Encana Corp. said Wednesday better-than-expected results in North American onshore natural gas plays will allow it to bump up 2010 production guidance by 65 MMcfe/d and increase capital spending by $500 million.

The Calgary independent reported a $505 million net loss in 2Q2010 from the year-ago period, which it blamed on unrealized hedging losses and foreign exchange losses on long-term debt. In the latest quarter Encana reported a $340 million loss on unrealized after-tax commodity hedging and a loss of $246 million for nonoperating foreign exchange taxes. By comparison, Encana earned $1.48 billion in the first three months of this year, which included an after-tax hedging gain of $912 million.

“We are reporting a loss in second quarter net earnings as a consequence of mark-to-market accounting despite the fact that our price hedges, covering about 60% of our production, were almost 50% higher than benchmark natural gas prices, and our natural gas production is about 10% more than one year ago,” said CEO Randy Eresman. “That’s why we believe cash flow and operating earnings are a far better measure of Encana’s financial performance.”

Taking Eresman at his word, Encana delivered a superb quarterly performance, with cash flow of $1.2 billion ($1.65/share) and operating earnings of $81 million (11 cents). Total production in the quarter was 3.3 Bcfe/d. Natural gas production, which was 3.2 Bcf/d, on a per-share basis jumped 12% compared with 2Q2009.

Current daily production already is higher than Encana’s full-year 2010 average daily production guidance, the company noted. Because of its strong performance in key resource plays so far this year, 2010 production guidance has been bumped up by 65 MMcfe/d to 3.365 Bcfe/d.

To accelerate long-term growth projects and build productive capacity for the company’s North American gas portfolio for 2011, Encana also increased capital spending this year by $500 million to $5 billion.

“Our production is ahead of target and we are gaining ground on costs through continual optimization programs that help us pursue our cornerstone goal of being the industry’s lowest-cost producer,” said Eresman. “To date 2010 operating costs are tracking about 17% below guidance and as a result we have lowered our operating cost guidance by 10 cents to 80 cents/Mcfe.

“As we look ahead, we expect to see substantial additional cost savings through expanded use of multi-well gas factories and as we continue to extend the reach of our horizontal wells.”

During the quarter Encana added the Haynesville Shale to its list of “key” resource plays. The producer also expanded its shale portfolio by capturing a significant land position in Michigan’s Collingwood Shale play (see Daily GPI, May 10). And talks progressed to advance a potential joint venture with China National Petroleum Corp. to develop gas plays in northeast British Columbia (see Daily GPI, June 28).

To manage its gas price risks through the rest of this year, Encana now has a hedge position on about 55% of forecast production. Operating earnings in the latest quarter, it noted, fell mostly because of lower realized gas prices on a pro forma basis compared with the year-ago period, “a year when Encana had very attractive hedges at a price above $9/Mcf on about two-thirds of the company’s natural gas production.”

Encana is using pro forma results because of the corporate reorganization completed last November, which resulted in its transition to a pure-play natural gas company. The company spun off most of its integrated oil assets into Cenovus Energy Inc., and the latest quarter reflects the company as if the split had been completed.

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