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Gas Prices Weigh on EnCana 2Q Results

EnCana Corp. last week reported second quarter results that were weighed down by weak natural gas prices but buoyed by commodity price hedges.

"In the past year natural gas prices dropped close to 70%, yet we have continued to meet or exceed our 2009 financial and operating objectives. Our natural gas price hedges provide an increased level of certainty to our cash flows so that we can most effectively manage our capital programs," said CEO Randy Eresman. "Operationally, our production is on track for the year and we have additional natural gas productive capacity that we are not bringing on due to the prevailing weak prices."

2Q2009 natural gas and oil production remained flat at 4.6 Bcfe/d compared to 2Q2008. Net earnings were $239 million, or 32 cents/share, down $982 million from the year-ago period when earnings were $1.2 billion, or $1.63/share.

2Q2009 earnings included a $900 million after-tax realized gain from hedges, offset by a $750 million after-tax unrealized loss that was previously included in net earnings as unrealized gains due to mark-to-market accounting treatment, EnCana said.

"It is because of these dramatic mark-to-market accounting swings in net earnings that EnCana focuses on operating earnings as a better measure of quarter-over-quarter earnings performance," the company said.

Cash flow was $2.2 billion, or $2.87/share, and operating earnings were $917 million, or $1.22/share, in the second quarter -- down 25% and 38%, respectively, on a per share basis compared to the second quarter of 2008.

EnCana realized $6.99/Mcf for its gas production in the second quarter, down 18% from $8.54/Mcf in the year-ago quarter.

"Through 2009, EnCana will remain focused on directing our capital investment to our lowest-cost, highest-return projects and on maintaining our financial strength and flexibility," Eresman said. "We are taking advantage of cost deflation and reduced industry activity by renegotiating supply and services contracts and by improving efficiencies. EnCana's cost-reduction initiatives, announced in February, have already exceeded our savings target of $900 million for the year. Some of those savings, achieved primarily through capital reductions, have been redeployed to other parts of our portfolio, largely to shale gas plays.

"In the past few months we have secured additional support for our financial future by hedging more than 45% of our expected natural gas production during the 2010 gas year at a price averaging $6.09/Mcf."

The company touted its Haynesville and Horn River shale gas plays. In the Haynesville EnCana has drilled 25 gross horizontal wells and has increased fracture stimulations in each horizontal well from eight to as many as 14, increasing initial production rates and reducing well costs by about 35%. Costs are now about $9 million per well.

In the Horn River play the company's joint drilling program with Apache Corp. at Two Island Lake continues to "meet or exceed" expectations. Thirty-two gross wells have been drilled to evaluate the basin, and 10 gross horizontal wells have been placed on production.

During a conference call last Thursday with financial analysts, Eresman was asked about the challenges of U.S. versus Canadian production. Costs in Canada have come down, he said, as well as volatility in exchange rates for now. The royalty structure in Alberta is working in the company's favor, he said.

"You know, it really is a play-specific situation," Eresman said. "There are and have been challenges historically being in Canada with the higher overall cost structure and challenges often times with the rapid changes in exchange rates, and the access to supplies and services. That situation has largely, you know, been reduced now.

"There are plays that are actually becoming more competitive to the U.S. Generally...wherever you have the most concentrated resources and the lowest-cost developments, the lowest operating costs, those are the ones that are going to be developed first in the future."

Executives said EnCana currently has 300-400 MMcf/d of production either shut in or curtailed. About 100 MMcf/d of that is in the Canadian Foothills. In the United States about 200 MMcf/d is shut in or curtailed. Most of the production, particularly from the drier wells, can be brought back online rather quickly, in a matter of weeks, they said.

EnCana also updated guidance for 2009. Production of natural gas, natural gas liquids and oil is expected to be 4.4-4.8 Bcfe/d, which is a revision from earlier guidance of 4.5-4.7 Bcfe/d. Capital spending is now expected to be $5.5-6 billion, a revision from an earlier estimate of $6.1 billion. Operating cost guidance was reduced to $1/Mcfe from $1.10/Mcfe.

EnCana and other producers in British Columbia have a potential new outlet for their gas production in the years ahead from a liquefied natural gas liquefaction plant being developed near Kitimat, BC (see NGI, July 20).

"The Kitimat project has always been of interest to us," said EnCana's Bill Oliver, executive vice president for business development. "In fact, I think we stimulated the idea of turning it from a regas[ification] into a liquefaction [plant] with some of the optimism we have in the Horn River.

"We really believe that there's a lot of liquidity in BC and if we follow the Horn River to the extent that we think it should be, there shouldn't be any problem in terms of getting enough gas into that facility. What they really need, though, is someone to come and build physically the liquefaction plant. I think that's what they're attempting to do to match up the buyers and sellers so anything that the industry can do to make that project go forward I think would be very positive for the natural gas industry in Canada and specifically the Horn River."

If it were to contract to supply gas to a future Kitimat liquefaction facility, EnCana would seek terms equivalent to what it receives at Aeco C and Westcoast Station 2, Oliver said.

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