EnCana profit hit by lower gas prices, hedging activity

By The Canadian Press

CALGARY - EnCana Corp. (TSX: ECA.TO) says its profit plunged 99 per cent in the third quarter compared with the gang-buster results in the summer of 2008 but added that its hedging activities softened the blow from lower commodity prices.

The Calgary-based energy company, which reports in U.S. currency, announced Thursday that its third-quarter net income fell to US$25 million or three cents per share, down from $3.5 billion or $4.73 per share in net earnings a year earlier.

However, after taking into account hedging activities, the year-to-year decline wasn't so dramatic - although still sizable.

In hedging contracts, EnCana enters into deals to sell natural gas and other commodities in future at set prices, usually higher than today's current spot price.

The advantage of such hedges is that you lock in future revenues at set prices, which could be much higher than future market prices if the gas market declines. The risk is that if the future spot price is much higher than the hedged price it creates accounting losses on the balance sheet.

Operating earnings, which include realized hedging gains and losses, fell to $775 million or $1.03 per share, down from $1.4 billion or $1.92 per share in operating earnings a year earlier.

Analysts had pegged earnings per share at $1.17, according to figures compiled by Thomson Reuters.

EnCana said financial performance in the third quarter 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.

Cash flow was $2.1 billion or $2.77 per share, down 26 per cent from a year from $2.8 billion or $3.74 per share a year earlier.

"Our company's solid operational and financial performance during a period of weak prices is evidence that EnCana's strategy is working," said Randy Eresman, EnCana's president and chief executive.

"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 early trading Thursday on the Toronto Stock Exchange,EnCana shares fell 65 cents to C$60.05, a drop of more than one per cent.

EnCana is one of North America's biggest natural gas producers with operations across Western Canada, and in the U.S. Rocky Mountain states, Texas and elsewhere.

The company also has an oilsands partnership with U.S. oil giant ConocoPhillips (TSX: COP.TO) and other energy businesses.