COG Cabot Oil and Gas Corp

Natural gas-focused energy company, Questar Corp. (STR) reported impressive second quarter 2011 results, reflecting strong performances of all business units and strong contribution from its expansion venture.

Earnings per share came in at 22 cents, surpassing both the Zacks Consensus Estimate and prior-year quarter result of 20 cents.

Total revenue came in at $222.9 million, up 10.8% from the year-ago level of $201.1 million and ahead of the Zacks Consensus Estimate of $189 million. The result reflects higher production volumes across all business segments.

Segment Analysis

Questar Gas: The segment generated $164.0 million in revenue, up 10.4% year over year. Net income was $0.4 million, against a loss of $2.2 million in second quarter 2010. The segment benefited from an increase in the number of customers along with higher margins.

At the end of June 30, 2011, Questar Gas served 914,000 customers, up 8,000, or 1.0% year over year.

Wexpro: Consolidated sales were up 95.3% year over year at $8.4 million in the quarter. Segmental income from continuing operations increased to $23.7 million from $22.0 million in the prior-year quarter, driven by a higher average investment base.

However, Wexpro reported a 2.5% decline in quarterly production of natural gas (11.8 billion cubic feet (Bcf) from 12.1 Bcf in first quarter 2010).

Questar Pipeline: Consolidated revenues of $50.5 million were up 4.8% from the year-ago quarter and income from continuing operations came in at $16.6 million, reflecting an increase of 4.4%. The income improvement was attributed to additional revenues from the Overthrust Loop Expansion Project along with reduced operating, maintenance, and interest expense.

Total natural gas transportation volumes in the quarter were 187.8 million decatherms, up 2.3% year over year.

Financials

As of June 30, 2011, Questar had long-term debt (including current portion) of $983.8 million, with a debt-to-capitalization ratio of 47.1%.

2011 Guidance

Management reaffirmed its 2011 earnings guidance at $1.07 to $1.11 per average diluted share, as improved revenue from Questar Pipeline is expected to counterbalance lower natural gas liquids sales. Questar plans to expend $108 million toward the Wexpro business segment in 2011. Additionally, the company targets to sustain a 5% to 10% dividend growth annually.

Our Recommendation

We believe that the business units of Utah-based Questar display robust expansion prospects, which will drive a high growth rate of production and reserve in the years to come. The company is expected to perform well in the coming quarters given its focused and experienced managerial team, manageable debt maturities and long-term contracts.

However, the expected bearish natural gas fundamentals over the next few quarters and excessive domestic gas supplies keep us cautious. Hence, we maintain our long-term Neutral recommendation on the stock. We also believe that Questar remains exposed to greater competitive risks from Cabot Oil & Gas Corporation (COG) and Anadarko Petroleum Corporation (APC) among its other peers.

 
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