* Q2 EPS $0.21 vs loss/shr $0.09
* Q2 cash flow/shr $1.47 vs $1.65 yr ago
* Q2 natural gas production up 4 pct at 3.46 bcfe/d
* Sees $5.40-$5.90 cash flow/shr, 3.35-3.4 bcf/d output for 2011 (Adds details on divestitures, FY operating costs in paragraphs 2-5, 7-10)
July 21 (Reuters) - Encana Corp posted a second-quarter profit and said it expects to meet its full-year cash flow target as the company has hedged its forecast output for the year at significantly higher prices.
Encana, Canada's largest natural gas producer, has also taken a number of steps to offset rising costs of raw materials, by self-sourcing steel, sand and fuel, and by increasing drilling efficiency at its operations.
At one of its shales, the company has reduced the number of days to drill a well by 20 percent.
"While industry cost inflation this year is expected to average about 10 percent, we expect our inflation rate to average approximately half that level," Chief Executive Randy Eresman said in a statement.
The company had forecast full-year operating and administrative costs of $1.15-$1.20 per thousand cubic feet equivalent.
The company expects cash flow and output to grow 5-7 percent this year. It has hedged half of its forecast production at $5.75 per thousand cubic feet, which is 27 percent higher than the commodity's current trading price NGc1.
Encana, which operates shale gas assets in Canada and the United States, said it was on track to achieve $1-$2 billion from divestitures, as it looks to sell its non-core midstream and upstream assets in North America.
The company, which called off a C$5.4 billion ($5.7 billion) joint venture with PetroChina last month, said it was looking for partners to develop some of its assets in British Columbia and Alberta, including Horn River.
Horn River, in northeastern British Columbia, is one of the richest shale gas basins in North America, with an estimated 78 trillion cubic feet of natural gas.
Proceeds from these planned transactions are expected to supplement 2011 cash flow generation in the current low-price environment and strengthen its balance sheet, the company said.
Encana has also hedged about 2 billion cubic feet per day of expected 2012 production at a price of about $5.80 per thousand cubic feet.
For the second quarter, Encana earned $176 million, or 21 cents a share in the quarter, compared with a loss of $457 million, or 9 cents a share, a year ago.
Operating earnings were 22 cents per share, compared with analysts' estimate of 14 cents a share, according to Thomson Reuters I/B/E/S.
Encana shares closed at C$29.83 on the Toronto Stock Exchange on Wednesday. ($1=$1.95 Canadian) (Reporting by Gowri Jayakumar in Bangalore; Editing by Saumyadeb Chakrabarty and Gopakumar Warrier)