EnCana: Going Forward, What Hedges and Natural Gas Means

EnCana Corp.’s (ECA) second quarter results last week left analysts in the dust. The oil and gas company’s cash flow per share outpaced the number-crunchers’ estimates. Thanks, hedges.

And hedges will continue to play a role in the company’s future. EnCana recently announced new hedges, and add that to the hedges it rolled out in June and now has about 45% of its gas production locked in at $6.09 per Mcf, noted Mark Polak, an analyst at Scotia Capital.

He said:

We view these hedges as a positive for EnCana since the dividend is less at risk and we expect these hedges to be in the money. The fact that North America’s largest gas producer is hedging below $6 has to be construed as a bearish indicator for 2010 gas prices, in our view.

Menno Hulshof of Dundee Securities Corp. also weighed in EnCana’s approach to natural gas and what it means for future prices.

He said:

As a point of interest, EnCana is starting to promote the idea of natural gas as a cleaning burning transportation fuel (could displace some [North American] oil consumption longer-term). This would suggest it has concerns over natural gas fundamentals longer-term (a concern we share).

Conclusion: This was an unexpectedly positive quarter highlighted by better than expected financial results, strong operating results, clear indications of cost deflation and an improvement in the 2010 outlook on the back of additional hedging activity (again, we can assume these hedges were relatively expensive but optically, EnCana will benefit from increased certainty with respect to 2010 cash flows, its ability to maintain production and perhaps even grow).