UPDATE 1-Chesapeake Energy cuts deeper into spending plans

(Adds previous cut to capex budget, details, share price)

SAN FRANCISCO, Oct 10 (Reuters) - Leading U.S. natural gas producer Chesapeake Energy Corp (CHK.N: Quote, Profile, Research, Stock Buzz) cut another $1.5 billion from its capital budget for the next two years as part of measures to increase cash as credit dries up.

Chesapeake shares, after dropping 6.7 percent in turbulent regular trading to less than half their level of just a month ago, rose nearly 5 percent to $17.31 in after-hours trading.

The announcement on Friday came just weeks after the company cut its capital expenditure budget for drilling through 2010 by 17 percent, or $3.2 billion, due to a plunge in natural gas prices and concerns about a U.S. market surplus.

Industry executives have been warning that more companies would have to rein in spending, following in the footsteps of Chesapeake, Petrohawk Energy Corp (HK.N: Quote, Profile, Research, Stock Buzz), SandRidge Energy Inc (SD.N: Quote, Profile, Research, Stock Buzz) and PetroQuest Energy Inc (PQ.N: Quote, Profile, Research, Stock Buzz) in the past few weeks.

U.S. natural gas prices are at their lowest level of the year in the cash market NG-W-HH, although this drop has helped improve Chesapeake's price hedging position dramatically since the end of the second quarter.

Chesapeake said its exposure to failed bank Lehman Brothers includes terminated derivatives and estimated the value of the oil and natural gas hedges would exceed the amount the company will get selling or rehedging by no more than $50 million.

In response to tighter credit, Chesapeake also said it used up the rest of its credit facility to ensure it had the money "in these turbulent economic times" and had $1.5 billion in cash and cash equivalents at the end of September.

Through asset sales and lower capex, Chesapeake aims to end 2008 with $2.5 billion to $3 billion of cash and generate excess cash of $1 billion to $1.5 billion in each of the next two years, it said in a statement ahead of its investor meeting in Oklahoma next Wednesday and Thursday.

The number of operated drilling rigs will fall from 145 rigs now, and 157 last month, to between 135 and 140 rigs by the end of 2008, and that would stay steady for two years, it said.

The Oklahoma City-based company plans to use excess cash to pay down debt, which grew to a net $13.7 billion at the end of June, or potentially buy back stock, it added. (Reporting by Braden Reddall; Editing by Andre Grenon)