EnCana Corp.’s management team said Thursday they were glad to see the turn to colder weather in the past month, a sign that some of the company’s natural gas-directed drilling soon will be back on track.

Higher-than-expected service costs, which averaged about 15% more than in 2005, forced EnCana to delay some of its drilling projects toward the end of the year (see Daily GPI, Oct. 26, 2006). Still, the Calgary-based producer managed a solid 4% gain in 4Q2006 natural gas production. Key resource plays, concentrated over 27 million net acres of the gas-prone Rocky Mountain fairway and Midcontinent, boosted production 12% year-over-year.

“We achieved all this in a tough operating environment,” CEO Randy Eresman said Thursday in a conference call. He called last year “transformational,” as EnCana unloaded its offshore assets and foreign investments to refocus its exploration onshore in the United States and Canada. EnCana is “essentially now a pure North American producer focused on unconventional natural gas and integrated oilsands.”

Production, which is nearly 80% weighted to gas, saw its biggest gains coming from coalbed methane production in central and southern Alberta, Bighorn in west-central Alberta, Cutbank Ridge in northeast British Columbia and in the Barnett Shale around Fort Worth. The emerging in-situ oilsands production from its Foster Creek steam-assisted gravity drainage project reported a 27% jump in output last year.

However, service costs weighed on the bottom line, and EnCana officials don’t see a big turnaround in expenses coming anytime soon.

“We reviewed the actual inflationary impact, and cost inflation [in 2006] averaged about 15%, which was about 5% higher than our original budget,” said CFO Brian Ferguson. “In 2007, we expect these inefficiencies in supplies and labor to ease somewhat.” This year, with the “inflationary pressures in United States, we believe [costs] will be on the higher side of EnCana’s guidance, in the 10% cost range overall.” He said EnCana in 2007 is assuming a 5% rate of inflation on its capital costs and a 10% hike in operating costs.

Through the drillbit, EnCana replaced 197% of its reserves last year, and it increased its North American proved reserves by 9% to 19.2 Tcfe.

Gas production in 2007 is expected to rise about 3% (9%/share based on expected share purchases), to 3.46 Bcf/d. Total production in 2007, prior to the allocation of oilsands volumes to ConocoPhillips as part of the heavy oil integration project, is expected to rise 4% over 2006. With the creation of the integrated oilsands business, EnCana expects 2007 total production to be about 4.28 Bcfe/d, flat from 2006.

Net earnings in the final quarter were $663 million (82 cents/share), down from nearly $2.37 billion ($2.71) in the final three months of 2005. Quarterly sales totaled $4.32 billion, down 8% from 2005’s $4.7 billion, with upstream revenue dropping to $2.81 billion from $3.53 billion.

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