* Q2 EPS $0.32 vs $1.63
* Cash flow per shr $2.87 vs $3.85
* Cuts spending, production outlook
* Shares up 2 percent at C$58.93 (Adds CEO comments; in U.S. dollars unless noted)
By Jeffrey Jones
CALGARY, Alberta, July 23 (Reuters) - EnCana Corp (ECA.TO), Canada's biggest energy company, said on Thursday its second-quarter profit fell 80 percent as oil and gas prices sank, but operating results beat expectations on a strong showing from its oil sands division.
EnCana shares jumped C$1.28, or 2 percent, to C$58.93 on the Toronto Stock Exchange. They are up about 3.5 percent so far this year.
The company also benefited from its lucrative forward sales of natural gas, which protected much of its production from the impact of sagging North American gas demand and weak prices.
"I thought it was a very good quarter and I think that the only concern in the market right now is of a macro nature. It relates to the fundamentals for the commodity that they happen to be most weighted to," Dundee Capital Markets analyst Menno Hulshof said.
EnCana, known for extensive North American unconventional natural gas and oil sands production and refining holdings, earned $239 million, or 32 cents a share, down from year-earlier $1.2 billion, or $1.63 a share.
Excluding unusual items such as large unrealized hedging gains and mark-to-market losses, operating earnings were $917 million, or $1.22 a share, down 38 percent from $1.47 billion, or $1.96 a share.
Analysts, on average, had expected the company to earn 86 cents a share, according to Reuters Estimates.
Cash flow, a glimpse into the company's ability to fund development, slipped 25 percent to $2.15 billion, or $2.87 a share, from $2.89 billion, or $3.85 a share.
The company cut its capital spending budget for the full year to $5.5 billion-$6 billion from $6.1 billion.
Profit at EnCana and among its industry peers has dropped as U.S. oil averaged $59.79 a barrel in the quarter, down 52 percent from a year earlier, as the economic downturn squeezed energy demand. Natural gas prices averaged $3.80 per million British thermal units, down 67 percent.
But EnCana said its realized gas price was $6.99, down just 18 percent from the year before, as a result of hedging. It has also sold forward 45 percent of its 2010 gas output at prices averaging $6.09 per mmBtu.
Gas production slipped 1 percent to 3.79 billion cubic feet a day. Oil output climbed 6 percent to 136,000 barrels a day.
Gas output was helped by favorable royalty changes in Alberta, but offset by volumes across the continent that EnCana has either shut in or delayed bringing on stream due to low prices, Chief Executive Randy Eresman told analysts.
"Production would have been quite a bit higher than our guidance had we not restricted volumes by about 300 million to 400 million cubic feet per day," he said.
About half of that can be brought back quickly as conditions improve, he said.
EnCana now expects to produce a total of 4.4 billion to 4.8 billion cubic feet natural gas equivalent a day, down about 100 million from its last target.
It has been concentrating efforts on developing shale gas operations in Louisiana, Texas and British Columbia, and on its joint venture with ConocoPhillips (COP.N), where the companies team up to produce bitumen from oil sands and process crude at refineries in the United States.
In the quarter, oil sands output from the Foster Creek and Christina Lake plays in northern Alberta rose 65 percent to a net 40,700 barrels a day.
Recent wells in the Haynesville shale gas play in Louisiana have tested at as much as 20 million cubic feet a day, and those in British Columbia's Horn River area at 11 million cubic feet a day, Eresman said.
Last week, EnCana sold a package of Alberta conventional natural gas assets to Bonavista Energy Trust BNP_u.TO for $620 million, accounting for most of its budgeted 2009 divestiture proceeds.
$1=$1.09 Canadian Additional reporting by Ajay Kamalakaran; editing by Rob Wilson