Chesapeake Energy Corp. has shifted its focus to shale oil operations in Texas and Wyoming, and it planned to curb spending on natural gas production that the company has used to help fund drilling for the higher-margin crude.

"The focus of the company is obviously to drive where we can capture the greatest returns," Domenic Dell'Osso, executive vice president and CFO, said during a second-quarter earnings call Aug. 6. "We are very fortunate to have extremely strong gas assets, which we have a lot of confidence in."

But Dell'Osso added that in 2020, "the bulk of the capital, as [with] this year, will be directed towards all the oil growth" instead of gas assets. The company predicted double-digit percentage growth in 2020 oil volumes coupled with a double-digit decrease in gas production with "an approximately flat capital program to 2019."

Analysts appreciated the news, even if it did not reverse a decline in Chesapeake stock, which has fallen more than 60% over the past year. Chesapeake's shares traded down more than 11% to $1.38 in early afternoon trading Aug. 6.

The falling share price was part of a sectorwide drubbing in natural gas producers' stocks as low natural gas prices put pressure on companies to cut future production growth and conserve cash. For Chesapeake, that effort includes plans to drop to zero drilling rigs in the Haynesville Shale in Louisiana and to keep drilling the Marcellus Shale play in the Northeast but at relatively flat volumes.

"We feel really good about the pretty obvious economic decision to pull back capital [from] the Haynesville in a time when gas prices are obviously extremely weak," Dell'Osso said.

The Oklahoma-based producer described its Marcellus footprint as a "foundational asset," where low break-even costs of about $1.50/Mcf to $1.75/Mcf continue to incentivize production despite some takeaway constraints in the Northeast.

"The Marcellus is capable of a tremendous amount more volume from us, and we just worry that if we overrun the in-basin markets, we would see prices collapse in a hurry," said Robert Douglas Lawler, president, CEO and director of Chesapeake. "So we just try to balance what that demand looks like with the supply that we deliver."

Chesapeake reported production that beat Wall Street forecasts, and it spent less than expected. The company reported average production of 496,000 barrels of oil equivalent per day in the second quarter and spending of $559 million.

The company also posted a slight miss on earnings. Chesapeake reported an adjusted loss attributable to the company of $158.0 million, or a loss of 10 cents per share, for the second quarter, compared to a loss of $118.0 million, or a loss of 13 cents per share, in the second quarter a year ago. The S&P Global Market Intelligence consensus normalized earnings estimate for the second quarter of 2019 was a loss of 7 cents per share.

Analysts at Tudor Pickering Holt & Co. praised the second-quarter results and 2020 commentary. "Early thoughts on 2020 envision a continued shift away from gas basins in favor of oil basins, a continuation of management's strategy to pursue liquids growth to enhance margins," the analysts said in an Aug. 6 note to clients.

Chesapeake, which has been haunted by a free-spending past, has targeted delivering free cash flow that would initially be used to reduce long-term debt and move its net debt-to-EBITDA multiple, currently at 3.2x, to 2x. Executives said Chesapeake will pursue the leverage target, which is the company's top priority, as rapidly as possible through a combination of EBITDA growth and potential asset sales. Executives pointed to small amounts of acreage in northeastern Pennsylvania and in its newly acquired Brazos Valley play in South Texas as possible divestments, depending on market conditions.

But for the sustainable free cash flow growth the company is targeting, "that's all going to be driven by the oil investments," Dell'Osso said.