We maintain our Neutral stance on the second largest natural gas producer in the U.S. Chesapeake Energy Corporation ( CHK - Analyst Report ) .

The company’s impressive second-quarter production results as well as its determination to generate higher volumes this year and the next help counter the lower-than-expected second-quarter profit.

Second-quarter production at Chesapeake increased 25% year over year with natural gas comprising 79% of the total volume. The company also boosted its 2013 production guidance while lowering the capex expectation, implying better efficiency. While drilling capex is estimated to be down year over year in 2013, Chesapeake boosted its 2013 production guidance by 7%, expecting strong performance in liquid plays.

The company also increased this year’s production guidance by 8% with most of the increase attributed to better operational results. It is also targeting retirement of the $4 billion term loan the company received in May by year end.

Again, given the downtrend in natural gas prices, it plans to deploy the majority of its capital budget to drill liquids-rich plays this year. The spending will be primarily targeted toward Eagle Ford Shale, Utica Shale, Mississippi Lime, Granite Wash, Cleveland, Tonkawa, Niobrara, Bone Spring, Avalon, Wolfcamp and Wolfberry. Although Chesapeake lowered its 2013 spending level by $750 million, it increased 2012 exploration and production capex by $500 million.

Importantly, Chesapeake is on track with its plan of reducing its long-term debt through monetizing its assets. The debt burden emanated mainly from the persistently low natural gas prices. During the first half of 2012, the company received $4.7 billion from asset sales and expects its third quarter to end with $7 billion worth of asset divestitures. It also raised this year’s proceeds expectations from $11.5–$14.0 billion to $13.0–$14.0 billion and anticipates an additional $4 billion to $5 billion from asset sales in 2013.

The efforts notwithstanding, we remain concerned of the company’s second-quarter earnings miss that came in the wake of a 64% decline in average natural gas price realizations.

Natural gas accounted for about 79% of Chesapeake’s second quarter production. Hence, the company’s outcomes are particularly vulnerable to fluctuations in the natural gas market. The company has been in the news in recent times as it is struggling to fund its capital budget amid diminishing cash flows in a weak natural gas price scenario.

Despite the success of Chesapeake’s asset monetization efforts, the company’s balance sheet is still more leveraged than its peers. At the end of the second quarter, outstanding debt stood at $14.3 billion, representing a debt-to-capitalization ratio of 42.0%.

Considering the pros and cons, we see the Chesapeake stock performing in line with its peers like Southwestern Energy Company ( SWN - Analyst Report ) . The stock retains a Zacks #3 Rank (short-term Hold rating).