October 20, 2011 / 10:29 AM / 7 years ago

UPDATE 4-Weak gas prices overshadow Encana profit

* Q3 cash flow up 3 pct at $1.16 bln, or $1.57/shr

* Says on track to meet output growth of 5-7 pct/shr

* Shares end down 0.5 pct at C$20.44 (Adds CEO comments, details)

By Gowri Jayakumar and Jeffrey Jones

Oct 20 (Reuters) - Encana Corp’s (ECA.TO) quarterly profit beat expectations, partly because of an unexpectedly large tax recovery, but shares of Canada’s top natural gas producer fell as investors stayed bearish on the outlook for gas prices.

Excluding unusual items, including a $414 million foreign exchange loss, third-quarter operating earnings were $171 million, or 23 cents a share, more than double the year-earlier result and well above analysts’ forecast of 11 cents a share, according to Thomson Reuters I/B/E/S.

But the company’s shares ended the session off 11 Canadian cents at C$20.44 on the Toronto Stock Exchange, after earlier falling as much as 3 percent.

The stock has been under heavy pressure in recent months as investors soured on the company’s large exposure to gas markets, where the outlook on prices has weakened due to a supply glut and shaky economic conditions.

The company has said it will limit spending in 2012 to match cash flow while concentrating on plays with the potential for higher-priced gas liquids.

FirstEnergy Capital analyst Michael Dunn said the results produced no major positive short-term surprises in its quest to shift to oilier output, which prompted investors to move the shares with the rest of the market.

“They are essentially performing in line with their Canadian peers and in line with their U.S. peers as well,” Dunn said.

Encana’s net earnings were $120 million, or 16 cents a share, in the quarter, down 80 percent from the year before. Revenue was $1.16 billion, up from $1.13 billion.

Natural gas prices NGc1 slipped about 15 percent in the July-September quarter, but hedging has partly cushioned Encana from lower prices, and helped generate higher cash flow.

Encana has hedged about 2 billion cubic feet per day of expected 2012 natural gas output at an average NYMEX price of $5.80 per million British thermal units and about 500 million cubic feet per day of expected 2013 output at $5.24 per mmBtu. Gas sold for $3.63 per mmBtu in New York on Thursday.

Cash flow rose 3 percent and the company said it realized $146 million in after-tax gains as a result of commodity price hedges. Tax expenses fell 70 percent to $86 million.

“People don’t give as much credit to a beat when it is tax-driven as opposed to when it is operationally driven ... but nonetheless, they were ahead of expectations,” said Andrew Potter, an analyst with CIBC World Markets.

Encana, which aims to sell up to $2 billion worth of non-core assets this year to help cope with weak gas prices, is planning several sales and joint venture deals that could be announced by the year-end, Chief Executive Randy Eresman said.

They include a disposition of Encana’s Barnett Shale assets in Texas and the search for a partner to help develop the company’s Cutbank Ridge holdings in northeastern British Columbia. It is also looking to sell more natural gas gathering and processing assets.

“The competitive sale of select midstream assets frees up capital for reinvestment in higher-return upstream projects,” Eresman said.

Encana has been looking to triple liquids-rich gas production in the Alberta deep basin and now expects overall gas liquids output to reach 80,000 barrels per day by 2015.

Eresman said he should be able to provide details on early stage liquids plays, including the Duvernay in Alberta, Collingwood in Michigan and Tuscaloosa Marine Shale in Mississippi, in February.

    $1=$1.02 Canadian Reporting by Gowri Jayakumar in Bangalore, Jeffrey Jones in Calgary; Editing by Maju Samuel

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