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30 octubre 2006

Chesapeake Energy and the Nature of Risk

Chesapeake is rather unusual in the extent of information it offers to shareholders, including up-to-date reserve information that continues to show strong reserve replacement, but at fast-rising costs.

Chesapeake Energy is both riskier and less risky than the sector to which it belongs. It is risky to be essentially a one-product company (natural gas in this case), but Chesapeake has hedged a substantial part of that risk away -- more than 90% of the next quarter's production is hedged, as well as about two-thirds of '07 and half of '08. Moreover, since Chesapeake owns and operates its own drilling rigs, it's effectively hedged against rising rates from Nabors (NYSE: NBR) and Patterson-UTI (Nasdaq: PTEN) as well.

Moreover, the company is pretty much solely interested in U.S. onshore opportunities. That means no risks of nationalization or expropriation like we've seen at Occidental, no threat of the hurricane damage sustained at Apache's Gulf of Mexico operations, and little need to worry about expensive gas-to-liquid conversion to bring product to market.