Chesapeake Energy Corp.'s shares surged Thursday after the company delivered a solid quarterly earnings report and outlines of a new strategy to live within cash flow, ending its longstanding mode of capturing leasehold to focus on developing only the best plays in the portfolio.

When the stock market had closed on Thursday, Chesapeake's shares had gained more than 7% from a day earlier, ending at $24.95. More than 31.6 million shares had traded hands, close to three times more than the daily average.

Newly installed CEO Doug Lawler led the conference call with his management team to elaborate on the new spending strategy. It's no longer about grabbing the biggest position in the biggest plays, the former Anadarko Petroleum Corp. executive told analysts.

Living within cash flow now is be the name of the game, something that hasn't been done since 2001. The CEO poured on the sugar before the salt.

"Chesapeake has an exceptionally broad and deep asset base, which offers tremendous opportunity for value creation," said Lawler, who took over in June. However, he said the company has to develop what's on the shelf instead of continuing to bolt-on new projects.

"A comprehensive company-wide review of our capital allocation and other processes is under way," Lawler said, "and I believe these initiatives will result in substantial further improvement in both near-term and long-term capital efficiency and returns."

The efficiency initiatives already are coming in view, as Chesapeake drops rigs through the rest of the year. The operator ran on average 76 rigs in 2Q2013, seven less than in the previous quarter, and it invested about $1.6 billion in drilling and completion costs.

However, Chesapeake spud a total of 312 wells and completed 410 wells in the latest period, up from 294 wells spud and 352 wells completed in 1Q2013.

In the second half of this year 64 rigs on average are planned, well below 81 rigs average in the first half.

Chesapeake also plans to drill about 20% fewer wells in the last half of the year versus the first six months. Based on the planned activity levels, the 2013 full-year guidance for D&C costs from $5.75-6.25 billion to $5.7-6.0 billion.

Guidance for 2014 will come later this year, but more asset sales could be part of the plan to reduce debt, Lawler told analysts. This year Chesapeake already has sold or agreed to divest close to $3.6 billion in natural gas and oil leaseholds, pipelines and real estate, after selling close to $11 billion in property last year.

Total natural gas and oil production in the latest quarter increased 7% year/year to 4.1 Bcfe/d, and it was 2% higher than in 1Q2013. Average daily production consisted of 3.1 Bcf of natural gas and 168,000 bbl of liquids, comprised of 116,000 bbl of oil and 52,000 bbl of natural gas liquids (NGL).

The turn to oil from its natural gas portfolio paid off, with oily production increasing 44% and up 12% sequentially, leading Chesapeake to lift guidance by 22-28% higher from 2012 by 1 million bbl to a range of 38 million to 40 million bbl.

Liquids accounted for 25% of total production in the quarter, up from 21% in 2Q2012, but it's still well below Chesapeake's gas-weighted output. Average NGL output was up 5% from a year ago but it was down 4% from the first three months of this year, primarily on "increased ethane rejection," said COO Steve Dixon.

Chesapeake has reduced its 2013 NGL guidance by 2 million bbl to 21-23 million bbl, reflecting the continuing pressure on ethane, "as well as anticipated delays associated with third-party gathering, compression and processing in the Utica Shale," Dixon said.

Net earnings in 2Q2013 came in at $580 million (66 cents/share), down from $972 million ($1.29) in the year-ago period. Excluding one-time gains/losses, profits per share were 10 cents higher than average Wall Street expectations. Operating cash flow climbed 53% from 2Q2012 to $1.37 billion.

Net spending to buy unproved properties totaled $55 million in 2Q2013, which brought spending through June to about $100 million. Going forward, the leasehold expenditures are going to be tracked, and spending for the full year has been cut to $300-350 million from previous guidance of $400 million.

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