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EnCana's North American Resource Plays Boost Output; Inflation Costs Force Cutbacks

EnCana Corp. reported cash flow in 2005 climbed 57% on record natural gas output and strong proved reserves additions, with growth in all of its North American resource plays. However, because of "inflationary pressures," the company, which is North America's largest independent, plans to reduce some of its drilling investments this year, resulting in an 8% reduction in its upstream capital forecast and a drop in gas sales of about 75 MMcf/d.

The "difficult operating conditions that existed during most of 2005 continued through year-end," said CEO Randy Eresman. "The inflationary pressures of 2005 are expected to continue this year, with cost inflation once again above 15%."

EnCana trimmed its 2006 upstream capital expenses by US$500 million, including $200 million invested in late 2005 to accelerate drilling coalbed methane wells and expansion of in-situ oil sands programs, and in 2006, $100 million for exploration and $200 million for development programs. Another $300 million of capital set aside to build the second segment of the Entrega Pipeline is not expected to be required because Entrega was sold last year (see Daily GPI, Nov. 16, 2005). In total, EnCana is reducing its 2006 capital investment plans by about $800 million, or 12%.

Despite rising costs, EnCana replaced 271% of its 2005 production and increased total proved reserves by 18% to 18.5 Tcfe by adding 4.5 Tcfe, compared with production of 1.7 Tcfe. EnCana's proved gas reserves increased 13% last year to 11.8 Tcf. Proved gas additions were up 2.5%, and were 100% organic. Gas production replacement was 213%. In North America, EnCana sold 3.33 Bcf/d in 4Q2005, up from 3.09 Bcf/d a year earlier.

"With all of the portfolio changes EnCana has undertaken, the best indicator of our value creation is our reserve replacement cost, which accounts for all of the reserves we bought, sold and found with the drill bit, and best reflects the value creation of our option value exploration program," Eresman said. In the past three years EnCana's reserve replacement cost averaged $1.22/Mcfe, and last year, the average finding and development (F&D) cost was $1.29/Mcfe. Excluding bitumen additions, F&D costs averaged $1.93/Mcfe.

Net earnings for the year and final quarter were down from a year ago, with reported 4Q2005 net income of $2.37 billion ($2.71/share) compared with $258 billion ($2.77) in 4Q2004, and full-year 2005 earnings of $3.43 billion ($3.85) fell from $3.51 billion ($3.75) in 2004. Operating earnings, which exclude gains from special items, nearly doubled to $1.27 billion ($1.46/share) in 4Q2005 from $573 million (62 cents) a year earlier. The Thomson First Call estimate for 4Q2005 profit was $1.27 a share. Revenue for the quarter rose to $5.86 billion from $3.54 billion.

In 4Q2005, EnCana put in place put options on about 1.6 Bcf/d of 2006 planned gas sales at an average New York Mercantile Exchange (Nymex) strike price of $8.42/Mcf. All in, about 93% of EnCana's forecast 2006 gas sales is hedged with a combination of put options and fixed price hedges with an average Nymex price of $7.30/Mcf.

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