Chesapeake Energy Corp.’s announcement it also will slash its domestic dry gas spending by 70% this year and cut in half operated gas drilling activity sent its natural gas prices up and its own share price soaring on Monday.

Chesapeake “immediately” plans to curtail 0.5 Bcf/d, or 8%, of its current operated gross gas output, which is 6.3 Bcf/d — 9% of the nation’s estimated gas production.

“If conditions warrant, the company is prepared to double this production curtailment to as much as 1 Bcf/d,” it said. “In addition, wherever possible, Chesapeake plans to defer completions of dry gas wells that have been drilled but not yet completed, and also plans to defer pipeline connections of dry gas wells that have already been completed.”

The news appeared to cheer investors; the company’s stock jumped by 6.3% to end the day at $22.28/share.

“Bam! Chesapeake throws down the gauntlet on natgas,” said the energy team at Tudor, Pickering, Holt & Co.

Many analysts have been skeptical of Chesapeake’s acquisitive spending in the past couple of years, which has increased debt despite several joint ventures. The news is a positive, said Canaccord Genuity’s energy team.

“This should be seen positively as there is now a high probability that the company achieves its debt target of $9.5 billion at year-end ’12 while previously we were expecting year-end debt of $11-11.5 billion,” said the Canaccord analysts. “Additionally, the company plans to immediately curtail 0.5 Bcf of its operated gross gas production of 6.3 Bcf, which represents 9% of U.S. natural gas production. This is a meaningful constructive step toward beginning to correct the supply imbalance by the second-largest natural gas producer in the U.S.”

In a note to clients BNP Paribas analyst Teri Viswanath noted that to contain the nation’s gas supply growth, “we think that a significant amount of forthcoming production will have to be deferred until 2013, with additional proactive measures implemented during periods of congestion…” Chesapeake is planning to curb output but “in our view, additional production cuts will be necessary this year in order to operate within the defined physical system limits.”

Chesapeake’s dry gas drilling rig count by the second half of this year is to be cut to 24 from 47 rigs now in use, which is down 67% from the average 75 gas rigs used in 2011.

This year’s operated dry gas drilling capital spending, net of drilling carries, now is set at $900 million, which is almost 70% less than the $3.1 billion spent in 2011.

“This anticipated level of dry gas drilling capital expenditures is the company’s lowest since 2005,” Chesapeake noted. “Specifically, during the 2012 second quarter, Chesapeake plans to have reduced its drilling activity in both the Haynesville and Barnett shales to six operated rigs each and to 12 operated rigs in the dry gas area of the Marcellus Shale in northeastern Pennsylvania.”

CEO Aubrey McClendon blamed “an exceptionally mild winter,” which has pressured U.S. gas prices “to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise.

“Having led the industry in natural gas production growth over the past 10 and five years, we recognize the need to demonstrate leadership and take action now in order to protect value for our shareholders.”

The CEO noted that in the past five years his company’s gross operated natural gas production “has increased from approximately 2.1 Bcf/d to 6.3 Bcf/d and accounted for close to 30% of the nation’s total growth in natural gas production.

As a result of its reduced activity and production curtailments in the gassy Haynesville and Barnett shales, Chesapeake is projecting that its combined gross operated gas output in these plays would fall this year.

“Because the Haynesville and Barnett shales have accounted for virtually all of the nation’s approximate 14 Bcf/d of gas production growth during the past five years, lower production in these two plays will likely lead to flat or lower total natural gas production in the U.S. in 2012,” the company stated.

Chesapeake intends to reallocate the capital savings from reduced dry gas drilling, well completion and pipeline connection activities to its liquids-rich onshore plays, which it said “offer superior returns in the current strong liquids price environment.”

As much as 85% of Chesapeake’s total net operated drilling capital spending this year is to be invested in the Eagle Ford and Utica shales, as well as the Mississippi Lime, Granite Wash, Cleveland, Tonkawa, Niobrara, Bone Spring, Avalon, Wolfcamp and Wolfberry formations.

The Oklahoma City-based independent said it also would “further reduce its undeveloped leasehold expenditures, the majority of which have been focused on liquids-rich plays during the past three years.”

About $1.4 billion now is expected to be spent in undeveloped leaseholds this year, net of joint venture partner spending, with about 90% of that amount in liquids-rich plays “and 100% will be in plays where the company is already active.”

In 2011 Chesapeake spent $3.4 billion in undeveloped leaseholds; in 2010 it spent around $5.8 billion.

“We have committed to cut our dry gas drilling to bare minimum levels that are likely to be maintained until expected drilling economics on dry gas plays return to levels competitive with expected returns in Chesapeake’s lineup of liquids-rich plays, which we believe is the best in the industry,” said McClendon.

“As in previous natural gas pricing downturns, Chesapeake is promptly responding to rapidly changing market conditions, and we hope [Monday’s] announcement helps disprove the view held by some industry observers that producers fail to act rationally in times of unusually low natural gas prices.”

Last week Anadarko Petroleum Corp. CEO Jim Hackett said he thought shut-ins were inevitable in light of low domestic gas prices, but Barclays Capital Markets said it wasn’t sure (see Daily GPI, Jan. 20).

McClendon said the company planned to hit a debt reduction target of $9.5 billion by the end of this year. The company also plans to increases its liquids output “to more than 250,000 b/d by 2015, which should represent one of the industry’s best liquids production growth stories during the next four years.”

Meanwhile, McClendon said the company’s natural gas resources “will become increasingly valuable in the years ahead as demand initiatives in the power generation, transportation, industrial and export sectors gain further traction and enable consumers to more completely embrace natural gas as a clean, affordable, abundant, American resource to fuel an increasing portion of their energy futures.”

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