Encana Corp. increased its onshore natural gas-weighted production in 3Q2010, but sustained low gas prices led the producer last week to cut its output guidance and spending for the year.

“North America’s ongoing oversupply of natural gas production has driven prices for the near term to levels that we believe are unsustainably low,” said CEO Randy Eresman. “As such, we are slowing the near-term growth rate of our resource plays. For the longer term, we continue to build the underlying productive capacity of our enormous resource portfolio for future years’ growth.

“Our low-cost assets are capable of achieving our stated objective: doubling production per share over five years from 2009 levels. However, if these low prices persist, we plan to adjust our growth rate to align with our capacity to generate cash flow.”

Encana’s quarterly gas production jumped 17% year/year (y/y) to 3.2 Bcf/d; total output was up 15% to 3.3 Bcfe/d. The USA Division’s quarterly production was led by strong growth in the Haynesville Shale, where output jumped to 335 MMcfe/d from 83 MMcfe/d a year ago. In the Piceance Basin of Colorado production grew nearly 30% y/y. Encana’s Canadian Division’s production was up about 14% to 1.5 Bcfe/d, mostly because of successful drilling programs at Bighorn and Cutbank Ridge, which grew y/y production by about 52% and 37% respectively.

Canadian Division capital spending in 3Q2010 totaled $529 million, most of which was focused on continuing Encana’s steady production growth across the division. Capital spending in the USA Division was $681 million, with most of the money focused on the Haynesville Shale, with about $240 million of that directed at retaining leases.

Using the experience it gained in the unconventional gas fields of the Piceance Basin in Colorado, and the Montney and Horn River shale plays in British Columbia, Encana has begun to advance its “gas factory” approach in the Haynesville Shale, where it holds more than 430,000 net acres spread across Louisiana and East Texas.

Encana now has eight rigs drilling on three gas factory locations in the Haynesville play. The scheme enables Encana to drill eight “and potentially more” horizontal wells, each containing multiple hydraulic fractures, from a single pad location.

However, gas prices will hinder long-term production plans, said Eresman.

“During this period of continued low prices, we remain focused on capital discipline and long-term value creation for every Encana share,” he said. “We will not pursue growth at any cost. Capacity constraints for completion services, particularly in the USA Division’s Haynesville play in Louisiana and East Texas, have hindered the addition of some of the production volumes we had previously forecast in the last half of this year.”

The “high demand for hydraulic fracturing equipment and services threatens to accelerate the modest inflation we have seen this year,” Eresman explained. “Across our organization we are committed to minimizing or eliminating cost increases through improved operational efficiencies and technology innovation. As a result, we are developing strategies to bring on new fit-for-purpose completion equipment, patterned after a highly successful program that saw our company contract for the construction and supply of fit-for-purpose drilling rigs — equipment that has improved our drilling and cost efficiency.”

Because of the completion delays, Encana plans to defer about $200 million in capital spending to 2011 from this year, which would set total spending in 2010 at $4.8 billion. Production guidance also was trimmed to 3.315 Bcfe/d, which is down by 50 MMcfe/d from a previous forecast but 12% higher than in 2009. The top end of 2010 projected cash flow was narrowed by 30 cents/share to $5.95-6.20/share, compared with an earlier forecast of $5.95-6.50.

Net earnings in 3Q2010 reached $569 million (77 cents/share), with operations netting 13 cents. Cash flow in the latest quarter totaled $1.1 billion ($1.54/share).

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