4. Natural gas prices
Natural gas is trading at $3 and it's so far been a light winter in what is usually the heaviest demand time of the year. Unlike its oil hedges, Chesapeake is now exposed to the spot pricing market in natural gas having sold all of its gas hedges. Its $6 billion operating cash flow assumption for 2012 includes roughly $500 million for natural gas sold at an average price of $4.50, according to Rezvan. With natural gas at $3, and to the extent it stays at that level, Chesapeake's operating cash flow assumptions could be off by a significant amount.
For a company with an already stressed balance sheet and the need to fund massive land drilling operations, a cash shortfall is the last thing it needs, and the lack of natural gas hedges in 2012 could be a headwind for the company.
Chesapeake can raise cash in many ways, so this isn't a "mission critical" issue. On the other hand, no analyst on Wall Street has a $3 natural gas price assumption in its Chesapeake model, and that could come back to haunt the stock.
"We thought our $4.20 natural gas price assumption for 2012 was bearish and now we are well above spot price," noted Rezvan. The spot price for Henry Hub natural gas was $2.99 on Tuesday afternoon.In defending the sale of the natural gas hedges during the company's last conference call, McClendon said, "I think we made it pretty clear that we feel like the bottoms are in, in the natural gas markets. We also took advantage of some days when there was worldwide financial chaos. And oil price is way down, and gas price is way down that we didn't think were justified by supply-demand fundamentals. So we went ahead and cashed out a good bit of them and then will look to the opportunity to put them back on. We've done this on several occasions in the last five years and, typically, we've been pretty successful at being able to put it back on. Maybe you noticed, we've made $8.1 billion on our hedges since 2006. So we don't always get it right, but we've got a pretty good track record there." If natural gas were to rally to $5 in 2012, then it becomes a tailwind, but few market experts seem willing to make that bet on natural gas in 2012. The prevailing view continues to be that spot natural gas prices remain a dog, and even lower than the bottom called by Chesapeake last November.