A day after its founder and CEO announced plans to step down at the end of the year, EnCana Corp. reported a disappointing 38% drop in third quarter net earnings from continuing operations to $266 million (30 cents/share) compared to $432 (46 cents/share) in 3Q2004. Making matters even worse, the company slightly lowered its production forecast.

Wall Street analysts had been expecting earnings of $1.10/share. As a result EnCana shares plunged nearly 8% to end the day on Wednesday at $48.02. ECA shares had been trading near $60 at the beginning of the month.

Third quarter net earnings were 30 cents per share diluted, or $266 million, which included an unrealized after-tax loss of $604 million due to mark-to-market accounting of all hedges and an unrealized foreign exchange after-tax gain of $166 million on translation of Canadian issued U.S. dollar debt. Net earnings in 3Q2004 were 42 cents/share, or $393 million. EnCana said 60% of the loss relates to its 2004 acquisition of Tom Brown Inc. All of the Tom Brown hedge positions expire at the end of 2006. EnCana said next year about 82% of its gas sales are fully exposed to price upside.

CEO Gwyn Morgan said the company was aware of the hedging impact when it bought Tom Brown last year but also was aware that the production from the Tom Brown assets would continue to grow for years to come. The company’s total natural gas sales in the third quarter increased to 3.22 Bcf/d, up 3% compared to the third quarter of 2004. Production in the third quarter from EnCana’s onshore resource plays was up about 3% from the second quarter to 2,235 MMcfe/d, and up 13% from the same quarter last year. Third quarter cash flow per share increased 51%. Total operating earnings per share increased 33%. Other positives include the expected sale of its interests in Ecuador for $1.42 billion by the end of the year, which will put EnCana squarely onshore in North American and focused on unconventional resource plays.

“Our third quarter was marked by strong cash flow and operating earnings, plus steady growth from continuing operations in North American natural gas production — up 4%, or 126 MMcf/d, since the third quarter of 2004,” said Morgan.

However, he also said the company will miss previous production guidance for the year. “Record setting wet weather in key Western Canadian producing regions and industry activity levels in the North American oil and gas service sector have restricted access to land and equipment in an unprecedented way this year,” Morgan said. “As a result, we have drilled fewer wells to date this year than planned and our gas production volumes are lagging forecast rates. EnCana also has wells capable of delivering about 225 MMcf/d of natural gas production waiting to be tied in to gathering and sales pipelines.

“With more than 120 operated rigs active in our gas fields, we are expecting to exit 2005 with gas sales of about 3.4-3.5 Bcf/d. The difference between our reduced 2005 production outlook and the midpoint of our original guidance range amounts to about a two-month delay in the ramp up of gas production,” he said. “Our 2005 average gas production is now forecast to be in the range of 3.25 billion to 3.30 Bcf/d, slightly below our original guidance range, but about 9% higher than average 2004 sales.”

EnCana’s 2006 gas sales are forecast to rise 7-11% to 3.50-3.63 Bcf/d. Total North American sales are forecast to be between 4.43 Bcfe/d and 4.59 Bcfe/d, an increase of 5-9% from the midpoint of the updated total North American sales guidance range for 2005.

“We expect that 2006 will be characterized by continued high industry activity levels and inflationary pressures, which are the product of the strong commodity prices that are generating robust netbacks,” said Randy Eresman, who will become the company’s new CEO at the end of the year. “Given these conditions and the learnings we’ve gained from this year’s experience, we have moderated our North American production growth rate to between 5% and 9% — a measured pace that’s aimed at more efficiently converting our proved reserves into sales growth and our unbooked resource potential into proved reserves as we generate substantial free cash flow.”

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