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Derivative and Hedging Activities (Notes) | 3 Months Ended
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Mar. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative and Hedging Activities Disclosure | 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, when applicable, 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 March 31, 2017 and December 31, 2016, 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.
• | 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 March 31, 2017 and December 31, 2016 are provided below.
|  | March 31, 2017 |  | December 31, 2016
|  | Volume |  | Fair Value |  | Volume |  | Fair Value
|  |  |  | ($ in millions) |  |  |  | ($ in millions)
Oil (mmbbl): |  |  |  |  |  |  |  |
Fixed-price swaps |  | 19 |  |  | $ | (26 | ) |  | 23 |  |  | $ | (140 | )
Call options |  | 4 |  |  | — |  |  | 5 |  |  | (1 | )
Total oil |  | 23 |  |  | (26 | ) |  | 28 |  |  | (141 | )
Natural gas (tbtu): |  |  |  |  |  |  |  |
Fixed-price swaps |  | 622 |  |  | (126 | ) |  | 719 |  |  | (349 | )
Collars |  | 48 |  |  | 3 |  |  | 60 |  |  | (9 | )
Call options |  | 102 |  |  | — |  |  | 114 |  |  | — |
Basis protection swaps |  | 18 |  |  | (2 | ) |  | 31 |  |  | (5 | )
Total natural gas |  | 790 |  |  | (125 | ) |  | 924 |  |  | (363 | )
NGL (mmgal): |  |  |  |  |  |  |  |
Fixed-price swaps |  | 27 |  |  | 1 |  |  | 53 |  |  | — |
Total estimated fair value |  |  |  | $ | (150 | ) |  |  |  | $ | (504 | )
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). Interest Rate Derivatives As of March 31, 2017 and December 31, 2016, there were no interest rate derivatives outstanding. We have terminated fair value hedges related to certain of our senior notes. Gains and losses related to these terminated hedges will be amortized as an adjustment to interest expense over the remaining term of the related senior notes. Over the next four years, we will recognize $3 million in net gains related to these transactions. Foreign Currency Derivatives We were party to cross currency swaps to mitigate our exposure to foreign currency exchange rate fluctuations. During the Current Quarter, both our 6.25% Euro-denominated Senior Notes due 2017 and cross currency swaps for the same principal amount matured. Upon maturity of the notes, t he counterparties paid us €246 million and we paid the counterparties $327 million. The terms of the cross currency swaps were based on the dollar/euro exchange rate on the issuance date of $1.3325 to €1.00. The swaps were designated as cash flow hedges and, because they were entirely effective in having eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates, changes in their fair value did not impact earnings. The fair values of the cross currency swaps were recorded on the condensed consolidated balance sheet as a liability of $73 million as of December 31, 2016. Supply Contract Derivatives From time to time and in the normal course of business, our marketing subsidiary enters into supply contracts under which we commit to deliver a predetermined quantity of natural gas to certain counterparties in an attempt to earn attractive margins. Under certain contracts, we receive a sales price that is based on the price of a product other than natural gas, thereby creating an embedded derivative requiring bifurcation. The bifurcated derivative is measured at fair value on a quarterly basis and in the Prior Quarter resulted in an unrealized gain of $20 million which was included in marketing, gathering and compression revenues in our condensed consolidated statements of operations. Effect of Derivative Instruments – Condensed Consolidated Balance Sheets The following table presents the fair value and location of each classification of derivative instrument included in the condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 on a gross basis and after same-counterparty netting:
Balance Sheet Classification |  | Gross Fair Value |  | Amounts Netted in the Condensed Consolidated Balance Sheets |  | Net Fair Value Presented in the Condensed Consolidated Balance Sheet
|  | ($ in millions)
As of March 31, 2017 |  |  |  |  |  |
Commodity Contracts: |  |  |  |  |  |
Short-term derivative asset |  | $ | 5 |  |  | $ | (4 | ) |  | $ | 1 |
Short-term derivative liability |  | (161 | ) |  | 4 |  |  | (157 | )
Long-term derivative asset |  | 8 |  |  | (1 | ) |  | 7 |
Long-term derivative liability |  | (2 | ) |  | 1 |  |  | (1 | )
Total commodity contracts |  | (150 | ) |  | — |  |  | (150 | )
Total derivatives |  | $ | (150 | ) |  | $ | — |  |  | $ | (150 | )
As of December 31, 2016 |  |  |  |  |  |
Commodity Contracts: |  |  |  |  |  |
Short-term derivative asset |  | $ | 1 |  |  | $ | (1 | ) |  | $ | — |
Short-term derivative liability |  | (490 | ) |  | 1 |  |  | (489 | )
Long-term derivative liability |  | (15 | ) |  | — |  |  | (15 | )
Total commodity contracts |  | (504 | ) |  | — |  |  | (504 | )
Foreign Currency Contracts:(a) |  |  |  |  |  |
Long-term derivative liability |  | (73 | ) |  | — |  |  | (73 | )
Total foreign currency contracts |  | (73 | ) |  | — |  |  | (73 | )
Total derivatives |  | $ | (577 | ) |  | $ | — |  |  | $ | (577 | )
____________________________________________
(a) | Designated as cash flow hedging instruments.
As of March 31, 2017 and December 31, 2016, we did not have any cash collateral balances for these derivatives. Effect of Derivative Instruments – Condensed Consolidated Statements of Operations The components of oil, natural gas and NGL revenues for the Current Quarter and the Prior Quarter are presented below.
|  | Three Months Ended March 31,
|  | 2017 |  | 2016
|  | ($ in millions)
Oil, natural gas and NGL revenues |  | $ | 1,147 |  |  | $ | 812 |
Gains (losses) on undesignated oil, natural gas and NGL derivatives |  | 332 |  |  | 192 |
Losses on terminated cash flow hedges |  | (10 | ) |  | (11 | )
Total oil, natural gas and NGL revenues |  | $ | 1,469 |  |  | $ | 993 |
The components of marketing, gathering and compression revenues for the Current Quarter and the Prior Quarter are presented below.
|  | Three Months Ended March 31,
|  | 2017 |  | 2016
|  | ($ in millions)
Marketing, gathering and compression revenues |  | $ | 1,284 |  |  | $ | 940 |
Gains (losses) on undesignated supply contract derivatives |  | — |  |  | 20 |
Total marketing, gathering and compression revenues |  | $ | 1,284 |  |  | $ | 960 |
The components of interest expense for the Current Quarter and the Prior Quarter are presented below.
|  | Three Months Ended March 31,
|  | 2017 |  | 2016
|  | ($ in millions)
Interest expense on senior notes |  | $ | 136 |  |  | $ | 157 |
Interest expense on term loan |  | 32 |  |  | — |
Amortization of loan discount, issuance costs and other |  | 9 |  |  | 10 |
Amortization of premium associated with troubled debt restructuring |  | (41 | ) |  | (42 | )
Interest expense on revolving credit facilities |  | 9 |  |  | 5 |
(Gains) losses on undesignated interest rate derivatives |  | 1 |  |  | — |
Capitalized interest |  | (51 | ) |  | (68 | )
Total interest expense |  | $ | 95 |  |  | $ | 62 |
Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss) A reconciliation of the changes in accumulated other comprehensive income (loss) in our condensed consolidated statements of stockholders’ equity related to our cash flow hedges is presented below.
|  | Three Months Ended March 31,
|  | 2017 |  | 2016
|  | Before Tax |  | After Tax |  | Before Tax |  | After Tax
|  | ($ in millions)
Balance, as of January 1 |  | $ | (153 | ) |  | $ | (96 | ) |  | $ | (160 | ) |  | $ | (99 | )
Net change in fair value |  | 4 |  |  | 4 |  |  | (7 | ) |  | (4 | )
Losses reclassified to income |  | 10 |  |  | 10 |  |  | 11 |  |  | 4 |
Balance, as of March 31 |  | $ | (139 | ) |  | $ | (82 | ) |  | $ | (156 | ) |  | $ | (99 | )
The accumulated other comprehensive loss, as of March 31, 2017, represents the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the hedged production is still expected to occur. Deferred gain or loss amounts will be recognized in earnings in the month in which the originally forecasted hedged production occurs. As of March 31, 2017, we expect to transfer approximately $20 million of net loss included in accumulated other comprehensive income to net income (loss) during the next 12 months. The remaining amounts will be transferred by December 31, 2022. Credit Risk Considerations Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that are rated investment grade and deemed by management to be competent and competitive market makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of March 31, 2017, our oil, natural gas and NGL derivative instruments were spread among 10 counterparties. Hedging Arrangements Certain of our hedging arrangements are with counterparties that are also lenders (or affiliates of lenders) under our revolving credit facility. The contracts entered into with these counterparties are secured by the same collateral that secures our revolving credit facility, which allows us to reduce any letters of credit posted as security with those counterparties. In addition, with other counterparties we enter into bilateral hedging agreements. The counterparties’ and our obligations 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. Fair Value The fair value of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil, natural gas and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are compared to the values given by our counterparties for reasonableness. Since oil, natural gas, NGL and cross currency swaps do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2. All other derivatives have some level of unobservable input, such as volatility curves, and are therefore classified as Level 3. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives. The following table provides information for financial assets (liabilities) measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:
|  | Quoted Prices in Active Markets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Fair Value
|  |  |  | ($ in millions) |  |
As of March 31, 2017 |  |  |  |  |  |  |  |
Derivative Assets (Liabilities): |  |  |  |  |  |  |  |
Commodity assets |  | $ | — |  |  | $ | 10 |  |  | $ | 3 |  |  | $ | 13 |
Commodity liabilities |  | — |  |  | (163 | ) |  | — |  |  | (163 | )
Total derivatives |  | $ | — |  |  | $ | (153 | ) |  | $ | 3 |  |  | $ | (150 | )
As of December 31, 2016 |  |  |  |  |  |  |  |
Derivative Assets (Liabilities): |  |  |  |  |  |  |  |
Commodity assets |  | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Commodity liabilities |  | — |  |  | (495 | ) |  | (10 | ) |  | (505 | )
Foreign currency liabilities |  | — |  |  | (73 | ) |  | — |  |  | (73 | )
Total derivatives |  | $ | — |  |  | $ | (567 | ) |  | $ | (10 | ) |  | $ | (577 | )
A summary of the changes in the fair values of Chesapeake’s financial assets (liabilities) classified as Level 3 during the Current Quarter and the Prior Quarter is presented below.
|  | Commodity Derivatives |  | Supply Contracts
|  | ($ in millions)
Balance, as of January 1, 2017 |  | $ | (10 | ) |  | $ | — |
Total gains (losses) (realized/unrealized): |  |  |  |
Included in earnings(a) |  | 12 |  |  | — |
Total purchases, issuances, sales and settlements: |  |  |  |
Settlements |  | 1 |  |  | — |
Balance, as of March 31, 2017 |  | $ | 3 |  |  | $ | — |
Balance, as of January 1, 2016 |  | $ | (91 | ) |  | $ | 297 |
Total gains (losses) (realized/unrealized): |  |  |  |
Included in earnings(a) |  | 25 |  |  | 33 |
Total purchases, issuances, sales and settlements: |  |  |  |
Settlements |  | 18 |  |  | (13 | )
Balance, as of March 31, 2016 |  | $ | (48 | ) |  | $ | 317 |
___________________________________________
(a) |  | Oil, Natural Gas and NGL Sales |  | Marketing, Gathering and Compression Revenue
|  | 2017 |  | 2016 |  | 2017 |  | 2016
|  | ($ in millions)
Total gains (losses) included in earnings for the period |  | $ | 12 |  |  | $ | 25 |  |  | $ | — |  |  | $ | 20 |
Change in unrealized gains (losses) related to assets still held at reporting date |  | $ | 5 |  |  | $ | 21 |  |  | $ | — |  |  | $ | 20 |
Qualitative and Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements The significant unobservable inputs for Level 3 derivative contracts include unpublished forward prices of natural gas, market volatility and credit risk of counterparties. Changes in these inputs impact the fair value measurement of our derivative contracts, which is based on an estimate derived from option models. For example, an increase or decrease in the forward prices and volatility of oil and natural gas prices decreases or increases the fair value of oil and natural gas derivatives, and adverse changes to our counterparties’ creditworthiness decreases the fair value of our derivatives. The following table presents quantitative information about Level 3 inputs used in the fair value measurement of our commodity derivative contracts at fair value as of March 31, 2017:
Instrument Type |  | Unobservable Input |  | Range |  | Weighted Average |  | Fair Value March 31, 2017
|  |  |  |  |  |  |  | ($ in millions)
Oil trades |  | Oil price volatility curves |  | 18.22% – 24.10% |  | 22.97% |  | $ | — |
Natural gas trades |  | Natural gas price volatility curves |  | 21.37% – 52.18% |  | 38.10% |  | $ | 3 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 + Details
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