Robert Douglas ("Doug") Lawler has the distinction of being the second CEO in the 25-year history of Chesapeake Energy Corp. (NYSE: CHK), a revolutionary unconventional E&P company with an enterprise value of $30 billion, and the second-largest producer of natural gas in the U.S. behind ExxonMobil Corp. (NYSE: XOM) The Oklahoma City-based company holds enormous acreage positions in most of the U.S.’ premiere onshore tight resource plays, amassed over the past decade through aggressive land grabs as the shale revolution unfolded.

But the company became mired in heavy debt with an out-of-control capital expenditure program some characterized as reckless as gas prices plummeted and drilling obligations to hold acreage forced ahead activity. Looking for change, Chesapeake’s board last June tapped Lawler, a 25-year industry veteran executive with Anadarko Petroleum Corp. (NYSE: APC), to right the company’s teetering financial ship.

“Chesapeake has always been a company that has sparked a lot of interest from the outside because of its ability to move quickly into high-quality basins,” says Lawler. “As the company was going through difficulties, I knew it had a strong asset base and that it was no accident Chesapeake had the growth rate it did. It’s a testament to the quality of the employees and, while initially a challenge, I saw this as a significant opportunity, if reset and redirected, to create sustained value for shareholders, employees and other stakeholders.”

Lawler graduated from the Colorado School of Mines in 1988 with a degree in petroleum engineering and immediately went to work at Kerr-McGee Corp. He was at Kerr-McGee until 2006 when the company was acquired by Anadarko. With an MBA from Rice University in Houston added to his sheath, Lawler worked his way through the ranks at Anadarko, including overseeing the company’s U.S. onshore shale operations at one point. He was intimately familiar with Chesapeake’s Eagle Ford and Marcellus shale positions while at Anadarko, as the two companies would occasionally partner or share lease lines in these two plays.

“I spent a significant amount of my time at Anadarko working the shale plays. That experience gave me a deep understanding of, and appreciation for, Chesapeake’s quality assets.”

In 2013, Chesapeake reduced its annual capex to $6.9 billion, down from $13.4 billion in 2012, and Lawler instilled a new philosophy of value creation through financial discipline and strategic capital allocation based on prescribed performance metrics geared toward increasing value.

In 2014, Chesapeake plans to further reduce capex to between $5.2 billion-$5.6 billion, a 60% reduction from 2012, while still forecasting production growth of 8%-10%, adjusted for asset sales. Eighty percent will be directed into drilling, versus only 50% previously.

More than a third of its budget will be aimed at the Eagle Ford shale, with up to 18 rigs deployed there, 95% of which will be on multi-well pads, and another 20% to the Midcontinent region, including the Mississippi Lime, Cleveland, Tonkawa, Colony and Granite Wash plays with 17 rigs. The gassier Utica, Haynesville and northern Marcellus shales together account for another third of its capex, while rig count is reduced in the Powder River, southern Marcellus and Barnett regions.

Investor: What is your vision for the company?

Lawler: Last year was a period of significant change and transformation at Chesapeake. We remain intensely focused on aligning our high-quality assets, talented employees and a value-driven strategy to become a top-performing oil and gas company. The resources and elements are in place at Chesapeake to achieve top-quartile performance. After an exhaustive assessment, I knew we had the ability to drive competitive returns and improve our financial position.

Investor: How do you intend to implement that strategy?

Lawler: Two fundamental tenets comprise our strategy. The first is financial discipline. The company historically used significant leverage to fund operations. Frankly, the high-leveraged, commodity price-dependent model used in the past was not sustainable. Going forward, we have adopted a disciplined approach when it comes to allocating our capital. We will be a low-cost operator and we will seek opportunities to further improve our cost structure. In addition, we have several new, ongoing cost-saving initiatives around supply chain management that will enable us at Chesapeake to capture the greater purchasing power of the whole company. Chesapeake will no longer be a price taker.

We must also materially improve our balance sheet and reduce the financial complexity to ensure we are not dependent on commodity prices. Our balance sheet historically had a lot of noise because it was so complex. As such, over the past four years, because of the leveraged position of the company, we were very vulnerable to commodity prices. We are driving toward becoming a company that is financially strong and flexible enough in our operations and our capital program such that we’re not dependent on oil and gas prices.

The second tenet is profitable and efficient growth from our captured resources. We must invest in our best projects, not just the next project. Our competitive capital allocation system and post-appraisal process will ensure that the best projects are being funded. We are basing our capital and investment decisions on a set of rigorous and sound analytics to drive value. In other words, we are shifting from capturing and holding land to creating the greatest value for our shareholders through our capital and investment program.

That said, we are indeed a growth company, not a harvest company. We will continue to actively search for new opportunities in new plays. Those potential opportunities will be governed by the same two strategic tenets.

Investor: Can you explain your value-based concept versus the activity-based concept?

Lawler: The large leasehold position of the company drove a capital program that was primarily designed to retain acreage. As you can imagine, when the company had 175 rigs running, the pace was so fast that good post-appraisal work to make better operational decisions was virtually impossible. Capturing the greatest amount of value, either from efficiency gains or high-grading the program, was severely constrained. The company made investment decisions based on not losing acreage.

We’ve slowed our drilling pace and reduced our capital program significantly. Instead of the next opportunity always being a game of addition, it’s now substitution. Projects must compete for funding. We won’t spend beyond our ability to generate cash and value. We will improve our profitability and continue to high-grade our investments.

Investor: Was the land grab phase and HBP drilling necessary cash burns to get the company into this position? Would you have done that any differently?

Lawler: It ties back to the strategy of financial discipline. Because of the outstanding work of the geoscientists at Chesapeake and the speed at which the company could move, it enabled the company to capture a large leasehold in the best shale basins. The pace that we enter into a new play, and the leverage that we will take on, has to be at a measured and prudent level such that our financial position doesn’t put the company at risk or jeopardize our future.

Investor: Describe how the new capital allocation process differs from the company’s previous practice.

Lawler: We’ve significantly changed the funding process for projects within the company. Projects compete for capital based on returns and strategic metrics that will drive top-quartile performance versus our peers. So, instead of funding a program to preserve leasehold, our investments must be competitive, both internally and externally.

It’s a very interesting phenomenon when you lay down rigs and reduce activity in an area. It drives the competitive spirit of the teams, and that’s when the greatest innovation, use of technology and operational synergies happen. At that time, asset teams will search for ways to improve their costs and economics, and it results in a better outcome for the company and our shareholders.

So in certain areas we’ll decrease the rig count based on the competitiveness of the investments. As the teams improve the economic performance and look for ways to drive greater value, we’ll then bring rigs back as necessary to drive the highest value for the company. It’s a dynamic process. Reducing activity in an area doesn’t imply that we’re condemning the acreage; rather, it underscores the need to improve returns and better perform.

Investor: How do you plan to simplify the balance sheet?

Lawler: The company has used a significant number of financial instruments in the past to fund the capital program. Some of the leverage the company utilized had production volume or well commitments, and often those commitments drove activity levels that were not necessarily the most efficient investments. Reducing activity commitments, contractual obligations and overall leverage are an integral part of improving, simplifying and strengthening our balance sheet. Improved cash flow from operations and further noncore asset dispositions are necessary to continuously strengthen our financial position.

Investor: How do you unwind those contracts?

Lawler: Some contracts have specific term obligations that will expire in time. Other financial liabilities can be offset through improved capital efficiency and improved well performance. We are evaluating our contractual obligations and determining how we can improve our economics. Where possible, we will work with counter-parties to align the contracts with our strategy.

Investor: How did you do deliver 150% cash flow growth in 2013 while cutting capex by half?

Lawler: We are focusing on higher-quality investments, reducing our capital spending and dramatically decreasing our cash costs. We are also making significant reductions in the land acquisition budget and reductions in other nonproduction-adding activities, such as our oilfield services unit. (Chesapeake has since announced it is exploring strategic alternatives for its OFS unit.) We continue to reduce the rig count to a level that enables us to keep the cash-on-cash cycle tighter and reduce our inventory of wells drilled but not yet producing.

I’m a major proponent of trying to shorten the cash cycle time—the time from our first investment to first production. In the past at Chesapeake, the focus of the large drilling program was on lease retention in areas with minimal infrastructure, resulting in the cash-cycle period often exceeding one year, significantly longer than the competitive average of our peers.

Investor: What do you plan to do to improve efficiencies?

Lawler: Because of our large acreage position and associated expiration terms, the company had to drill a significant number of wells to avoid losing the acreage. We know now, from that high activity level, where the higher-quality core acreage is located. We also know that through improved capital efficiencies and cost reductions, that we can expand the high-quality core acreage. Multi-well pad drilling, supply-chain management and the implementation of performance optimization initiatives will drive the improved efficiencies. We are seeing the early gains of these initiatives in every one of our major plays.

In the past few years, the company drilled less than 25% of its wells from multi-well pads. In 2014 we will drill more than 80% of our wells from multi-well pads. This focus will reduce rig move time and improve operational efficiencies. And it helps with recoveries, because we can now test longer laterals, frac spacing and different completion techniques that can help boost the recovery on a per-well basis in a particular geographic area.

We are just getting started on the efficiency curve that the rest of industry has climbed in the past five years. To retain our leasehold, we haven’t been able to climb the efficiency curve yet. But consistent with Chesapeake's culture of speed, we will climb the efficiency curve quickly.

Investor: Are you giving up holding quality acreage with the decision to focus on pad drilling?

Lawler: No. Not at all. We will not allow high-quality acreage to expire. Lower-tier acreage that offers lower returns will be evaluated with the other unfunded opportunities in our portfolio, which may result in releasing the acreage or a divestiture.

Investor: Should we expect Chesapeake to live within cash flow going forward?

Lawler: We have set the target to balance our operating cash flow with our drilling capital program, but it’s not an absolute hard line. We want to curb our spending so we’re consistently investing in the very best projects that provide the highest strategic growth metrics for our shareholders. At times we may invest a little more than our cash flow; at other times, less.

The focus is on how we can drive the greatest value, while not being dependent upon commodity prices, and not taking on additional leverage or being dependent upon selling assets to fund a capital program.

Investor: How do you rank the plays in your portfolio as to how they may receive capital?

Lawler: The oil plays remain our primary focus. We will continue to direct the largest percentage of our capital into our excellent acreage position in the Eagle Ford. The Oklahoma Midcontinent asset will also be a focus area for oil production. We are also excited about our Utica acreage, where we have strong NGL [natural gas liquids] growth potential.

We also have more modest, ongoing capital programs in a few of our high-quality gas assets, including the Marcellus, Haynesville and the Utica dry gas window.

Investor: What about the Eagle Ford commands an immediate ramp in activity?

Lawler: The economics are outstanding and we see significant upside. Obviously, the prices and margins from the oil investments are attractive to us. And as we shift almost exclusively to multi-pad drilling, we’re already seeing significant reductions in our capital costs due to the synergies of multi-well pads and supply chain cost improvements.

Also, we’re testing various methods to optimize EURs [estimated ultimate recoveries] and IPs [initial production rates], as well as downspacing. We’re focused on the levers that lead to cost reductions and greater EURs. As we improve efficiencies, our profitability is only going to increase from the Eagle Ford.

Investor: The company has drilled forward in the Utica in spite of infrastructure constraints, with approximately 200 wells waiting on completion. What’s your strategy in the Utica going forward?

Lawler: We really like the Utica. It’s going to be an outstanding growth asset. We just drilled our first two-mile lateral well, and we’ve drilled two sub-eight-day wells. Chesapeake has drilled more wells and has more data in the Utica than any of our competitors. We’re doing things in the Utica that no other operator can, and we’re realizing major efficiency gains.

However, we’re not going to park capital in the ground. We will monitor and gauge our investment activity to ensure that we reduce cash cycle times and don’t erode value. We anticipate doubling takeaway capacity by the end of the year and, accordingly, you will see a significant production increase from our Utica acreage.

Investor: Last summer Chesapeake had as many as 10 rigs in the Powder River Basin, but is dropping to three in 2014. Can it be competitive in your portfolio?

Lawler: It absolutely can. The combination of reducing our well costs and optimizing cycle time with the build-out of infrastructure will be key to our investment pace. I personally really like the Powder River Basin. I think there’s a significant amount of opportunity, and I see it as another potential growth play for the company.

Investor: Why are you ramping up capex in the Haynesville shale when natural gas prices are still relatively low?

Lawler: Our Haynesville acreage is outstanding. The rock quality and the well deliverability are excellent. We’re often asked, “At what gas price is the Haynesville economic and at what price would you add more rigs?” If you have the best rock, the opportunity to reduce well costs can be the equivalent of a higher gas price. The economics can be substantially improved with lower costs. When you can crush $1-$2 million out of your well cost—which we are in the process of doing—the economic impact is huge. A $1 million reduction in well cost has the economic equivalent of about $1 per Mcf [thousand cubic feet] gain in gas price. We cannot control gas prices, but we can control are our well costs—and we are doing just that.

We’ve already recognized significant cost savings from multi-pad drilling in the Haynesville. Our investment program this year is expected to deliver 100% rate of return, and we expect further cost efficiencies of 20% to 25%. Our focus in the Haynesville is surgical and precise. We see significant opportunity in the Haynesville to reduce our cost structure and make the investments more competitive.

Investor: What is the future of dry gas plays in Chesapeake’s portfolio?

Lawler: The dry gas plays will continue to play a key role. We have some of the best dry gas rock in the country. We’re focused now on how to drive down costs to make those investments more competitive. While we can’t control commodity prices, we have to be efficient and competitive with our investments regardless of commodity prices to provide differential value to our investors.

Investor: Do you plan to divest your dry gas assets, or hold on to them for the potential future upside that could be created by anticipated demand drivers such as LNG export or increased gas-fired power generation?

Lawler: The gas-lever option we have is significant. The Haynesville, Marcellus and Utica give us great optionality with improved costs to take advantage of greater price support. We have a significant drilling inventory in these premier areas that can be adjusted accordingly if the market changes.

I do not envision Chesapeake reducing the portfolio flexibility that we enjoy today. We have outstanding oil, liquids and gas options. We will maintain our high-quality gas assets in our portfolio and pursue the most competitive, capital-efficient value opportunities for our shareholders. We will seek the best marketing options, with particular interest in LNG exports.

Investor: Chesapeake entered another two joint-venture partnerships last year, a model it pioneered in the shale plays. Do you anticipate continuing that practice?

Lawler: We could potentially enter more JVs. We’re not focused on trying to execute any particular JV right now or in the near term, but new JVs can be capital and tax efficient and also accelerate value.

Investor: Chesapeake has been known as an aggressive first-mover into emerging plays. Are those days over, or will exploration still be a part of your plan?

Lawler: Exploration and subsurface technology will play an important role in our future. Chesapeake is a growth company, not a harvest organization. We will be opportunistic where our analysis meets our investment strategy for return. There is no doubt we will play a significant role in the U.S. energy industry for decades to come.

The energy and talent of the Chesapeake employees is amazing, and the speed at which they can move is outstanding. The skill sets that have been employed to capture these great plays are still within the company, and we’ll continue to have an active exploration program. When we find those opportunities, we will evaluate them within the context of the two strategic tenets I mentioned earlier, and we will act accordingly.

Investor: What challenges do you see that remain?

Lawler: We have a number of challenges. We have a clear line of sight on improving capital efficiencies and our cash costs, and we must continue to high-grade and evaluate our portfolio. We must also move deliberately to de-lever and improve our balance sheet.

Investor: The company has sold $5 billion in assets since the beginning of 2013. Do you need more divestitures to meet capex needs?

Lawler: Absolutely not. We are in a position now where asset sales will be driven solely on value, not on financial necessity or to fund capex needs. We no longer need to divest assets to survive or fund our drilling programs.

Investor: Chesapeake’s stock price gained about 60% over last year. Why would Chesapeake be a good long-term investment opportunity at this point in time?

Lawler: We must constantly demonstrate we can competitively execute our strategies based on rigorous top-quartile performance metrics. Let me point to two high-quality attributes of this great company that give me tremendous confidence in the future. First, it’s the quality of the rock we have in our portfolio and second is the quality of the people. We’ve gone through a significant transformation, and we have a lot of work yet to do, but the best days for Chesapeake are indeed ahead of us. 2014 is going to be an important and exciting year for Chesapeake as we improve our profitability and financial strength. We have laid the foundation and now the company is poised to make real progress this year on our goal of becoming one of the best performing exploration and production companies in the country.