Breakthrough in Commodity Hedging

As male-dominated industries go, oil and gas production has to be near the top. That hasn't stopped Jennifer Grigsby from becoming a veteran in the sector and putting her mark on important finance functions at Oklahoma City-based Chesapeake Energy Corp.

As treasurer since 2007 at Chesapeake, which had $9.37 billion in 2010 revenue, Grigsby, who is also senior vice president and corporate secretary, has responsibilities that include overseeing cash and risk management, debt compliance and corporate compliance initiatives.

Like many of her finance peers at energy companies, much of Grigsby's time is spent monitoring swings in oil and gas prices and looking for opportunities to hedge the company's future oil and gas production. "We have a very active hedging program," she says. "When we see an opportunity to layer on futures, we lock it in."

That work has become easier to manage thanks to a breakthrough commodity hedging program Grigsby spearheaded in 2009. The new facility grew out of an earlier program in which Chesapeake used its oil and gas interests as collateral for its futures trades, in place of the cash that's typically used.

In the past, Chesapeake's treasury team had separate one-off hedging arrangements with each of the company's 13 counterparties, including six facilities backed by oil and gas collateral, and managing the multiple collateral pools was a real chore. Grigsby came up with the idea of structuring the hedging vehicle to allow multiple counterparties to participate in a single collateral pool, which was far easier for Chesapeake to manage. "We were able to get all counterparties on one level footing," Grigsby notes.

"It's an amazing facility, a first of its kind," she adds. "It's a remarkable risk management tool for us. It allows us to hedge our future production so as to lock in attractive margins, smooth our cash flow and mitigate potential liquidity issue by having a reserve-based program in place that moves in tandem with gas and oil prices."

Last year, Grigsby was also instrumental in negotiating a $4 billion revolving bank credit facility that took advantage of the improving market conditions.

As for Chesapeake, in January it announced a "25/25" plan to grow its oil and natural gas production (mostly oil) by 25% by the end of 2012 while reducing its long-term debt by 25% over the same period.

To fund those objectives, Chesapeake continues to expand its international partnerships and monetize its valuable oil and gas assets. Also in January, the company announced its sixth joint venture, with Chinese oil producer CNOOC; in March it announced the sale of its Fayetteville Shale assets to BHP Billiton for $4.75 billion; and earlier this month it announced a tender offer for up to $2 billion of its outstanding debt.

Grigsby hopes the rating agencies will soon appreciate the balance-sheet enhancing, risk-reducing goals the company is working toward. Certainly, Grigsby's treasury shop looks to be quite busy in the near future.

See the complete coverage of Treasury & Risk's 2011 Women in Finance list here.


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