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Derivative Activities Oil, Natural Gas and NGL Derivatives Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. Executive management is involved in all risk management activities and the Board of Directors reviews the Company's derivative program at its quarterly board meetings. We believe we have sufficient internal controls to prevent unauthorized trading. As of December 31, 2016, our oil, natural gas and NGL derivative instruments consisted of swaps, options, collars and basis protection swaps. Item 7A. Quantitative and Qualitative Disclosures About Market Risk contains a description of each of these instruments and gains and losses on oil, natural gas and NGL derivatives during 2016, 2015 and 2014. Although derivatives often fail to achieve 100% effectiveness for accounting purposes, we believe our derivative instruments continue to be highly effective in achieving our risk management objectives. Our commodity derivative activities allow us to predict with greater certainty the effective prices we will receive for our hedged production. We closely monitor the fair value of our derivative contracts and may elect to settle a contract prior to its scheduled maturity date in order to lock in a gain or minimize a loss. Commodity markets are volatile and Chesapeake's derivative activities are dynamic. Mark-to-market positions under commodity derivative contracts fluctuate with commodity prices. As described under Hedging Arrangements in Note 11 of the notes to our consolidated financial statements included in Item 8 of this report, the counterparties’ and our obligation under certain of the bilateral hedging agreements must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us or by us exceed defined thresholds. In 2016, certain of our counterparties that are also lenders under our revolving credit facility entered into derivative contracts to be secured by the same collateral that secures the revolving credit facility. This will allow us to reduce any letters of credit posted as security with those counterparties. The estimated fair values of our oil, natural gas and NGL derivative contracts as of December 31, 2016 and 2015 are provided below. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for additional information concerning the fair value of our oil and natural gas derivative instruments. December 31, 2016 2015 ($ in millions) Derivative assets (liabilities): Oil fixed-price swaps .................................................................................................. Oil call options ............................................................................................................ Natural gas fixed-price swaps .................................................................................... Natural gas collars ...................................................................................................... Natural gas call options .............................................................................................. Natural gas basis protection swaps ............................................................................ NGL fixed-price swaps ............................................................................................... Estimated fair value .............................................................................................

$

$

(140) (1) (349) (9) — (5) — (504)

$

$

144 (7) 229 — (99) — — 267

Changes in the fair value of oil and natural gas derivative instruments designated as cash flow hedges, to the extent effective in offsetting cash flows attributable to the hedged commodities, and locked-in gains and losses of settled designated derivative contracts are recorded in accumulated other comprehensive income and are transferred to earnings in the month of related production. As of December 31, 2016, 2015 and 2014, accumulated other comprehensive income included unrealized losses, net of related tax effects, totaling $97 million, $113 million and $136 million, respectively, associated with commodity derivative contracts. Based upon the market prices at December 31, 2016, we expect to transfer approximately $22 million of net loss included in accumulated other comprehensive income to net income (loss) during the next 12 months. A detailed explanation of accounting for oil, natural gas and NGL derivatives appears under Application of Critical Accounting Policies – Derivatives elsewhere in this Item 7.

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Profile for Chesapeake Energy

2016 Annual Report  

2016 Annual Report