October 20, 2010 / 11:13 AM / 8 years ago

UPDATE 3-Encana says growth may slow, shares tumble

* Q3 adj EPS $0.13 vs analyst forecast $0.19

* Cuts 2010 production forecast by about 50 mmcfd

* Will align growth with cash flow

* Shares fall 3 pct in Toronto (Adds executive comments; in U.S. dollars unless noted)

By Jeffrey Jones

CALGARY, Alberta, Oct 20 (Reuters) - Encana Corp (ECA.TO) cut its outlook for the year on Wednesday and said stubbornly low gas prices could lead it to claw back longer-term growth targets, prompting a 3 percent drop in its shares.

Third-quarter profit at Encana, Canada’s largest natural-gas producer, lagged market expectations and Chief Executive Randy Eresman said he remained concerned that weak gas-market conditions may persist.

Eresman said the company, known for large unconventional gas plays in Canada and the United States, reduced 2010 spending by $200 million and would cut capital expenditures in 2011 if prices stay weak.

“I would think if it persists we will cut back further on our capex program and live closer to what we were otherwise planning ... but I wouldn’t say we’re going to live exactly within cash flow,” he said during a conference call.

The company previously said it aimed to boost production by 14 percent annually, spending an average of $6 billion a year.

Some investors have worried it could not afford its growth plans as high inventories and weak industrial demand in the United States and Canada have keep a tight lid on gas prices.

Eresman said he does not believe the current futures price below $3.60 per million British thermal units is high enough to sustain current drilling levels across the industry.

Encana stock fell C$1.03 to C$29.13 on the Toronto Stock Exchange.

“Encana is signaling a more conservative spending outlook should natural gas prices remains weak — indicating that it would not spend in excess of cash flow,” Andrew Potter, an analyst with CIBC Securities, said in a research note.

For 2010, Encana lowered its production forecast by about 50 million cubic feet a day to 3.315 billion cubic feet equivalent a day.

It now sees 2010 cash flow of $5.95-$6.20 a share, compared with its prior view of $5.95-$6.50. Encana cut its 2010 spending by about $200 million to $4.8 billion.

Some of the cut stemmed from a decision to slow activity at the huge Haynesville shale gas play in Louisiana and east Texas, where the industry is struggling with a shortage of well completion equipment and inflation in service costs of about 8 percent, it said.

“This will affect our pace of development in the near term as we will not pursue growth at any cost,” Eresman said. “Currently our teams are working very hard to develop new and innovative solutions for managing our pumping equipment requirements, including the development of new fit-for-purpose completions equipment.”

Encana also said it plans to offer stakes in numerous Canadian and U.S. gas properties to third-parties to accelerate development of assets that it would not otherwise move ahead on for several years.

The packages, to be rolled out over the next few weeks, follow an agreement in June with state-owned China National Petroleum Corp to negotiate joint development of shale gas assets in northeastern British Columbia.

However, Eresman said the initiative was not related to low gas prices, but a desire to begin unlocking value for longer-term projects.

Third-quarter net income was $569 million, or 77 cents a share, up from year-earlier $25 million, or 3 cents a share.

Operating income, which excludes one-time and unusual items like hedging gains and losses, fell to $98 million, or 13 cents a share, from $378 million, or 50 cents a share.

That fell short of the average analyst estimate by 6 cents a share, according to Thomson Reuters I/B/E/S.

Cash flow, an indicator of its ability to fund growth plans, fell to $1.13 billion, or $1.54 a share, from $1.27 billion, or $1.70 per share.

Total production was 3.3 bcfd, up about 17 percent from the third quarter last year.

$1=$1.02 Canadian Addition reporting by Scott Haggett and Bhaswati Mukhopadhyay; editing by Rob Wilson

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