Encana Q2 2012 Results: Falling Natural Gas Prices Drive $1.48 Billion Loss At Energy Giant

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ENCANA Q2 EARNINGS LOSS
Randy Eresman, president and CEO of Encana Natural Gas, addresses the company's annual meeting in Calgary, Wednesday, April 25, 2012. Encana Corp. (TSX:ECA) says it lost US$1.48 billion in the second quarter as it booked charges related to the decline of natural gas prices, and warned it could face additional impairment charges due to the market. (THE CANADIAN PRESS/Jeff McIntosh) | CP

Encana Corp. (TSX:ECA) says it is working to diversify its portfolio away from its focus on natural gas after booking a US$1.48-billion quarterly loss, but adds that it is "cautiously optimistic" that declining natural gas prices will recover in the near future.

The Calgary-based company, which reports in U.S. dollars, said Wednesday it lost $1.48 billion in the second quarter, compared to a profit of $383 million a year earlier.

Encana's results were hit by a $1.7-billion charge related to the decline of natural gas prices, and warned it could face additional impairment charges due to the market.

Pressure on the natural gas market is part of the reason the company wants to diversify into other energy sources.

"For companies like ourselves that have a tremendous inventory of production, we'll take advantage of rising natural gas prices," president and CEO Randy Eresman said in an interview. "But we won't necessarily invest significantly more in natural gas drilling opportunities until we are comfortable that prices will be at a more sustainable level."

Eresman added there are several factors to support his optimistic view about a recovery in natural gas markets — notably an increased demand for natural gas across the U.S. as lower natural gas prices see power generators replace significant amounts of coal with natural gas to generate electricity.

In addition, Eresman said above average summer temperatures in parts of the continent have increased demand for electricity — and natural gas is being used to feed a lot of that demand.

During the quarter, operating earnings fell to $198 million, or 27 cents per share, down from $352 million or 48 cents per share as realized natural gas prices fell to $4.79 per thousand cubic feet during the quarter from $5.09 during the 2011 quarter.

Analysts polled by Thomson Reuters were expecting Encana (TSX:ECA) to earn 18 cents per share on average and bring in revenues of $1.62 billion.

The company hopes to accelerate the pace of development of liquid gas, but it also plans to invest in dry gas and natural gas plays in order to preserve their value, Eresman said.

One of its liquid-rich plays is the Duvernay shale formation in Alberta, where Encana is hoping to find a joint venture partner willing to take on between a 25 and 50 per cent interest.

"The Duvernay is an exploration play that has got a few data points with some very interesting production results, high BTU content gas and high quantities of fuel condensates," Eresman said.

"Fuel condensate in Western Canada has historically traded at a premium to WTI, so it's a very valuable commodity."

Since it spun off its oil and refinery assets into Cenovus Energy Inc. (TSX:CVE) in 2009, Encana has been focused exclusively on developing natural gas.

With prices of that commodity remaining dismally low, Encana's pure-play status has been particularly challenging.

Encana has been looking at partnership deals, drilling for more lucrative natural gas liquids, tapping export markets and asset sales in order to get by in the gloomy market.

Last month, Encana announced it's adding $600 million to its original $2.9-billion capital budget to produce more liquids-rich gas, which fetches a price more akin to oil than ordinary dry natural gas.

The company's stock plummeted sharply after that announcement as investors questioned the wisdom of spending more money in such an ugly market environment.

Encana is also a partner in a project to build a liquefied natural gas export terminal in the northern West Coast port of Kitimat, B.C. U.S. firms Apache Corp. and EOG Resources are also involved.

At Kitimat, natural gas piped in from northeastern B.C. will be cooled into a liquid and loaded onto tankers for export to energy-hungry Asian markets. Natural gas fetches a drastically higher price overseas than it does in the oversupplied North American market. Shipments are targeted to begin in 2015.

Last month, emails surfaced that suggested Encana colluded with U.S. competitor Chesapeake Energy to suppress land prices in Michigan.

Encana's board of directors is looking into the allegations, which have not been proven in court.

The company said it could not provide any details about the investigation, because the process is still underway.

"Encana takes compliance with the law very seriously, and we are committed to ethical conduct in all that we do," Eresman said in an earlier conference call.

Encana shares fell 3.3 per cent or 69 cents to close at $20.08 on the Toronto Stock Exchange.

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