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EnCana Sees Triple-Digit Production Gains in Deep Bossier

Strong natural gas prices and increased gas output pushed EnCana Corp.'s quarterly results ahead of expectations. Key resource plays across North America, including triple-digit gains from its Deep Bossier gas play in East Texas, lifted total output by 17%.

Because of a bad bet on forward natural gas sales contracts -- a $235 million hedging loss -- the Calgary-based producer's 2Q2008 profit fell 16% from a year ago to $1.2 billion ($1.63/share) from $1.4 billion ($1.89) in 2Q2007. However, operating income was up 7% to $1.5 billion ($1.96/share) from $1.4 billion ($1.79), and gas production rose to 3.8 Bcf/d.

"With natural gas production growing faster than forecast and stronger than expected prices, we are raising our 2008 cash flow forecast to a range of $10 billion to $11 billion from a current level of $9.6 billion to $10 billion," CEO Randy Eresman said during a conference call Thursday. "Our full-year gas production forecast is also increasing to an expected average of 3.85 Bcf/d," which would be 7% higher than in 2007.

EnCana already is "directing the higher than originally forecast cash flows into growing our already strong position in the Haynesville Shale in Louisiana, where recent test wells are demonstrating very strong potential," Eresman said. "At the same time, we are stepping up our divestiture program for the remainder of the year to offset the additional costs of expanding shale gas lands and resources."

In the United States, rising gas production was led by EnCana's East Texas operations, where production from the Deep Bossier tight gas play climbed 127%. Gas production from the Canadian Foothills rose 5% as drilling success and new infrastructure assisted growth from operations in the Bighorn in west central Alberta, coalbed methane in central Alberta and Cutbank Ridge, which straddles the British Columbia-Alberta boundary.

EnCana drilled several exploration wells in the Horn River Basin of British Columbia, and two of the recently completed wells are producing at first-month average rates of more than 5 MMcf/d. And in the emerging Haynesville Shale play in northwestern Louisiana, EnCana's second horizontal well flowed at an initial two-day rate of 15 MMcf/d. EnCana's Haynesville leasehold now numbers around 370,000 net acres, and earlier this month it acquired an additional 89,000 acres of mineral rights from Indigo Minerals LLC for $457 million.

"These well results are exceptional and are a strong indication that the addition of these plays has the potential to accelerate the pace of our natural gas growth," Eresman said.

The CEO did not detail what assets EnCana may be putting up for sale, but he indicated it was an "ambitious" program. Proceeds would be used to offset more land purchases in "key" resource plays. The company is planning a more ambitious divestiture program. Proceeds, estimated to bring $500 million net, would be used to offset additional land purchases this year, he said.

"As a result of higher commodity prices and increased activity, we are seeing signs of cost inflation in services and materials -- particularly for steel and fuels, and we believe inflationary pressure may continue to climb the rest of the year," Eresman cautioned. "EnCana has largely managed to offset inflationary pressures to date through a series of long-term contracts.

"For example, we have been working to lock in longer-term contracts for our well fracturing services. The majority of these contracts are priced at current levels. Significant portions of our steel requirements were contracted early so that we have the benefit of those more favorable cost levels. Going forward, we will continue to pursue cost management opportunities when possible."

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