UPDATE 3-Hedging loss masks operating gains at EnCana

(Adds CEO comments. In U.S. dollars unless noted)

By Jeffrey Jones

CALGARY, Alberta, July 24 (Reuters) - EnCana Corp (ECA.TO: Quote, Profile, Research, Stock Buzz) said on Thursday its second-quarter profit fell 16 percent on an unrealized loss on forward natural gas sales contracts, but surging gas prices and production pushed operating results at Canada's biggest energy company above expectations.

EnCana, which is preparing to split into two separate oil and gas producers by early next year, also increased its forecast for 2008 cash flow by about 7 percent to as much as $11 billion as its gas business exceeds its projections.

Chief Executive Randy Eresman said big gains came despite a slower than expected lift in output in at the company's Deep Bossier prospect in East Texas, one of several key unconventional gas plays it is developing.

"Despite achieving year-over-year growth of almost 130 percent, expected ramp-up of production is behind schedule," Eresman told analysts.

However, overall output is ahead of projections as the company has bulked up on acreage in the continent's hottest shale-gas plays, including the Haynesville in Louisiana, Barnett in Texas and Horn River in British Columbia, he said.

Such prospects are known for huge reserves but they require prolific drilling and high-tech rock fracturing techniques to increase output gradually.

In the quarter, EnCana earned $1.2 billion, or $1.63 a share, down from year-earlier $1.4 billion, or $1.89 a share.