STR Sitio Royalties Corporation

Natural gas-focused energy company, Questar Corp. (STR) reported mixed fourth quarter and full year 2011 results, reflecting strong transportation revenues and well performing capital projects, partially offset by steeper operating and maintenance costs.

Earnings per share came in at 34 cents, on par with the Zacks Consensus Estimate. However, comparing year over year, earnings dropped 5.6% from 36 cents.

In full-year 2011, the company earned $1.16 per share, up 2.6% from $1.13 in the prior year. The reported results were a penny higher than our projection.

Total revenue came in at $354.8 million, surpassing the Zacks Consensus Estimate of $330.0. On a year-over-year basis, revenue dropped 2.2% from the year-ago level of $362.7 million due to low contributions from the Questar Gas and Questar Pipeline segments.

Questar generated revenues of $1,194.4 million in fiscal 2011, compared with $1,123.6 million in 2010. The fiscal result, however, failed to meet the Zacks Consensus Estimate of $1,303.0 million.

Segment Analysis

Questar Gas: The segment generated $297.8 million in revenue, down 1.6% from the prior year. The segment registered an income of $20.2 million, down 8.6% from $22.1 million in fourth quarter 2010.

As of December 31, 2011, Questar Gas served 919,236 customers, up 9,666, or 1.1% year over year.

Wexpro: Consolidated sales were up 5.0% year over year at $8.4 million in the quarter. Segmental income from continuing operations increased to $23.6 million from $22.7 million in the prior-year quarter, driven by a higher average investment base.

However, Wexpro reported a 5.5% growth in quarterly production of natural gas (13.4 billion cubic feet (Bcf) from 12.7 Bcf in fourth quarter 2010).

Questar Pipeline: Consolidated revenue of $48.6 million was down 6.5% from the year-ago quarter and income from continuing operations came in at $17.2 million, reflecting a decrease of 4.4%. The quarter’s performance was impacted by lower natural gas liquids sales revenue along with higher depreciation expense and other taxes.

Total natural gas transportation volumes in the quarter were 200.8 million decatherms, up from the prior-year level of 174.5 decatherms.

Financials

As of December 31, 2011, Questar had long-term debt (including current portion) of $1,084.5 million, with a debt-to-capitalization ratio of 51.2%.

2012 Guidance

Management reiterated 2012 earnings guidance in the range of $1.15 to $1.19 per average diluted share.

Questar expects to register strong growth in the coming months with a high investment base at Wexpro, a multi-year pipeline-replacement program and strong customer growth.

Our Recommendation

We believe that Utah-based Questar will be able to generate steady earnings and dividend growth, going forward, through strong operational performances by its business units. The company is expected to perform well in the coming quarters given its benefits from the cost cutting initiatives, focus on natural gas markets and long-term contracts.

However, we remain worried about the current low natural gas price environment that is likely to restrict near-term growth prospects at Questar Pipeline. Hence, we maintain our long-term Neutral recommendation on the stock. We also believe that Questar remains exposed to greater competitive risks from Copano Energy LLC (CPNO) and Western Gas Partners L.P. (WES) among its other peers.

 
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