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Chesapeake Is Focusing on Cash-Flow Generation

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Nov. 25 2015, Updated 6:55 p.m. ET

Historic fall of crude oil

Cash flow from operations in the oil and gas sector started a falling trend in the third quarter of 2014 when prices started a historic fall. Cash generated from operations is being used for debt servicing as producers are getting half of realized prices compared to what they were getting in mid-2014.

Therefore, upstream energy companies (XOP) have no cash left for expansion or investment activities. This leaves them to borrow more via more stringent agreements.

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Cash generation strategies

Chesapeake’s (CHK) management is extremely focused on preserving liquidity and cash flow generation. It holds cash of $1.7 billion and a credit facility of $4 billion as of September 30, 2015.

The company’s planned non-core asset sale is expected to generate nearly $200 million–$300 million in cash flows in 4Q15. CHK also added some meaningful hedges in the last quarter that will protect cash flows from further commodity (DBC) price volatility.

As of September 30, 2015, Chesapeake has hedged 444 Mmboe (million barrels of oil equivalent) of oil and gas using swaps and three-way collars with nine counterparties amounting to an aggregate mark-to-market capacity of $7.1 billion.

Hedging: A double-edged sword

A disciplined approach to hedging may prove it to be a double-edged sword. It protects cash flows from asset price volatility. Also, it can be useful to generate significant revenues. But very few upstream oil and gas companies have hedges in place.

According to a survey of 48 US energy companies done by information and analysis company IHS, oil and gas explorers and producers have hedged only 11% of their total productions for 2016 at prices significantly below those locked in for 2015.

Among the explorers, Chesapeake Energy and Newfield Exploration (NFX) have strong hedging portfolios in place, protecting production volumes in 2016 and 2017, while Apache (APA) has no open derivative position for hedges as of September 30, 2015.

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