Chesapeake Energy Corp., which has dropped rigs and deferred most of its dry natural gas drilling for the year, said Wednesday that stronger-than-anticipated output from the Marcellus Shale should lift output higher in 2013 than it was two years ago.

Natural gas production from January through March totaled 273 Bcf, up from 271 Bcf in the year-ago period but down from 280 in 4Q2012. For the year, natural gas output now is forecast to be higher than previously forecast at 1,060-1,090 Bcf, which is lower than 2012’s 1,129 Bcf but higher than in 2011, when gas production was 1,004 Bcf.

The 2013 midpoint guidance is 25 Bcf higher “primarily due to strong well results in the Marcellus Shale play,” acting CEO Steven Dixon told analysts during a conference call. said. “Natural gas markets have improved materially in last few months,” which provide “two important things: improved profitably and made our gassy assets more attractive to buyers.” Most of the gas production continues to be deferred, until the output can “competitively compete” with liquids.

Chesapeake still has a lot of work to do to repair its balance sheet, which was damaged by a buying spree in the gas-rich unconventional basins coupled with sustained low gas prices over the past two years. The company plans to sell another $4-7 billion properties this year, a target that should easily be met, Dixon said. Already this year the company has closed or signed about $2 billion of transactions. Several other transactions are in “advanced stages of negotiation.”

Chesapeake reversed losses from a year ago, with net profit of $15 million (2 cents/share) in 1Q2013 versus a loss of $71 million (minus 11 cents). In the latest quarter, the operator lost $94 million on hedging bets and $83 million on expenses partly related to former CEO Aubrey McClendon’s retirement April 1. Adjusting for the one-time items, earnings were $183 million (30 cents/share), which was 95% higher than in the year-ago period.

Operating cash flow jumped 29% year/year to $1.18 billion, and revenue was $1 billion more at $3.42 billion ($9.56/Mcfe) from $2.42 billion ($7.27). Operating expenses fell in the latest period by about $800 million $3.21 billion from $2.41 billion. Upstream spending also declined, down 56% to $1.51 billion.

On average, Chesapeake was running 83 rigs from January through March. During the period it also invested about $1.5 billion in drilling and completion costs, a run rate consistent with the $6 billion midpoint of the full-year 2013 guidance.

“We plan to devote more than 80% of our total capital expenditures [capex] to drilling and completion activities in 2013 as compared to an average of approximately 50% over the last three years,” said CFO Nick Del’Osso. “Going forward, we expect this capex trend to continue to improve as we capitalize on our past investments in leasehold, oilfield services and other assets to deliver meaningful improvements in returns on capital.”

Production expenses averaged 86 cents/Mcfe, which was 18% lower year/year.

“We have achieved good progress in controlling costs and generating efficiency gains,” noted the CFO. “We now project that production expenses will range from 85 cents to 90 cents/Mcfe for the year, down 5 cents versus prior guidance.” Decreases overall amount to a nearly $100 million improvement to the projected operating cash flow this year.

The increase in liquids drilling over the past year was evident. Total production in 1Q2013 averaged 4.0 Bcfe/d, 9% higher year/year and 1% more than in the fourth quarter. About 76% of the output now is natural gas-weighted, but its measure of total output has fallen from 81% year/year and from 77% in the final period of 2012.

“Our liquids mix as a percentage of total production was 24% during the 2013 first quarter, up from 19% in the 2012 first quarter,” Dixon noted. “Our average daily oil production increased more than 6% sequentially and 56% year/year, and our average daily NGL production increased 8% sequentially and 14% year/year. These increases were driven primarily by strong contributions from the Eagle Ford Shale and Greater Anadarko Basin plays.”

Liquids production totaled 157,000 b/d in 1Q2013, comprised of 103,000 bbl of oil and 54,000 bbl of NGL. This year oil production is expected to approach 1 million bbl, higher than forecast last year, “largely as a result of improving performance in the Eagle Ford Shale, where we are drilling longer laterals, achieving better-than-expected well performance and encountering improved gathering system pressures along with fewer gas processing constraints,” said Dixon. NGL guidance, however, has been reduced by 1 million bbl on “infrastructure delays and a shift in our drilling activity toward more oily plays.”

The transition since McClendon relinquished the helm has been “smooth and effective,” Dixon told investors. Dixon, who was COO, is sharing management responsibilities with Chairman Archie Dunham and Del’Osso until a new CEO is named. No update was provided on the search, but Chesapeake previously had said it expected to name a new chief in the second quarter.

“We are beginning to see the benefits of our operational strategy shift from identifying and capturing new assets to developing our extensive existing assets and entering a new era of shareholder value realization,” said Dixon. “Our operational focus on the ‘core of the core’ is enabling our drilling program to increasingly target the best reservoir rock in each of our key plays. We are capitalizing on pad drilling efficiencies wherever possible and leveraging our substantial investments in roads, well pads, gathering lines, and compression and processing facilities. As a result, we are generating more efficient production growth, stronger cash flow and better returns on capital.

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