The costly and complex decision to shift from being one of the biggest natural gas producers to becoming one of the largest liquids operators showed some positives for Chesapeake Energy Corp. in the first three months of this year, which also gained on improving natural gas prices.

First quarter net production rose 9% year/year and 1% sequentially to 4 Bcfe/d. The liquids production mix was 24% of total output, versus 19% a year ago. The company also reversed year-ago earnings losses.

“We’re beginning to see the benefits of our operational strategy shift from identifying and capturing new assets to developing our extensive existing assets as we enter a new era of shareholder value realization,” acting CEO Steve Dixon told analysts during a conference call Wednesday. “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’re 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.”

As a result of better than expected performance in the Eagle Ford and Greater Anadarko Basin, Chesapeake has increased 2013 oil production guidance by 1 million bbl to a new range of 37 million to 39 million bbl, said CFO Nick Del’Osso. This year’s NGL production guidance was cut by 1 million bbl to between 23 million and 25 million.

Surprisingly stronger-than-anticipated gas output from the Marcellus also should lift output higher than it was two years ago. 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, gas output now is forecast to be 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,” Dixon told analysts. “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.

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 remains 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.”

The higher oil production guidance this year begins and ends with the Eagle Ford Shale. For natural gas, it’s all about the Marcellus.

In the first three months Chesapeake drilled 91 wells in the Eagle Ford and brought online 111 wells at average peak rates of 950 boe/d, said Executive Vice President of Production Jeff Fisher. “As infrastructure continues to develop, we remain on plan to reduce excess well inventory by drilling a total of 300 wells, while bringing online approximately 400 wells to sales by year-end.” Production in 1Q2013 averaged 61,600 b/d, a whopping 251% higher year/year and a 21% sequential increase from the final period of 2012. The company now is targeting a year-end exit rate of 71,000 b/d of liquids, with a total exit rate of 92,000 boe/d.

“On average, Eagle Ford’s spud-to-spud cycle time during the first quarter was 18 days, down 28% year/year,” said Fisher. “We executed 30% more hydraulic fracture stages versus the prior quarter and we continue to make progress in our completion practices…We are targeting an average spread-to-spread cycle time of approximately 30 days in full-pad development mode and an average completed well cost of $6.5 million for a 6,300-foot lateral.”

In the Marcellus, where Chesapeake owns more than one million net acres, the company hit a “milestone” of more than 2 Bcfe/d in 1Q2013, Fisher told analysts.

“As gas prices have recovered nicely from year-ago levels, we are benefiting greatly from strong growth and returns in both the northern dry and the southern wet gas portion of the play,” said Fisher. “Natural gas production in the first quarter was up an impressive 58% year/year and 9% sequentially versus the fourth quarter…Extending from our position is west into northern Wyoming [county] and southern Bradford County, the most prolific portion of our acreage position, is yielding amazing performance.”

Recent wells in the Marcellus “are flowing at restricted rates in excess of 12 MMcf/d. Based on results of over 150 producing wells in this area, we are currently estimating per-well recoveries of over 10 Bcf. We own approximately 100,000 net acres and have over 1,000 remaining develop of locations to drill in this core of the crop.”

In the Utica Shale, Chesapeake at the end of March had drilled 249 wells, with 66 completed and turned to sales. Production remains flat from earlier this year as new processing infrastructure has not yet come online, said Fisher. “We now expect the next step change in our Utica production will occur closer to mid-year, and we are maintaining our year-end exist rate target of 330 MMcfe/d net.”

Five plays are being targeted in the Greater Anadarko Basin: the Mississippian Lime, Cleveland, Tonkawa, Granite Wash and Hogshooter. At the end of March, 28 Chesapeake rigs were running in the basin with combined net output of 114,000 boe/d, which is 9% higher than in the last three months of 2012. “This was in spite of some fairly substantial winter weather-related downtime during the quarter that impacted our production by nearly 5,000 boe/d,” said Fisher.

Chesapeake still has a lot of work to do to repair its balance sheet, and it 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.” On Wednesday the company agreed to sell some Mississippian Lime acreage to SemGroup (see related story).

On average, Chesapeake ran 83 rigs from January through March. Production expenses averaged 86 cents/Mcfe, 18% lower year/year.

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 departure. 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.

Although there was no mention of McClendon, Dixon said the transition has been “smooth and effective.” Shareholders, he said, will see a “very different” strategy “from our past. This is a very important development for our company…This strategy transition is a natural evolution design to capitalize on the durable competitive advantages created by Chesapeake during the unconventional resource revolution of the past decade.”