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EnCana Corp. (TSX:ECA) said Thursday its second-quarter natural gas production was up 10 per cent from a year ago, but oil output fell 12 per cent because of a longer-than-expected maintenance shutdown at its Foster Creek oilsands operations.
The Calgary-based firm, which will split into separate natural gas and oil companies early next year, said it has bumped up its natural gas production forecast by 70 million cubic feet per day to 3.85 billion cubic feet per day – an eight per cent increase over full-year 2007 production.
The Deep Bossier play in East Texas has been the strongest asset, as it has grown 130 per cent year over year, said EnCana CEO Randy Eresman, who will head up the new natural gas company.
However, production ramp up has been slower than expected, he added.
"We fully expect this situation to improve as we move forward through the remainder of the year. The Deep Bossier continues to be a leading near-term driver of EnCana’s future production growth," Eresman told an analyst conference call Thursday.
Other natural gas plays, like the Montney and Horn River Basin in Northeast B.C. and the Haynesville shale in Texas and Louisiana, have "exceeded expectations," Eresman said.
"This should clearly illustrate the depth and strength of EnCana’s unconventional asset portfolio, with leading positions in many of the highest performance gas plays throughout the continent."
On the other hand, production from EnCana’s oilsands operations at Foster Creek and Christina Lake was down 12 per cent to approximately 24,700 barrels per day.
Yearly guidance for those two assets has been cut by 3,000 barrels per day, said Brian Ferguson, EnCana’s chief financial officer, who will become chief executive of the new integrated oil company.
Extreme cold caused a power outage in the region and a maintenance turnaround at the Foster Creek plant took longer than expected, Ferguson said.
A project to convert a refinery EnCana co-owns with ConocoPhillips in Wood River, Ill., to handle oilsands crude will likely fall four to nine months behind schedule because of regulatory problems.
Ferguson said EnCana expects to get its air permits reinstated soon for the 130,000 barrel-a-day facility, on which construction was supposed to have begun this month.
EnCana, which reports its earnings in U.S. dollars, reported a 30 per cent surge in second-quarter revenue to $7.32 billion, compared with $5.61 billion a year earlier.
But net earnings declined 14 per cent to $1.22 billion, or $1.63 per share, from $1.45 billion, or $1.89 per share, due to hedging losses.
"Commodity price risk management measures resulted in realized losses of approximately $400 million after-tax, composed of a $308-million after-tax loss on gas hedges and a $92-million after-tax loss on oil and other hedges," EnCana said.
The quarter’s hedging losses "reflect the dramatic increase in oil prices in the past year and natural gas prices over the past few months compared to the portion of EnCana’s sales that are hedged at fixed prices – a risk management strategy that is aimed at providing more certainty of cash flow to fund the company’s annual capital investment program," EnCana stated.
For this year it has hedged 1.5 billion cubic feet per day of gas at $8.20 per thousand cubic feet, and 23,000 barrels per day of oil at $70.13 per barrel.
EnCana’s 2008 cash flow forecast for 2008 was increased to between $10 billion and $11 billion from between $9.6 billion to $10 billion.
UBS Investment Research analyst Andrew Potter said EnCana had a "blowout quarter," with operating earnings per share of $1.93, compared to his firm’s estimate of $1.72.
He gave EnCana a "buy" rating and set a share price target of $135.
EnCana’s excess cash flow will be focused on the Haynesville shale, where EnCana has established a big land base with partner Royal Dutch Shell.
"We are stepping up our divestiture program for the remainder of the year to offset the additional costs of expanding shale gas lands and resources," Eresman said.
EnCana’s corporate overhaul, announced in May, is going ahead "as planned," Eresman said.
"As we transition toward the creation of two strong, independent companies, it will be business as usual and we expect consistent and strong performance to continue."
EnCana shares were up 53 cents to $73.74 in afternoon trading on the Toronto Stock Exchange Thursday.
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