Hedging program weighs on EnCana profits

Profits at EnCana fell by almost a third in the third quarter as the energy giant felt the drag of a hedging program that hurt its ability to reap the full benefits of high oil and natural gas prices.

EnCana (TSX:ECA) said it made $266 million US (30 cents a share), compared to $393 million (46 cents a share) it made in the same quarter last year. EnCana reports in U.S. dollars.

The main reason for the lower bottom line was a hedging program it inherited from the Denver-based natural gas producer Tom Brown Inc., which EnCana bought last year.

EnCana said its Q3 earnings included an unrealized after-tax loss of $604 million from its hedge positions. It said about 60 per cent of that loss was due to hedge positions from the Tom Brown era.

The Tom Brown hedge positions expire at the end of 2006, when EnCana says 82 per cent of its forecast sales will be unhedged and therefore "fully exposed to price upside."

Cash flow from continuing operations surged 45 per cent to $1.82 billion and operating earnings rose 32 per cent to $731 million.

The earnings report came a day after EnCana's founder and chief executive officer, Gwyn Morgan, announced his retirement from the company at year-end.

"Record setting wet weather in key Western Canadian producing regions and industry activity levels in the North American oil and gas service sector have restricted access to land and equipment in an unprecedented way this year," Morgan said in a release.

"As a result, we have drilled fewer wells to date this year than planned and our gas production volumes are lagging forecast rates."

Morgan said the ramp up of gas production is about two months behind schedule and estimated that average production this year will be 3.25 billion to 3.30 billion cubic feet per day. That is slightly below EnCana's original guidance and 9 per cent higher than average sales in 2004.

EnCana shares were down $5 to close at $56 on the TSX.