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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 11. Derivative and Hedging Activities Chesapeake uses derivative instruments to secure attractive pricing and margins on its share of expected production, to reduce its exposure to fluctuations in future commodity prices and to protect its expected operating cash flow against significant market movements or volatility. Chesapeake also uses derivative instruments to mitigate a portion of its exposure to foreign currency exchange rate fluctuations. All of our commodity derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty. Oil, Natural Gas and NGL Derivatives As of December 31, 2016 and 2015, our oil, natural gas and NGL derivative instruments consisted of the following types of instruments: •

Swaps: Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we granted options that allow the counterparty to double the notional amount.

Options: Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty the excess on sold call options and Chesapeake receives the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party.

Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the market price. If the market price is between the put and the call strike prices, no payments are due from either party.

Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. Chesapeake receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity.

The estimated fair values of our oil, natural gas and NGL derivative instrument assets (liabilities) as of December 31, 2016 and 2015 are provided below. December 31, 2016 Volume Fair Value ($ in millions) Oil (mmbbl): Fixed-price swaps ................................. Call options ........................................... Total oil..............................................

23 5 28

Natural gas (tbtu): Fixed-price swaps ................................. Collars ................................................... Call options ........................................... Basis protection swaps ......................... Total natural gas................................

719 60 114 31 924

NGL (mmgal): Fixed-price swaps .................................

53

Total estimated fair value..............

$

(140) (1) (141)

14 19 33

(349) (9) — (5) (363)

500 — 295 57 852

— $

December 31, 2015 Volume Fair Value ($ in millions)

(504)

$

144 (7) 137 229 — (99) — 130

— $

267

We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges for which the hedged production is still expected to occur. See further discussion below under Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss). 118

Profile for Chesapeake Energy

2016 Annual Report  

2016 Annual Report