In its first quarterly financial report since EnCana Corp. was formed in April by the merger of PanCanadian and Alberta Energy Company, the company reported stable earnings and company officials predicted solid growth in the future despite the decline in commodity prices and current turmoil in the industry.

EnCana reported earnings of $458 million, or $0.97 per diluted share, compared to pro forma earnings of $459 million, or $1.75/diluted share, a year earlier. The company said it generated $938 million of cash flow, compared to $622 million in 2Q2001, and posted a 10% increase in oil and gas sales.

CEO Gwyn Morgan said he’s confident the company can increase returns despite weak commodity prices and a struggling energy market. He said onshore North America operations are expected to achieve double-digit production growth. EnCana’s North America natural gas production during the second quarter increased to 2.7 Bcf/d, up 11% compared to pro forma results of the same period last year. The production increase came primarily from the U.S. Rockies and northeastern British Columbia. The onshore North America division drilled more than 540 net wells during the quarter.

EnCana expects to grow U.S. Rockies gas production by more than 15% per year over the next three years. And in the Greater Sierra region of northeastern British Columbia, gas production is expected to more than double its current 150 MMcf/d rate in the next three years.

The slow pace of regulatory proceedings over its Deep Panuke project offshore Nova Scotia probably means production won’t begin until 2005 at the earliest. The Canada-Nova Scotia Offshore Petroleum Board and the National Energy Board currently are reviewing the development plan for Deep Panuke. A final regulatory decision is expected in the first quarter of 2003. The project is estimated to recover 1 Tcf of reserves.

Other promising new developments include the Buzzard discovery, a major light oil find in the UK central North Sea that is moving to development planning, and the Tahiti project in the Gulf of Mexico that could contain more than an estimated 400 million bbl of recoverable oil (EnCana owns a 25% stake).

“We have identified an even stronger array of multi-year, organic growth opportunities that are expected to generate rates of return exceeding 20% after tax at current strip prices,” said Morgan. “While we may be facing softer natural gas prices in the very short term, the inaugural EnCana capital program is aimed at building productive capacity for what we believe will soon be strong gas prices.

“In our three current key producing platforms, Western Canada, the U.S. Rockies and Ecuador, we have identified profitable organic growth opportunities that are expected to generate growth of 10%-plus for the next several years. Starting in 2005, exciting new exploration discoveries in three additional platforms — the UK North Sea, the Gulf of Mexico and off Canada’s East Coast — are expected to layer more growth on top of that solid base growth,” he said.

To capitalize on these opportunities, EnCana’s board has approved a 2002 gross capital budget of $5 billion. The company expects to complete upstream asset dispositions this year of $500 million and dispositions of about $1.5 billion in midstream assets. These dispositions, combined with about $460 million in recently completed acquisitions, including U.S. Rockies natural gas assets, would result in net capital investment of $3.5 billion. Of the $5 billion budget, $3.5 billion is planned for onshore North America projects, including about 65% to gas and 35% to oil projects. International development of $600 million is directed to longer-term development of production growth in Ecuador, the UK central North Sea and the Gulf of Mexico. EnCana’s international and offshore exploration investment is about $700 million, directed to additional appraisal on exploration success in the Gulf of Mexico and the North Sea, plus exploration in other select international locations.

The company still intends to sell off two oil pipelines, the Express Pipeline and Cold Lake Pipeline, both of which transport Canada’s growing oil sands production to Canadian, U.S. Rocky Mountain and Midwest refineries. It also hopes to sell PanCanadian’s Houston-based marketing and trading business, but already has recorded a $49 million after-tax loss as discontinued operations.

EnCana said it is well positioned despite the current period of lower gas prices and has sold forward 1.4 Bcf/d of gas through September. Fixed prices include 875 MMcf/d at an effective Aeco price of C$4.24/Mcf, 333 MMcf/d at an effective Opal, WY, price of US$2.61/Mcf and 205 MMcf/d at a Nymex-related price of US$3.33/Mcf. In the fourth quarter, EnCana expects gas prices to strengthen as North American gas production continues to drop due to reduced drilling and high overall decline rates. EnCana is using its natural gas storage facilities, combined with increasing field capacity, to prepare for anticipated strong sales in the fourth quarter.

A key focus of EnCana’s midstream growth will be expansion of its large independent gas storage network. The California Public Utilities Commission recently approved EnCana’s application to more than double the size of the Wild Goose gas storage facility in Northern California. Under the proposal, the facility’s working gas capacity would expand from 14 Bcf to 29 Bcf, withdrawal rates would climb from 200 MMcf/d to 700 MMcf/d and injection rates would increase from 80 MMcf/d to 450 MMcf/d. Construction started this week and expansion facilities are expected to be in service beginning April 2004. EnCana plans to aggressively pursue other North American gas storage opportunities in order to expand capacity to supply volumes at peak periods of demand in the anticipated growing market.

EnCana’s 2002 daily sales target is forecast to grow by about 10% from 2001 pro forma sales to between 2,675 MMcf/d and 2,745 MMcf/d of gas and 245,000 and 264,000 b/d of oil, for a total daily sales forecast of between 690,000 and 721,000 boe. Sales in 2003 are forecast to rise about 13% above the midpoint of the 2002 forecast, reaching between 775,000 and 825,000 boe/d.

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