Chesapeake Energy (CHKA.Q), the nation's second-largest gas producer, reported solid earnings last week, fueled by robust liquids production growth, continued cost reductions, and higher realized natural gas prices.

Adjusted EBITDA rose 29% year over year to $1.325 billion, while operating cash flow increased 22% year over year to $1.368 billion. Let's take a closer look at three key takeaways from the company's third quarter.

Solid oil production growth and improving commodity mix
While Chesapeake's total production fell 2% year over year, liquids output continues to grow at double-digit rates. During the quarter, oil production soared 23% year over year and 4% sequentially to 120,000 barrels per day, while natural gas liquids production similarly grew by 31% year over year and 12% sequentially.

Chesapeake also continues to make progress in improving its commodity mix, as it increasingly targets liquids-rich formations such as the Eagle Ford shale and the Greater Anadarko Basin. During the quarter, liquids accounted for 27% of total production, up from 21% in the year-earlier quarter and 25% in the second quarter of this year.

Continued expense reductions
Production and overhead costs continue to fall, showcasing CEO Doug Lawler's ability to deliver on earlier promises that Chesapeake would target higher rates of oil production growth while simultaneously decreasing capital intensity.

During the quarter, Chesapeake spent roughly $1.2 billion on drilling and completion activities, about $180 million less than budgeted and $350 million less than in the second quarter of this year. Similarly, average production expenses during the quarter fell 10% year over year, while adjusted general and administrative expenses declined 12% year over year.

Chesapeake's not the only gas producer slashing expenses. Devon Energy (DVN -0.79%), for instance, cut total capital spending to just $5.2 billion in the first nine months of this year, down from $6.2 billion last year. Roughly 90% of its budget is devoted to development activity, mainly in the Permian Basin and the Mississippian-Woodford trend. Encana (OVV -1.22%) is also drastically reducing capital spending and expects to spend just $2.5 billion next year, down from $3.5 billion in 2012 and $4.6 billion in 2011, as it seeks to become a leaner, more focused energy producer.

Improving financial health
Thanks to a combination of asset sales, sharply reduced expenses, and higher liquids production, Chesapeake is also making good progress in reducing its leverage and improving its financial health.

The company closed out the quarter with almost $5.2 billion of liquidity, representing a $430 million improvement compared to the end of the second quarter and an $840 million improvement from year-end 2012. Long-term debt net of cash also improved to $11.7 billion, down from $12.4 billion as of the end of the second quarter.

The takeaway
This was another solid quarter for Chesapeake, even though the market didn't take too kindly to decreased expectations for fourth-quarter oil production. Going forward, I think Chesapeake's biggest challenge will continue to be balancing its asset sales and debt reduction priorities with its goal of delivering strong double-digit production growth -- two conflicting objectives I highlighted earlier this year.

Due to renewed concerns about its liquids growth outlook, I think the stock's near-term upside may be limited, though the recent sell-off could be a good buying opportunity for those with a longer investment horizon. At any rate, I still think Chesapeake's long-term appeal remains strong, especially given its tremendous upside optionality to a recovery in natural gas prices.