* Oil and natural gas liquids volumes rise 69 pct in second quarter
* Says capital investment to be at lower end of forecast
* David O'Brien, one of the founders of Encana, steps down as chairman
July 24 (Reuters) - Encana Corp, Canada's largest gas producer, reported a 25 percent increase in second-quarter operating profit as its move to spend a bulk of its budget on developing more-lucrative oil and liquids-rich natural gas plays paid off.
The company has said it expects to spend 80 percent of its capital budget for the year to raise oil and natural gas liquids (NGL) production, while keeping natural gas output unchanged. Oil and NGL volumes jumped 69 percent in the quarter.
Encana's strong results come amid a rebound in natural gas prices due to declining inventories and a chilly spring in the United States.
The average benchmark price of the fuel on the New York Mercantile Exchange rose 75 percent in the second quarter from a year ago, when natural gas hit a 10-year low.
Low natural gas prices weighed on Encana for much of last year, leading the company to write down the value of its gas assets by about $2.89 billion.
"My focus is on developing a strategy that will deliver sustainable growth in shareholder value during a period of modest commodity prices," said Chief Executive Doug Suttles, who took the helm last month.
Investors have been looking for signs that Suttles, a former BP Plc executive, will steer the company toward a new course after years of strategic missteps.
Encana has been criticized for spinning off the company's oil operations and stepping up natural gas production even as new shale gas supplies flooded the market.
Encana said on Wednesday an internal strategy development team, which directly reports to Suttles, was thoroughly evaluating the company's assets, strengths and capabilities, current performance and competitive positioning.
The company said David O'Brien, one of the founders of Encana, stepped down as the chairman after 10 years in the role and would remain a director. The company named board member Clayton Woitas, who served as interim CEO before Suttles took over, as its new chairman.
O'Brien has held leadership roles with Encana or one of its predecessor companies for more than 20 years.
The company posted net profit of $730 million, compared with a loss of $1.48 billion a year earlier, when it reported a large asset impairment charge. This is the company's first quarterly net profit in five quarters.
Operating income, which excludes most one-time items, rose to $247 million, or 34 cents per share, from $198 million, or 27 cents per share, a year earlier.
Encana said it expects full-year capital spending to be at the lower end of its forecast of $3.0 billion to $3.2 billion. Cash flow is expected to be in the middle to higher end of its forecast of $2.3 billion to $2.5 billion.
Encana said it was looking to divest its assets in Osage County, Oklahoma, representing the remainder of its position in the Mississippian Lime. The Calgary-based company plans to raise $500 million to $1 billion from asset sales in 2013.
Cash flow, a key indicator of the company's ability to pay for new projects and drilling, fell 16 percent to $665 million, or 90 cents per share.
The company also faces a U.S. Department of Justice probe into whether it illegally colluded with Chesapeake Energy Corp to lower the price of exploration lands.
Encana Shares closed at C$18.13 on the Toronto Stock Exchange. The stock has fallen about 16 percent so far this year.