* Raises 2010 production forecast by 65 Mmcfe/d
* Q2 net loss $0.68 per share
* Op profit $0.11 vs $0.22 expected
* Raises 2010 capex forecast by $500 mln, trims costs
* Shares fall 5 pct (Adds detail and comment, updates shares and changes dateline from TORONTO. In U.S dollars unless noted.)
By Scott Haggett
CALGARY, Alberta, July 21 (Reuters) - Encana Corp (ECA.TO), Canada's biggest natural gas producer, reported a net loss on Wednesday while a drop in gas prices pushed operating profit well below expectations, sending its shares down 5 percent.
The shares tumbled even though Encana boosted its production forecast, raised capital spending and lowered costs. Cash flow exceeded expectations, boding well for its ability to fund a planned expansion of output in the coming years.
"The headline numbers were certainly ugly ...but the underlying operating results I thought looked pretty favorable," said Lanny Pendill, an analyst with Edward Jones. "I'm kind of scratching my head on the market reaction."
The net loss came in at $505 million, or 68 cents per share in the quarter, compared with a profit of $238 million, or 28 cents, in the second quarter of 2007 2009.
The bottom-line result largely reflected a $340 million markdown in the value of commodity hedging contracts and a non-cash $246 million charge for unfavorable foreign exchange fluctuations.
Operating profit, which excludes most of the non-cash gains and losses and other one-time items, fell 83 percent to $81 million, or 11 cents per share. That was half the operating profit expected, according to the average of analyst forecasts compiled by Thomson Reuters I/B/E/S.
The lower operating result came as the company's average gas price fell 19 percent to $5.74 per thousand cubic feet from $7.04 in the year-earlier quarter.
Encana, which expects to double output over the next five years, boosted its production forecast for 2010 by 65 million cubic feet per day to 3.365 billion cubic feet per day.
It also raised its capital budget for this year to $5 billion, $500 million higher than prior estimates.
"This investment will be used to advance the development of our key and emerging resource plays in Canada and the United States," Randy Eresman, Encana's chief executive, said on a conference call.
The company also trimmed its 2010 operating cost forecast by a dime to 80 cents per thousand cubic feet and raised its estimate of 2010 cash flow by 10 cents to between $5.95 and $6.50 per share.
Encana's cash flow in the quarter -- a key measure of its ability to pay for new projects and drilling -- was $1.22 billion, or $1.65 per share, well above the average forecast of $1.30 a share, according to Thomson Reuters I/B/E/S.
The company, which spun off its oil sands operations into Cenovus Energy Inc (CVE.TO) late last year, produced 3.34 billion cubic feet equivalent per day in the quarter, up 8 percent from 3.1 bcfe per day
The rise in output came on higher production from its properties in the Haynesville shale gas region of Louisiana and Texas, and the Piceance basin in Colorado.
The company is prowling for partners that could help speed up development of its unconventional gas fields. Last month it agreed to negotiate a deal with China National Petroleum Co that could see the state-owned company share in the development of Encana's Horn River and Montney properties in British Columbia.
Eresman said on Wednesday those talks are going well.
"I'm unable to say much at this time, but I can say that our discussions have been developing very well," he said on the conference call. "If successful we foresee a significant multi-year transaction that could help provide with us the ability to grow at a faster rate and a lower cost."
Encana's shares fell C$1.74 to C$32.75 late afternoon on the Toronto Stock exchange.
($1= $1.04 Canadian)
Editing by Frank McGurty Additional reporting by Euan Rocha in Toronto and Bhaswati Mukhopadhyay in Bangalore