NGI The Weekly Gas Market Report / NGI All News Access

EnCana Foresees More Cost Cutting Down the Road

Calgary-based EnCana Corp. relied on hedging to keep its 4Q2008 profits flat year/year, but the CEO said Thursday that sustained lower natural gas prices will require more cost cutting if the economic environment does not improve.

EnCana's net profit in 4Q2008 was nearly unchanged from the same period of 2007, totaling $1.077 billion ($1.43/share), compared with $1.08 billion ($1.43) in the final three months of 2007. Excluding one-time gains, the producer earned 60 cents/share in the final quarter of 2008, which was about 15 cents below Wall Street's earnings forecast.

Natural gas comprises around 80% of the independent's output, and as commodity prices fell the economic picture grew dimmer. The company last December set a 2009 capital spending plan that was 18% below 2008's spending (see NGI, Dec. 15, 2008). Now CEO Randy Eresman said more spending could be cut if the climate does not improve.

"Natural gas and oil prices are expected to remain low at least through the first quarter of 2009," Eresman told financial analysts during a conference call. "While we have seen some indication of a softening in service and supply costs, reductions are likely to be more pronounced in the latter half of 2009."

EnCana's cash flow forecast "is underpinned by strong hedges," said Eresman. About two-thirds of expected natural gas production now is hedged through October at an average price of $9.13/Mcf. "In addition, we are continually seeking new ways to strengthen our financial position, including cost-reduction initiatives, project reviews throughout the year and exploring and implementing operational efficiencies across our company."

The CEO noted that even with the "unprecedented volatility" in commodity prices and the "challenging operating environment" last year, the company "met or exceeded all of our targets, including those for cash flow, production and capital investment."

For the final quarter, EnCana's total oil and gas production grew 6%. Gas output rose 4% to 3.9 Bcf/d from a year earlier. In EnCana's key North American resource plays output jumped 13% from 4Q2007. The company added 2.5 Tcfe of reserves and replaced 150% of production at a finding and development cost of $2.50/Mcfe. EnCana's gas output for the year rose 8% from 2007 to average around 3.8 Bcf/d.

Production growth was led by a 21% increase in U.S. gas output, mostly from EnCana's East Texas operations in the Deep Bossier Sands. Canadian output was flat quarter/quarter as increases from drilling successes in Bighorn, coalbed methane and Cutbank Ridge offset natural declines.

Gas and oil output in 2009 should remain "essentially flat" from 2008, Eresman told analysts. EnCana will pursue "a conservative and prudent capital program" this year. The company "has built flexibility into our plans to adjust investment depending on how the year unfolds. With widespread economic uncertainty, we remain intently focused on our core business objectives: maintaining financial strength, generating significant free cash flow, further optimizing our capital investments and continuing to pay a stable dividend to shareholders..."

©Copyright 2009 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.