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EnCana Earnings Up 40%; 'Well Positioned' for Downturn

The recent economic downturn will delay EnCana Corp.'s plans to split into two independent energy companies, but the Calgary-based producer is "well positioned to weather the current market storm and, in fact, to thrive in it," according to CEO Randy Eresman, who reported 3Q2008 operating earnings up 40% from the same period last year.

"The events that have unfolded in the financial markets over the past month have created a great deal of uncertainty...This applies to both the costs of goods and services we use and for the commodity prices that we receive," Eresman said. "As a result, we believe it is prudent to be conservative in the short term with our capital program until we get a better understanding about how it will all turn out. We do however believe that the current market downturn provides us with an opportunity to showcase the underlying strength of our company's assets, our strategy, our operational performance and our financial discipline."

Earlier this month EnCana announced that it would delay its plans to split into two independent energy companies because of the volatility in the global financial markets (see NGI, Oct. 20). Until there are "clear signs of stabilization" in the financial markets, EnCana said it would delay the split, which was to be put to a shareholder vote in December (see NGI, Oct. 6). The split would create an integrated oil company to be named Cenovus Energy Inc., and the pure-play natural gas company would retain the EnCana brand. EnCana first announced the split in May (see NGI, May 19).

"We believe that the underlying reasons [for the split] are still valid," Eresman said. "However, there's simply too much uncertainty in the global debt and equity markets to proceed at this time. Despite this delay we're continuing to work on reorganizing our company so we're prepared to announce the transactions when we determine that the market conditions are appropriate...the fundamental rationale for the split remains unchanged. The economic environment, however, has changed dramatically. It is too difficult to assess at this time when the debt and equity markets may stabilize and present us with the right opportunity to proceed with the transaction."

Driven by solid production growth and higher commodity prices compared to 3Q2007, EnCana saw operating earnings up 40% in 3Q2008 to $1.4 billion ($1.92/share).

Over the next year EnCana has a "substantial" portion of expected future production hedged at strong prices. About 80% of EnCana's total production is natural gas. For the 2009 gas year, which runs from November 2008 through October 2009, EnCana has about 2.5 Bcf/d -- about 60% of current production -- hedged at an average price of US$9.15/Mcf.

Total natural gas production in 3Q2008 increased 8%, to 3.9 Bcf/d, compared to 3Q2007, EnCana said. Production from key natural gas resource plays increased 16%. The application of new technology helped reduce costs for many of the company's key resource plays, resulting in improved well performance and continued efficiency gains. Production increases were led by a rise of 135% at East Texas, where production averaged about 340 MMcf/d in the third quarter, mainly due to new wells coming on production and the doubling of EnCana's interest in Deep Bossier last year.

EnCana said lower natural gas prices in the Rockies region had prompted it to shut in approximately 50 MMcf/d of production (net of royalties) at the its Jonah key resource play in Wyoming. Although EnCana hedged 100% of expected production from the Rockies region, production levels have been higher than anticipated, creating a small exposure to Rockies spot prices, the company said. As a result, EnCana decided to limit production at Jonah to 580 MMcf/d (net of royalties) for October. If prices improve, EnCana will reevaluate a return to productive capacity. In September a testing outage of the Rockies Express Pipeline (see NGI, Sept. 8) resulted in lower gas prices in the Rockies region, prompting EnCana to shut-in approximately 60 MMcf/d.

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