Questars engine runs on natural gas


  Recent Price
  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$74.86 - $41.46

Energy operations fueled Questar’s ($45; NYSE: STR) per-share-profit growth of 31% in the first half of 2008. All three operating divisions posted gains in net income during the period, with production profits up 42%, pipeline profits up 35%, and the natural-gas utility managing a 2% gain. With an impressive portfolio of production asseats and ambitious expansion projects under way, Questar, a Long-Term Buy, seems poised for more growth.

A company with energy
Questar’s businesses span the entire product cycle of natural gas.

Market resources (62% of 2007 revenue, 83% of net income) produces natural gas and oil. The unit also gathers and processes gas. The pipeline business (5%, 9%) operates more than 2,500 miles of interstate pipeline and underground storage tanks in Utah, Wyoming, and Colorado. Questar Gas (33%, 7%) is a utility, distributing natural gas to more than 870,000 customers in Utah, southwestern Wyoming, and southeastern Idaho.

Exploration-and-production efforts drive most of Questar’s growth. About 80% of the company’s proved reserves are in the Rocky Mountain region of Wyoming, Utah, and Colorado, with the rest in Oklahoma, Texas, and Louisiana. Production rose 8% in 2007, driven by a 20% increase at the rich Pinedale field in Wyoming, the site of most of Questar’s undeveloped reserves. In the six months ended June, production jumped 14%, lifted by a 27% increase at the natural-gas fields in Oklahoma, Texas, and Louisiana.

Pinedale contributes more than 30% of Questar’s total production, and the company expects to drill 73 to 78 new wells there in 2008, supporting much stronger production growth in the second half of the year. Because of the quality of its natural-gas fields, Questar enjoys an above-average rate of drilling success (about 95% over the last three years) with below-average costs.

Production profits are highly sensitive to changes in energy prices. To reduce its exposure to that volatility, Questar aggressively hedges production. At the end of July, about 80% of expected production in the second half of 2008 and 75% of 2009 production was hedged.

Steady performers
Operating results at the pipeline business and utility are not especially sensitive to changes in energy prices. Growth tends to be steady, if not as potentially explosive as that of the production unit. In an effort to connect fields in the Rockies with end markets in Canada and the U.S. Midwest, where it can charge higher prices, Questar is expanding its pipeline network. The utility’s customer base is expanding at more than 2.5% a year, well above the national average.

Questar has sharply boosted capital spending in recent years. Expenditures rose 29% in 2006 and 50% in 2007, with 64% growth to $2.3 billion expected in 2008. About 90% of this year’s capital budget is earmarked for exploration and production.

At 12 times estimated year-ahead earnings of $3.87 per share, the stock trades below its five-year average forward P/E of 14. Consensus estimates for 2008 and 2009 have been trending upward over the last three months and project per-share-profit growth of 30% this year and a conservative 6% next year. An annual report for Questar Corp. is available at 180 E. 100 South St., Salt Lake City, UT 84145; (801) 324-5699;

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