Encana Delivers Solid Financial Results on Hedging Gains

Encana delivered strong operational performance and solid financial results in the second quarter of 2011, growing natural gas and liquids production by 4 percent per share from the second quarter in 2010. Cash flow was US $1.1 billion, or $1.47 per share. Operating earnings were $166 million, or 22 cents per share. As a result of commodity price hedging in the second quarter, Encana's cash flow was $131 million, after tax, or 18 cents per share, higher than what the company would have generated without its commodity price hedging program. Second quarter total production was approximately 3.46 billion cubic feet equivalent per day (Bcfe/d), up 111 million cubic feet equivalent per day (MMcfe/d) from the same quarter in 2010.

"Encana delivered another quarter of strong operating performance and achieved solid cash flow and operating earnings in the face of natural gas prices that remain at levels that we believe are unsustainably low in the long term. We are on track to meet our annual guidance for cash flow and production, which is expected to grow between 5 and 7 percent per share in 2011. We remain firmly focused on being among the lowest-cost producers in the natural gas industry, diligently applying capital discipline, risk management and increased operational efficiencies in all of our decision making," said Randy Eresman, President & Chief Executive Officer.

Pursuing cost savings through operating efficiencies and supply chain optimization

"We have adapted to this prolonged period of soft natural gas prices by taking meaningful steps and applying advanced technologies to manage costs over the long term as we pursue margin maximization on all of the natural gas that we produce. On our Haynesville resource play hubs, we have reduced well drilling times in the last year by 20 percent to 40 days, and a number of wells this year have been drilled in 35 days. To counter the high demand and inflationary rates for well completion equipment, we have established long-term, efficiency-based contracts with four new, dedicated completions crews. In addition, by applying effective logistics management and leveraging Encana's demand, we have reduced our cost of commodities by self-sourcing steel, sand and fuel. These are proactive cost management programs that we expect will result in significant and ongoing cost savings. Our integrated supply chain approach also helps eliminate bottlenecks and optimize cycle times. We now have 15 rigs fueled by natural gas, about one-third of our current drilling complement, generating fuel savings of between $300,000 and $1 million per rig per year, depending on the rig's size and fuel system. While industry cost inflation this year is expected to average about 10 percent, we expect our inflation rate to average approximately half that level – which we expect will be more than offset by improvements in efficiencies," Eresman said.

Encana establishes sizable positions in two promising liquids rich plays – Duvernay and Tuscaloosa

In keeping with the company's first-mover strategy of quietly assembling meaningful land positions to capture large resource opportunities, Encana has established two more sizable land positions in prospective liquids rich plays. In western Alberta, the company has accumulated more than 365,000 net acres in the Duvernay play, where preliminary drilling results by Encana and other operators show significant potential. Two more Duvernay exploration wells are planned for this year. In Mississippi and Louisiana, Encana has captured more than 250,000 net acres of the Tuscaloosa marine shale lands and the company plans to evaluate the play's potential this year.

"Both of these plays are in their early days, but we are encouraged by our exploration results to date. Duvernay and Tuscaloosa are just two of a handful of exciting opportunities that we are pursuing on the more than 2.1 million net acres we hold with strong potential for liquids production. The Niobrara formation in Colorado and the Collingwood shale in Michigan, plus our well-established land positions in the Alberta Deep Basin and the Montney formation in Alberta and British Columbia, provide us with a diverse and promising portfolio of prospective opportunities to grow liquids production over the long term," Eresman said.

Several divestiture and joint venture initiatives moving forward

Encana's non-core divestiture program is well underway towards achieving the company's 2011 net divestitures goal of between $1 billion and $2 billion. Encana is actively engaged with a number of parties in a competitive process to divest of non-core midstream and upstream assets in Canada and the U.S. – transactions that include the northern portion of Encana's Greater Sierra resource play, midstream assets in the Cutbank Ridge resource play which straddles the British Columbia-Alberta border, the company's interest in the Cabin Gas Plant in Horn River and midstream assets in the Piceance basin of Colorado. In its joint venture initiatives to accelerate the value recognition of its enormous resource potential, Encana is also pursuing investment partners in its undeveloped Horn River lands and producing properties in the south portion of Greater Sierra. In addition, competitive marketing of joint venture opportunities on Encana's extensive undeveloped lands in its Cutbank Ridge resource play will commence this summer. Proceeds from these planned transactions are expected to supplement 2011 cash flow generation in the current low price environment and strengthen the company's balance sheet, providing financial flexibility going into 2012.

Deep Panuke project gearing up to begin production in fourth quarter

After sailing from its Abu Dhabi construction site in the Middle East, the production field center (PFC) for Encana's Deep Panuke natural gas development offshore Nova Scotia arrived in the port of Mulgrave on the Strait of Canso in late June. Crews are completing pre-commissioning work before the PFC is towed to the field location for installation about 250 kilometres southeast of Halifax. Deep Panuke is expected to deliver its first natural gas to market in the fourth quarter of 2011, with production ramping up to about 200 million cubic feet per day (MMcf/d). Offshore work this fall includes commissioning of all the operational systems, hooking up the four production wells to the PFC and connecting production facilities to the 176 kilometer pipeline that will deliver natural gas to shore at Goldboro, Nova Scotia.

"Our Deep Panuke project is gearing up to begin delivering clean natural gas to prime markets along the Eastern seaboard of North America," said Michael Graham, Encana's Executive Vice-President & President, Canadian Division.

Natural gas hedges help protect cash flow generation

For the next 18 months, Encana has about half of its expected production hedged at attractive prices – about 1.8 billion cubic feet per day (Bcf/d) at an average NYMEX price of $5.75 per thousand cubic feet (Mcf) for the last half of 2011 and approximately 2.0 Bcf/d of expected 2012 natural gas production at an average NYMEX price of about $5.80 per Mcf.

"Our risk management programs increase the certainty of our cash flow generation and help ensure stability for our capital programs and dividend payments – prudent measures that continue to underpin Encana's financial strength," Eresman said.


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