Against an industry backdrop of widening oil price differentials and rising operating costs, Calgary-based EnCana Corp. on Wednesday reported a net loss due to mark-to-market accounting, despite a 34% jump in operating earnings and a 46% boost in total cash flow, compared to results in the first quarter last year. Operating earnings were $611 million, or $1.34/share, and total cash flow was $1.41 billion, or $3.11/share. These are U.S. dollar figures, the company said.

However, a net loss from total operations was recorded at $45 million, or 10 cents/diluted share, because of what EnCana called the impact of “an unrealized after-tax loss due to mark-to-market accounting for all of the company’s hedges.” The company’s first quarter net earnings from continuing operations were reduced by $628 million, after-tax, as a result of what it called “unrealized mark-to-market accounting standard governing price risk management activities.”

“About one-third of the mark-to-market loss is attributed to price hedges put in place in the spring of 2004, relating to the acquisition of Tom Brown, Inc.,” EnCana said. “The Tom Brown volumes were hedged through 2006 as a prudent financial measure to help lock in strong returns on the 2004 acquisition. The balance primarily applies to other oil and gas hedges running through 2006.”

Lehman Brothers’ Thomas Driscoll said he expected “neutral” reaction to the EnCana first quarter results, noting that the operating earnings of $1.34/share beat Lehman’s estimate and the Wall Street consensus of about $1.27/share. There was also better-than-expected U.S. natural gas production by EnCana, Driscoll said.

First quarter sales of gas, oil and natural gas liquids from total operations increased 8% for EnCana, equating to 4.52 Bcf/d of gas equivalent. Natural gas sales from continuing operations were up 20% to 3.15 Bcf/d, compared with the first quarter a year earlier.

Shrugging aside the net loss, EnCana President/CEO Gwyn Morgan called the company’s strategy “unconventional” and one that is “delivering strong shareholder value.” He said “the market has recognized the merits of our sharpened focus on profitable, long-life North American resource plays.”

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