NEW YORK (TheStreet) -- Chesapeake Energy (CHK) is the second-largest natural gas producer in the U.S. In the past three quarters, almost 40% of its revenue from production came from natural gas. However, Chesapeake's realized natural gas prices are much lower than market prices. This suggests that investors who think the natural gas market will heat up may not reap the rewards by investing in Chesapeake.
The table below shows the realized prices of natural gas (these prices account for realized gains/losses from derivatives but not unrealized gains/losses) as recorded by Chesapeake and the average quarterly prices of natural gas during the first three quarters of the year.
Source of data Chesapeake's Web site and EIA
The company's realized prices tend to be well below the average quarterly market prices of natural gas. By comparison, Anadarko Petroleum (APC) , another oil and natural gas producer in the U.S., had a third-quarter average sales price of $3.62 -- only 8.6% lower than the average quarterly market price.
The recent earnings report showed that Chesapeake's adjusted net income reached 38 cents per share, 5 cents higher than the consensus among analysts. This higher-than-expected figure was driven by a slightly better-than-expected gain in production -- the company's output reached 66.8 million barrels of oil equivalent due to higher yield in natural gas liquids.
One of the reasons for the disparity in realized prices is Chesapeake's hedging scheme to protect against a potential fall in natural gas prices, which includes a three-way collar. Under this type of hedge, the company set a ceiling and a floor price. This means Chesapeake didn't cash in on the high price of natural gas for a sizable portion of its production.