Encana Cuts Production Guidance on Low Gas Prices

Encana Corp., Canada’s largest natural-gas producer, trimmed capital spending for the year and cut its production outlook because of “unsustainably low” gas prices.

The company won’t pursue “growth at any cost,” Randy Eresman, Calgary-based Encana’s chief executive officer, said in a statement today. “North America’s ongoing oversupply of natural gas production has driven prices for the near term to levels that we believe are unsustainably low. As such, we are slowing the near-term growth rate of our resource plays.”

The company will defer about $200 million of its proposed $5 billion in spending until next year. Gas production, previously forecast to rise 15 percent from 2009, will now increase about 12 percent to the equivalent of 3.315 billion cubic feet daily, according to the statement.

“The cuts are largely in the Haynesville” shale area, said Phil Skolnick, an analyst at Canaccord Genuity Inc. in New York who rates Encana “hold” and doesn’t own the stock. The company increased its production outlook for Canada, he said.

Encana had planned to boost production from the Haynesville area in Louisiana and East Texas. Demand for hydraulic fracturing and other services has hindered its ability to complete wells and bring them into production, the company said. The Haynesville is a shale-rock formation that requires injection of water, sand and chemicals to release gas.

Haynesville Gas

The company has 430,000 net acres in the Haynesville, an area that may hold 251 trillion cubic feet of technically recoverable gas, according to an April 2009 report done for the U.S. Energy Department.

Encana in June signed a memorandum of understanding with China National Petroleum Corp. to potentially develop gas from shale formations in British Columbia. The talks are still ongoing, Eresman said on an investor conference call today, and he’s not sure where they will go.

Encana fell $1.03, or 3.4 percent, to C$29.13 at 4 p.m. on the Toronto Stock Exchange. Before today, Encana had lost 12 percent so far this year.

Energy companies are under pressure to complete wells in the Haynesville to meet land-retention conditions in their contracts. Encana and others have boosted demand for services and the Canadian company has moved some drilling into next year to avoid inflating costs.

“There are a lot of people trying to drill to retain land” in the Haynesville area, said Lanny Pendill, an analyst with Edward Jones & Co. in St. Louis who rates Encana “buy” and doesn’t own the stock.

Gas Prices

Barclays Plc cut its forecast yesterday for U.S. natural gas prices by 3.9 percent for next year, saying they may average $3.94 per million British thermal units, down from an earlier estimate of $4.10.

New York gas futures rose 23 percent in the third quarter to an average of $4.235 per million British thermal units. Prices are up from $3.441 in third quarter of 2009, the lowest quarterly average since 2002, according to Bloomberg data.

Encana reported net income for the quarter rose to $569 million, or 77 cents a share, from $25 million, or 3 cents, a year earlier.

Encana’s net income was boosted by $331 million from hedging gains as the company sold gas under contracts at higher-than-market prices. Without those contracts and a gain related to foreign currencies, profit would have been $98 million, or 13 cents a share, below the 20 cents-a-share average estimate of 17 analysts polled by Bloomberg. The shares have one sell, 10 buy and 13 hold recommendations.

“They missed the street expectations,” Skolnick said. “Production was a bit light.”

(Encana will hold a webcast at 1 p.m. New York time to discuss its results. To listen click on http://encana.com/investors/presentations/.)

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