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Encana blames Q2 loss on hedging, foreign exchange, bumps up 2010 spending

CALGARY - Encana Corp. is boosting capital spending by half a billiondollars this year and says it expects to produce substantially morenatural gas in 2010 than previously anticipated.

CALGARY - Encana Corp. is boosting capital spending by half a billion dollars this year and says it expects to produce substantially more natural gas in 2010 than previously anticipated.

“This initial investment will be used to advance the development of our key and emerging resource plays in Canada and the United States,” chief executive Randy Eresman told a conference call Wednesday to discuss his firm's second-quarter results.

Encana (TSX:ECA) now expects to spend $5 billion on capital projects in 2010.

Meanwhile, Encana forecasts it will produce nearly 3.7 billion cubic feet of natural gas per day in 2010, an increase of 65 million cubic feet, while operating costs are about 17 per cent below earlier expectations.

The strong operating results came as Encana, which reports its earnings in U.S. dollars, said foreign exchange and hedging losses dragged it to a $505-million loss in the second quarter, compared with a profit of $92 million in the same 2009 period.

That amounted to a loss of 68 cents per share versus a year-ago profit of 32 cents per share.

Encana's shares fell about 4.6 per cent to C$32.90 on the Toronto Stock Exchange.

Encana said it took an unrealized after-tax loss of $340 million on its hedging contracts - which provide shelter from commodity price volatility by allowing companies to sell their production at a set price for a certain period of time. The company also booked a foreign exchange loss of $246 million.

Operating earnings, which Encana deems a more accurate measure of its financial performance, were $81 million, or 11 cents per share, from $472 million, or 63 cents per share, in the second quarter of 2009.

Cash flow was $1.2 billion, or $1.65 per share. That handily beat UBS analyst Matt Donohue's expectation of $1.28 per share, but Encana missed his estimate of 22 cents per share in operating earnings.

“The variance from our estimates was attributed approximately 75 per cent to higher than expected realized natural gas prices with the remainder attributed to higher operating costs and realized hedging losses,” Donohue wrote in a research note.

Encana's revenue after royalties was $1.47 billion, down about $1 billion from the year-earlier period, before its oil business was spun off into Cenovus Energy Inc (TSX:CVE).

Calgary-based Encana is a natural gas producer, with a focus on prolific, but tough-to-access shale plays across North America.

Encana produces gas across Western Canada and has major operations in the U.S. Rocky Mountain states, Texas and new emerging shale gas regions in the U.S. Midwest.

The company said in June it may team up with China National Petroleum Corp.

to develop some of its shale natural gas holdings in northeastern British Columbia.

The potential joint-venture is expected to include the Horn River Basin, Greater Sierra and Cutbank Ridge, where Encana is already a major player.

“Our discussions have been developing very well, and if successful, we foresee a significant multi-year transaction that could help provide us with the ability to grow at a faster rate and a lower cost,” Eresman said.

The company has said it aims to bring in between $1 billion and $2 billion per year of joint-venture capital in order to speed up development of its vast land base.

Over the past three years, Encana has attracted more than $4 billion in third-party capital.

Encana's portfolio is so massive, it would take 18 years to develop all of it at its current pace of 1,300 wells per year without a boost from joint-venture deals, Eresman said.

“This, we believe, is simply too long for our shareholders to wait to access that value,” he said.

In March, Encana signed an agreement with Korea Gas Corp. that saw the Asian company buy a 50 per cent stake in properties in the promising Horn River Basin and Montney shale gas plays in northeastern B.C.