EnCana Corporation achieved strong increases in cash flow and operating earnings in the second quarter of 2008 as a result of solid performance from the company's North American portfolio of resource plays and substantial increases in commodity prices.
EnCana is increasing its 2008 guidance for total cash flow to a range of $10 billion to $11 billion, or between $13.30 and $14.65 per share. EnCana is also increasing its natural gas production forecast by 70 MMcf/d to 3.85 Bcf/d, or 8% higher than 2007 gas production. Production from the company's Foster Creek and Christina Lake projects is now expected to average about 31,000 bbls/d, down about 3,000 bbls/d due to an unexpected power outage and an extended plant turnaround in the second quarter at Foster Creek.
"As a result of higher commodity prices and increased activity, we are seeing signs of cost inflation in services and materials - particularly for steel and fuels, and we believe inflationary pressure may continue to climb the rest of the year. EnCana has largely managed to offset inflationary pressures to date through a series of long-term contracts. For example, we have been working to lock in longer-term contracts for our well fracturing services. The majority of these contracts are priced at current levels. Significant portions of our steel requirements were contracted early so that we have the benefit of those more favorable cost levels. Going forward, we will continue to pursue cost management opportunities when possible," said Randy Eresman, EnCana's President & Chief Executive Officer.
Total natural gas production increased 10% in the second quarter to 3.8 Bcf/d, driven by a 17% increase in EnCana's natural gas key resource plays to 3.15 Bcf/d. In the U.S. increases were led by East Texas at 127% as a result of drilling success as well as incremental volumes from the Deep Bossier acquisition. In the Canadian Foothills natural gas production was up 5%, with drilling success and new facilities in the key resource plays of Bighorn in west central Alberta, CBM in central Alberta and Cutbank Ridge straddling the British Columbia-Alberta boundary.
Integrated Oil generated $527 million in operating cash flow, down slightly from $557 million in the same quarter of 2007. The upstream business benefited from a 138% increase in the average heavy oil price to $93.64 per bbl at Foster Creek and Christina Lake. Operating cash flow for the second quarter includes $172 million related to lower purchased product costs as a result of accounting for inventory based on a first-in first-out valuation which is required under Canadian generally accepted accounting principles. This inventory valuation methodology results in lower product charges to operations in a rising input cost environment. The Chicago 3-2-1 crack spread averaged $13.60 per bbl in the quarter, down 55% from $30.12 per bbl from the same period last year when crack spreads reached record levels as gasoline inventories were drawn down to five-year lows.
EnCana announced that it has established a leading land and resource position in the Horn River Shale in northeast British Columbia and the Haynesville Shale in Louisiana and Texas. EnCana has drilled several exploration wells that have shown strong potential to deliver commercial volumes of natural gas.
EnCana's commodity price risk management measures resulted in realized losses of approximately $400 million after-tax, composed of a $308 million after-tax loss on gas hedges, and a $92 million after-tax loss on oil and other hedges. EnCana has hedged about 1.5 Bcf/d of expected 2008 gas production for the balance of the year at an average NYMEX equivalent price of $8.20 per Mcf. EnCana has about 23,000 bbls/d of expected 2008 oil production hedged for the balance of the year under fixed price contracts at an average West Texas Intermediate price of $70.13 per bbl. For 2009, EnCana has 391 MMcf/d of its expected natural gas production under fixed price contracts at an average NYMEX equivalent price of $9.85 per Mcf and 341 MMcf/d under NYMEX put options at an average strike of $8.85 per Mcf.
EnCana has hedged 100% of its expected U.S. Rockies basis exposure in 2008 using a combination of downstream transportation and basis hedges, including some hedges that are based on a percentage of NYMEX prices. At June 30, 2008, U.S. basis hedges, a combination of Rockies, Mid- Continent and San Juan instruments, had an effective average differential to NYMEX of $1.66 per Mcf for the rest of 2008. EnCana has also hedged about 8% of its expected 2008 Canadian gas production at an average AECO basis differential of 76 cents per Mcf.
EnCana's Board of Directors has declared a quarterly dividend of 40 cents per share payable on September 30, 2008 to common shareholders of record as of September 15, 2008. Based on the July 23, 2008 closing share price on the New York Stock Exchange of $72.62, this represents an annualized yield of about 2.2%.
EnCana announced plans to split into two highly focused energy companies, one a North American natural gas company and the other a fully integrated oil company with in-situ oil properties and refineries supplemented by reliable production from natural gas and crude oil resource plays.
In the second quarter of 2008, EnCana purchased for cancellation approximately 200,000 common shares at an average price of $74.81 per share under the company's Normal Course Issuer Bid for a total cost of $15 million.
In the quarter, EnCana invested $1.7 billion in capital, excluding acquisitions and divestitures, on continued development of its key resource plays and expansion of the company's downstream heavy oil processing capacity through its joint venture with ConocoPhillips.
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