April 22, 2008 / 11:17 AM / in 10 years

Earnings, cash gains at EnCana muddied by charges

CALGARY, Alberta (Reuters) - First-quarter profit at EnCana Corp (ECA.TO) fell 81 percent as it was forced to take about $1 billion in non-cash charges from natural gas sales contracts priced below market rates and from foreign exchange losses, Canada’s biggest energy company said on Tuesday.

<p>EnCana's Doug Shea (R) goes over drilling reports with driller Ron Webster at an EnCana gas drilling well east of Calgary, Alberta, February 15, 2007. REUTERS/Todd Korol</p>

But EnCana said rebounding gas and sky-high crude prices, as well as rising output, pushed operating income up 23 percent and cash flow up 36 percent, beyond even its own expectations.

Despite mounting cash, the company will wait until next year to boost spending from its current budget, Chief Executive Randy Eresman said. It cut Canadian spending late last year amid low gas prices and fears of costs associated with the Alberta government’s decision to raise royalties.

“We think we’ve found the right balance in a combination of a sustainable growth strategy and use of share buybacks rather than chasing production growth,” Eresman told analysts.

“We kind of feel that with any incremental cash we will be generating in excess of our expectations we will be targeting additional share buybacks or possibly reducing debt.”

Some analysts expect firms to boost spending as oil prices flirt with an unprecedented $120 a barrel. Canadian gas prices, meanwhile, have climbed 50 percent this year.

EnCana, known for gas operations in Canada and the United States, as well as its oil sands business, earned $93 million, or 12 cents a share, in the first quarter, down from year-earlier $497 million, or 64 cents a share.

Net earnings were cut by charges that included a $737 million unrealized loss from natural gas hedging and $215 million in nonoperating foreign exchange losses, it said. Under accounting rules, companies must tally the value of the hedging contracts as if they were due at the end of the quarter.

Excluding that, operating earnings rose to $1.05 billion, or $1.39 per share, from $850 million, or $1.09 a share.

<p>David O'Brien, EnCana Corporation Chairman of the Board, smiles during the company's annual general meeting of shareholders in Toronto April 22, 2008. REUTERS/ Mike Cassese</p>

That beat the average forecast of analysts polled by Reuters Estimates by 12 cents.

Cash flow, a glimpse into an oil company’s ability to fund development projects, rose to $2.39 billion, or $3.17 a share, up from $1.75 billion, or $2.25 a share.

EnCana shares were off C$1.16 at C$85.52 on the Toronto Stock Exchange. They have climbed 28 percent this year, putting EnCana among Canada’s three most valuable companies.

Results were driven by higher realized prices and lower taxes, which offset a jump in costs and weak refining margins as part of EnCana’s oil sands venture with ConocoPhillips (COP.N), UBS Securities analyst Andrew Potter said in a note to clients.

EnCana and its rivals enjoyed record oil prices in the quarter, which averaged $97.82 a barrel, up 68 percent from a year earlier. Canadian gas averaged C$7.51 a gigajoule, up 7 percent.

The company produced 3.73 billion cubic feet of gas and 137,000 barrels of oil a day in the quarter. That’s up from 3.4 billion cubic feet and 131,000 barrels a day a year earlier.

The oil totals include output from with the integrated oil sands venture, in which EnCana has stakes in U.S. refineries.

EnCana touted its position in Canadian and U.S. shale gas plays that have created industry buzz as EOG Resources (EOG.N) and other companies have announced huge potential reserves from exploration.

EnCana has acreage in the Horn River Basin in British Columbia, where EOG has said it may have found 6 trillion cubic feet, as well as the Deep Bossier play in east Texas, where it paid $2.6 billion to buy out its partner in the Amoruso prospect last year.

($1=$1.00 Canadian)

Additional reporting by Scott Anderson; editing by Rob Wilson

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