Encana credits risk strategy for earnings

CALGARY — EnCana Corp. (TSX:ECA) says its hedging program softened the blow of weak natural gas prices during the second quarter, in which the Calgary-based energy giant saw a 38 per cent decline in operating profits.

CALGARY — EnCana Corp. (TSX:ECA) says its hedging program softened the blow of weak natural gas prices during the second quarter, in which the Calgary-based energy giant saw a 38 per cent decline in operating profits.

“EnCana’s continued strong financial and operating performance during this period of weak natural gas prices provides clear evidence of how our risk management measures reduce volatility in our business and help us continue to enhance long-term value creation,” EnCana chief executive officer Randy Eresman said in a statement Thursday.

“In the past year, natural gas prices have dropped close to 70 per cent, yet we have continued to meet or exceed our 2009 financial and operating objectives.”

Operating earnings during the quarter ended June 30 were US$917 million, or $1.22 per share, down from $1.47 billion, or $1.96 per share in the same 2008 period.

Analysts polled by Thomson-Reuters were on average expecting earnings of $1.19 per share.

UBS Investment Research analyst Andrew Potter said EnCana’s results “shatter expectations,” mostly due to better earnings from its downstream, or refining, segment and higher than anticipated natural gas price realizations.

EnCana’s net income was $239 million, or 32 cents per share, down 80 per cent from year-earlier net earnings of $1.2 billion, or $1.63 per share.

A $900 million gain on hedging was largely offset by a $750-million loss due to mark-to-market accounting, the company said.

Quarterly cash flow declined 25 per cent to $2.2 billion.

EnCana said average quarterly oil and gas production remained flat compared to year-earlier levels at the equivalent of 4.6 billion cubic feet of gas per day.

EnCana said it has hedged more than 45 per cent of its 2010 natural gas production at an average price of $6.09 per 1,000 cubic feet.

Through to October of this year, EnCana has locked in two-thirds of its production at a price of $9.13. Natural gas was trading around $3.67 on the New York Mercantile Exchange on Thursday.

“Our natural gas price hedges provide an increased level of certainty to our cash flows so that we can most effectively manage our capital programs,” Eresman stated.

EnCana said it has exceeded its 2009 savings target of $900 million thanks to a cost-cutting initiative launched in February.

Eresman said some of those savings are being funnelled into the company’s shale gas plays.

EnCana has accumulated big land positions in the potentially prolific Horn River Basin in northeastern B.C. and in the Haynesville play, which straddles the Louisiana-Texas border.

Until recently, those types of unconventional natural gas resources were deemed too expensive and technically tricky to exploit. But now those resources are beginning to see some promising early results.

In an effort to fine-tune its portfolio, EnCana recently sold some of its non-core oil and gas properties in central Alberta to Bonavista Energy Trust (TSX:BNP.UN) for $632 million”.

The company’s shares rose three per cent, or C$1.75, to $59.40 on the Toronto Stock Exchange in Thursday trading.

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