from its gas hedging operations during the first 9 months of this year. The gas futures contract obligates the company to sell its natural gas product at a specific price or within a certain price range. So far, these bets have paid off for them. The hedging strategy has helped Aubrey McClendon, the company's CEO, pull the company out of the red since 1999, when the company had big losses due large investments in Louisiana gas wells that turned out to be duds. Since then, CHK stock has quadrupled in price. Other energy companies are not convinced of the hedging strategy- they find it too risky due to the many unpredictable influences on markets. Flush with cash, Chesapeake has been on the prowl, looking to acquire both smaller gas producers and more acreage of potential gas wells. Last year, Chesapeake acquired Columbia Natural Resources LLC, an energy firm based in Appalachia, for $2.2 billion. Last month it bought Dale Resources for $200 million. Analysts are cautious about highly acquisitive energy firms. If a company make the wrong bets, such firms could be left with worthless gas fields and debt, as had happened to Chesapeake in Louisiana.
Related links: Natural Gas is Running Out of Steam • Chesapeake is a Natural Pick in Natural Gas • Trading Markets: Chesapeake Q3 Profit Soars
Potentially impacted stocks and ETFs: Stocks: Chesapeake (NYSE:CHK), BP plc (NYSE:BP), ExxonMobil (NYSE:XOM), Andarko Petroleum (NYSE:APC), ConocoPhillips (NYSE:COP) • ETFs: iShares Dow Jones US Oil & Gas Ex Index (NYSEARCA:IEO), PowerShares Dynamic Oil & Gas (NYSEARCA:PXJ), SPDR Oil & Gas Exploration & Production (NYSEARCA:XOP)
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