We are upgrading our rating on Questar Corporation (STR) to Neutral from Underperform, following an impressive third quarter performance and upbeat outlook for the full year 2010. The company’s healthy results reflect a superb operational execution by the business units and lower interest expense.
Questar, post the QEP Resources (QEP) spin-off, has emerged as a sorely natural gas-operated energy company, with an exclusive focus on exploring natural gas resources and serving customers domestically as well as worldwide.
Management’s confidence in the reformed business model is highlighted through the upwardly revised guidance. The company hiked 2010 net income and earnings per share guidance and came up with 2011 forecast, for the very first time.
We also believe that the business segments of Questar exhibit strong development prospects, which are expected to lead to a high growth rate in production and reserves in the years to come. With a focused and experienced managerial team, manageable debt maturities and long-term contracts, the company will likely sustain its profitability in the coming quarters.
In an effort to broaden the market exposure of liquefied natural gas (“LNG”) products and services, Questar formed an alliance with Applied LNG Technologies LLC to jointly explore new market opportunities for LNG in the Rockies. We remain optimistic about this promising collaboration that brings together two eminent natural gas providers.
Despite all these positive aspects, Questar is unable to avoid the risks associated with the global economic volatility. The supply-demand imbalance, resulting from the flood of natural gas in the domestic market, continues to weigh down the stock in the near to medium term.
With weak natural gas fundamentals and political headwinds in Utah and Wyoming affecting the Wexpro business unit, the company’s growth prospects remain blurred.
We also believe that Questar will take some time to fully absorb the outcome of the spin-off. Until then, the business profile of the company is exposed to greater competitive risks.
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