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EnCana Suffers Hedging Losses, Hints Gas Plays on Horizon

EnCana Corp. reported a huge jump in 1Q2008 operating profit and cash flow last week, but the company's net earnings sank 81% after it lost a big bet on natural gas prices. North American gas output rose 10% to 3.7 Bcf/d, and U.S. production climbed 27% -- aided by rising volumes from the Deep Bossier trend in East Texas.

The Calgary-based producer reported net income of $93 million (12 cents/share), well below the $497 million (65 cents) reported in 1Q2007. A wrong-way bet on natural gas prices led to unrealized hedging losses of $737 million. EnCana also lost $215 million in the quarter from the rising Canadian dollar on its U.S. debt. Operating profit rose 28% to $1 billion ($1.39/share), and cash flow rose 41% to $2.4 billion ($3.17). The report beat Wall Street's estimate, which forecast operating profit of $1.37/share and cash flow of $2.89. EnCana's 1Q2008 revenue totaled $5.34 billion, well ahead of the $4.43 billion a year earlier.

EnCana "is well on track to achieve its 2008 forecast," said CEO Randy Eresman during a conference call with financial analysts. "Our resource plays continue to deliver excellent performance, driven by our industry-leading positions in plays such as the Deep Bossier formation of East Texas, the emerging Montney formation of Cutbank Ridge in northeast British Columbia [BC] and Jonah in Wyoming."

The company has nearly one million net acres under lease across Canada and the United States, but Eresman hinted that some new resource plays are on the radar.

EnCana's operational teams have "recently achieved some promising exploration results in a number of North American shale plays, such as the Horn River in northeast BC," he said. "We have built sizeable land positions in various emerging shale plays and believe that over time they have the potential to add significant depth to our very strong portfolio of natural gas assets across the North American unconventional fairway. We are clearly well positioned for the future."

Nearly all of the emerging resource plays are North American shale plays, but Eresman declined to offer much more information.

"We are in a lot of these plays already, and we're still building our position. I try not to be too specific on the results in those areas. We're working through the technical details now."

Jeff Wojahn, president of EnCana USA Region, elaborated only a bit. He said this was EnCana's "year of evaluation for gas shales..."

One area piquing EnCana's interest is in the Niobrara area of the Piceance Basin, where EnCana has a substantial leasehold. The company plans to "proceed with a horizontal well this year" in the Niobrara, said Wojahn. "You don't hear much from the industry on this play, but we're talking about it now."

Another promising area is the Pearsall Shale in the Maverick Basin, which extends about 760,000 acres. EnCana has a joint venture under way with EXCO there now. In addition, the Delaware trend of the Barnett Shale is getting a long look, and EnCana has partnered with Chesapeake Energy Corp. to explore acreage there, Wojahn said.

Still more prospects await in British Columbia (see related story). In the deep basin Montney formation near Dawson Creek, BC, EnCana holds 548,000 acres -- 240,000 net acres. Current daily gas production from the Montney is more than 120 MMcf/d. EnCana also has set its sights on the Horn River Basin of northeastern BC, where it has 216,000 net acres. EnCana, which discovered the shale in 2003, last year formed a venture with Apache Corp. giving Apache a 50% stake in the lease. Apache in 1Q2008 drilled three earning wells with encouraging initial test results, and EnCana is currently drilling and completing four additional wells. Results are expected later this year, Wojahn said.

With several possible shale plays on the horizon, EnCana has plenty to fall back on. Natural gas production from its key North American resource plays in 1Q2008 increased 18% to 3.0 Bcf/d from 2.6 Bcf/d in the same period in 2007. East Texas was the biggest gainer, up 165% from a year ago on aggressive drilling and incremental volumes from the Deep Bossier. EnCana also reported strong performances at Bighorn in west-central Alberta, at the Fort Worth area's Barnett Shale in Texas and from coalbed methane production in central Alberta.

The producer also designated a new oil resource play: the Weyburn field in Saskatchewan, which is one of the largest oil fields in Canada. Weyburn's enhanced oil recovery project is playing a role in helping research underground storage of carbon dioxide (CO2), Eresman noted.

"This Weyburn oil field has caught the attention of the world as the largest operating CO2 sequestration project," he said. "It is one of the most visited and most studied reservoirs anywhere, so much so that it was recently visited by Canadian Prime Minister Stephen Harper. It is a great example of a business and a technologically driven solution that improves oil recovery while permanently storing CO2, a greenhouse gas."

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