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EnCana Q3 Profit Falls, Misses View; Says Split Plan On Track; Updates FY09 Forecast - Update


Canadian oil and natural gas company EnCana Corp. (ECA,ECA.TO) reported Thursday a sharp fall in profit for the third quarter, reflecting unrealized mark-to-market accounting loss, lower natural gas prices, as well as the absence of prior year's huge mark-to-market gain. Operating earnings for the quarter fell 46%, and missed market projections. Further, the company said its plan to split EnCana into two independent companies is on track, and also updated its fiscal 2009 forecast and issued fiscal 2010 guidance.

The Calgary, Canada-based company's third-quarter net earnings were US$25 million or US$0.03 per share, down from US$3.55 billion or US$4.73 per share in the same quarter last year.

The latest quarter results included unrealized mark-to-market accounting loss of US$931 million, partly offset by non-operating foreign exchange gain of US$181 million. Meanwhile, prior year's results included unrealized mark-to-market accounting gain of US$2.04 billion, and gain on discontinuance of US$99 million, partly offset by non-operating foreign exchange loss of US$31 million.

Operating earnings for the quarter, excluding items, were US$775 million or US$1.03 per share, down 46% from US$1.44 billion or US$1.92 per share in the year ago quarter.

On average, 11 analysts polled by Thomson Reuters expected the company to report earnings of US$1.17 per share for the quarter. Analysts' estimates typically exclude special items.

EnCana generated third-quarter cash flow of US$2.08 billion or $2.77 per share, 26% lower than last year's US$2.81 billion or US$3.74 per share. The company noted that its financial performance was significantly enhanced by commodity price hedges, which contributed $913 million in realized after-tax gains or $1.22 per share to cash flow in the third quarter.

Revenues, net of royalties, for the quarter declined to US$3.88 billion from US$10.85 billion in the year ago quarter. Total third-quarter production fell 7% to 4.39 billion cubic feet equivalent per day, or Bcfe/d, from prior year's 4.72 Bcfe/d.

Natural gas production was down 9% to 3.55 billion cubic feet per day, or Bcf/d, in the quarter. EnCana noted that it curtailed or shut in about 500 million cubic feet per day, or Mmcf/d, of natural gas production in the third quarter, because of the low price environment and natural declines in conventional properties.

Meanwhile, production of oil and natural gas liquids, or NGLs, increased 4% to 139,000 barrels per day, or bbls/d, driven by a 44% production increase from the Foster Creek enhanced oil project.

Realized natural gas prices were US$7.31 per thousand cubic feet, or Mcf, down 8% from last year, and realized liquids prices fell 37% to US$57.39 per barrel. The company said the prices include financial hedges.

Commenting on the results, Randy Eresman, EnCana's President & Chief Executive Officer, stated, "Our company's solid operational and financial performance during a period of weak prices is evidence that EnCana's strategy is working. We remain focused on being the lowest cost producer by applying advanced technologies and by pursuing operational efficiencies across all resource plays. In addition, our successful hedging program has helped us sustain strong cash flow. To help preserve the value of our resource base, we have curtailed significant natural gas production in many of our operating areas and have significant productive capacity available to bring to market as prices recover."

In its preceding second quarter, EnCana had reported an 80% fall in net earnings to US$239 million or US$0.32 per share from prior year's US$1.22 billion or US$1.63 per share, hurt by unrealized mark-to-market hedging losses as well as lower natural gas and liquids prices. Operating earnings fell 38% to US$917 million or US$1.22 per share, and non-GAAP cash flow was US$2.15 billion or US$2.87 per share, down 25% from a year earlier. Second-quarter revenues, net of royalties, plummeted to US$3.76 billion from US$7.42 billion last year.

Among others in the sector, Canada's largest energy company Suncor Energy Inc. (SU,SU.TO), following its merger with Petro-Canada, last week reported its third-quarter net earnings of C$929 million or C$0.74 per share, compared to C$815 million or C$0.86 per share last year. The Calgary, Alberta-based company's operating earnings plunged to C$288 million or C$0.23 per share, from C$810 million or C$0.87 per share reported in 2008, mainly due to lower prices and higher operational expenses in its oil sands segment. Cash flow from operations for the quarter totaled C$574 million, down from C$1.146 billion recorded in the three-month period of last year. Quarterly revenues declined to C$8.44 billion from C$8.51 billion in the corresponding period of last year.

For the nine months of fiscal 2009, EnCana's net earnings fell to US$1.23 billion or US$1.63 per share from last year's US$4.87 billion or US$6.47 per share. Operating earnings dropped 33% to US$2.64 billion or US$3.51 per share from US$3.96 billion or US$5.26 per share a year ago. Cash flow from operations was US$6.18 billion or US$8.22 per share, down 24% from US$8.09 billion or US$10.75 per share in the previous year. Nine-month revenues, net of royalties, plunged to US$12.25 billion from US$23.71 billion last year.

Further, EnCana said its planning is on track to split EnCana into two independent companies, such as a pure-play natural gas company, EnCana, and an integrated oil company, Cenovus Energy Inc. EnCana noted that a shareholders' meeting to vote on the proposed transaction is scheduled for November 25, 2009, and that transaction is expected to be completed on November 30, subject to the required shareholder and court approvals and the satisfaction of conditions.

While announcing the second quarter results, the company had noted that its plans for splitting were on hold as market conditions continued to be volatile.

Further, EnCana said its fiscal 2009 guidance, which does not account for the proposed split, has been updated.

The company now projects full-year total production, including integrated oil, of 4.465 MMcfe/d, and production, excluding integrated oil, of 4.205 Mmcfe/d. Natural gas production for the year is estimated to be 3.635 Mmcf/d. The company's previous outlook was total natural gas, oil and NGLs production of 4.4 to 4.8 Mmcfe/d.

For the year, cash flow is now estimated to be US$7.6 billion or US$10.10 per share.

EnCana also updated its capital investment guidance to US$5.8 billion, compared to previous forecast with in a range of US$5.5 billion to US$6 billion.

Further, the company provided fiscal 2010 guidance for the post-split EnCana and Cenovus.

For EnCana, fiscal 2010 cash flow, on a post-split basis, is projected to be US$4.0 billion to US$4.6 billion, or US$5.40 per share to US$6.00 per share. For the year, total production after royalties is estimated to be in a range of 3.2 Bcfe/d to 3.3 Bcfe/d, and capital investment is projected to be between US$3.6 billion and US$3.9 billion. The company said it targets natural gas production growth of about 10% for the year.

Investment in the USA Division is expected to be about US$1.9 billion, with natural gas production expected to grow about 16% to about 1.8 Bcf/d. About US$1.6 billion of investment is planned for the Canadian Division, currently the Canadian Foothills Division.

For Cenovus Energy, fiscal 2010 cash flow, on a post-split basis, is estimated between US$2.3 billion and US$2.6 billion, or US$3.10 per share and US$3.50 per share, while capital investment is projected in a range of US$2.0 billion to US$2.3 billion. According to the company, Cenovus's capital investment in 2010 is focused on increased development of the Foster Creek and Christina Lake enhanced oil operations, where 2010 production is expected to increase by 15% to 20%, and continued construction of the CORE project at Wood River.

EnCana added that, following the completion of the split transaction, it will continue to report using U.S. Protocols, while Cenovus expects to report its results in Canadian dollars and its volumes on a before-royalty basis, and the change in reporting is expected to commence with the first quarter of 2010.

Further, EnCana said it intends that the initial combined dividends of EnCana and Cenovus for the fourth quarter of 2009, after the Arrangement becomes effective, will be equal to EnCana's current quarterly dividend of US$0.40 per share, to be equally apportioned between EnCana and Cenovus.

It is anticipated that such dividends will be payable on December 31, 2009 to shareholders of record, for each respective company, as of December 21, 2009.

ECA closed Wednesday's regular trading session at US$58.02, down US$0.69, on a volume of 2.9 million shares.

ECA.TO settled at C$60.70 on Wednesday, down C$0.80, on a volume of 2.3 million shares.

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