CALGARY — Natural gas giant Encana Corp. is trimming its production target, cash flow guidance and capital spending for the remainder of the year as prices are expected to remain dismally weak.
“Although we’re pleased with our year-to-date performance, we’re concerned with near-term natural gas prices,” CEO Randy Eresman said on a conference call to discuss the company’s third-quarter results, which included a US$569-million profit.
Encana (TSX:ECA) now expects production of 3.315 billion cubic feet of gas equivalent a day, down from the former target of 3.365 billion cubic feet.
Encana also lowered its cash flow to a range of $5.95 to $6.20 per share for all of 2010, compared with an earlier range of $5.95 to $6.50.
In response to the reduced cash flow, Encana is reducing its capital spending plans by $200 million to $4.8 billion.
Eresman said capacity constraints for its completion services, most notably at its Haynesville play in Louisiana and Texas, have affected plans to boost production in the back half of the year.
“These constraints are delaying us from completing some of our Haynesville wells in a cost-efficient manner,” Eresman told the conference call.
“This will affect our pace of development in the near term as we will not pursue growth at any cost.”
The decision to rein in expectations and spending comes after the company insisted previously that it would remain aggressive in its production targets despite persistently low gas prices.
“North America’s ongoing over-supply of natural gas production has driven prices for the near term to levels that we believe are unsustainably low. As such, we are slowing the near-term growth rate of our resource plays,” Eresman said in an earlier statement.
“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,” he added.
“(But) If these low prices persist, we plan to adjust our growth rate to align with our capacity to generate cash flow.”
Investors will likely welcome Encana’s more conservative approach, CIBC World Markets analyst Andrew Potter said in a research note.
“Investors have been concerned about (Encana’s) high spending plans in a weak gas price environment, and this should help alleviate those fears,” he wrote.
Encana’s third-quarter profit was equal to 77 cents a share in the three months ended Sept. 30 as it benefited from a $331-million unrealized hedging gain, a reflection of Encana’s efforts to offset volatile commodity prices with future sales contracts.
A year earlier, Encana posted a $685-million hedging loss, which drove an overall quarterly net loss of $53 million in the third quarter of 2009.
Stripping out the impact of hedging, Encana’s operating income slipped to $98 million in the third quarter of 2010 from $378 million a year earlier.
Cash flow in the quarter was $1.1 billion, or $1.54 per share, down from $1.70 per share a year earlier.
Encana’s revenues rose to $2.4 billion from just under $2.3 billion in the third quarter of 2009 as lower gas prices were offset by higher production, which increased by 17 per cent to 3.2 billion cubic feet per day.
Encana, which spun off its oil assets into Cenovus Energy Inc. (TSX:CVE) last year, is focused almost entirely on exploiting unconventional natural gas reserves in North America.
In order to develop its vast holdings more quickly, it has looked to team up with deep-pocketed international players. Encana has said it aims to bring in up to $2 billion per year in joint-venture capital.
The company said in June it may team up with China National Petroleum Corp. to develop some of its shale natural gas holdings in northeastern British Columbia.
The potential joint venture is expected to include the Horn River Basin, Greater Sierra and Cutbank Ridge, all in northeastern British Columbia where Encana is already a major player.
In March, Encana signed an agreement with Korea Gas Corp. that saw the Asian company buy a 50 per cent stake in properties in the promising Horn River Basin and Montney shale gas plays in B.C.
Encana shares were down 37 cents at C$29.79 in afternoon trading Wednesday on the Toronto Stock Exchange.