Natural gas-focused energy company, Questar Corp. (STR), reported robust fourth-quarter results on higher production volumes. Earnings per share, excluding gains from non-core asset sales and mark-to-market losses on natural gas basis-only swaps, came in at 81 cents, comfortably beating the Zacks Consensus Estimate of 70 cents. However, compared to the fourth quarter of 2008, Questar’s adjusted earnings per share fell approximately 18.2%, primarily attributable to lower realized natural gas prices. 

Total revenues, at $890.8 million, were up slightly from the year-ago level of $878.8 million and also beat the Zacks Consensus Estimate of $885 million. 

For the reported quarter, total operating expenses went up 2.9% year-over-year to $626.8, reflecting higher per-unit production costs. 

Earnings Revisions & Surprise 

Trend Questar’s outperformance didn’t come as a major surprise as estimates for the quarter have been trending up over the last month. During this period, the Zacks Consensus Estimate for earnings per share increased from 68 cents to 70 cents. Nearly a third of the analysts covering the stock (4 out of 13) raised their projections, while there was only a single revision in the opposite direction. 

The reported quarter represents the company’s third positive earnings surprise in the past four quarters. Questar has performed well during this period, with its average earnings surprise being 9.4%. This implies that the company has exceeded the Zacks Consensus Estimate by 9.4% over the last four quarters. 

However, looking ahead to the first quarter 2010, the overall trend in estimate revisions for Questar Corp. has been erratic and lacks any specific trend. The quarterly estimate has seen the same number of revisions during the past month (1 each in either direction). This indicates lack of clear directional pressure on the performance of the stock in the upcoming quarter. As a result, our short-term recommendation on Questar remains Hold (Zacks Rank #3). 

Questar Market Resources 

Business segment wise, Questar Market Resources’ sales was up 9.3% to $554.6 million, while the segment income increased 34.2% to $116.1 million, mainly buoyed by the E&P sub-segment results. 

Questar E&P reported a 20.4% rise in quarterly production to 55.4 Bcfe (90% natural gas) from 46.0 Bcfe, a year ago, reflecting resumption of sales from wells that were affected by voluntary production curtailments in the second and third quarters of 2009. Additionally, the company’s focus to expand its E&P business beyond the traditional Rockies focus is also working. 

Growing production volumes were partially offset by 21% lower realized natural gas price and a 7% rise in per-unit production costs. Overall, the segment’s income increased 47.4% to $70.6 million. However, lower realizations pulled down E&P revenue by 2.8% to $351.8 million. 

Questar Pipeline 

Questar Pipeline’s revenue of $43.8 million was up 4.5% from the year-ago period. Net income came in at $14.4 million, an increase of 2.9%, helped by improved natural gas processing results. 

Questar Gas 

At $292.4 million, revenue declined 11.2% year over year. The segment reported net income of $19.9 million, down 2.5% from the fourth quarter of 2008. This was mainly on account of lower residential and commercial gas sales. 

Capital Expenditure & Balance Sheet 

The company spent nearly $481 million in capital expenditure during the quarter, with the full-year total coming at around $1.5 billion. As of Dec. 31, Questar’s total long-term debt stood at $2.2 billion (debt-to-capitalization ratio of 38.0%). 

Year-End Proved Reserves 

As of year-end 2009, Questar E&P had 2,746.9 billion cubic feet equivalent (Bcfe) in proved reserves, of which 92% was natural gas. The company’s 2009 year-end proved reserves were 24% above the year-earlier level. 

2010 Guidance 

The company estimates that Questar E&P’s 2010 full-year production will range from 210-215 Bcfe, up 11% to 13% from 2009. Management sees full-year EBITDA of $1.45 to $1.55 billion, compared with its prior view of $1.48 to $1.58 billion. Questar plans capex of about $1.6 billion in 2010, of which a major portion (approximately 57%) will be allocated to Questar E&P.
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