Natural gas-focused energy company, Questar Corp. (STR) reported impressive fourth quarter and full-year 2010 results, thanks to superb execution by its business units and lower operating and maintenance expense.
Earnings per share in the fourth quarter came in at 36 cents, surpassing both the Zacks Consensus Estimate and the prior-year quarter result of 31 cents. Full-year 2010 earnings, excluding separation costs, were $1.13 per share, up 10.8% year over year and 4.6% above our projection.
Total revenue for the quarter came in at $362.7 million, up 5.4% from the year-ago level of $344.0 million and ahead of the Zacks Consensus Estimate of $301 million. The result reflects higher production volumes across all business segments.
Questar generated total revenue of $1,123.6 million in 2010, up 1.2% year over year from $1,109.9 million. The company comfortably surpassed the Zacks estimate of $1,098.0 million.
Questar Spin-Off
On June 30, 2010, Questar successfully split its unregulated exploration and production business from its regulated utility business, thereby creating two independent, publicly traded companies. The newly formed company was named QEP Resources (QEP).
Segment Analysis
Questar Gas: The segment generated $302.7 million in revenue, up a modest 3.5% year over year. Net income from the segment was of $22.1 million, 11% higher than fourth quarter 2009. The segment benefited from an increase in the number of customers along with higher tariff rates.
At the year-end 2010, Questar Gas served 909,600 customers, up 11,000 or 1.2% year over year.
Wexpro: Wexpro’s consolidated sales were up 17.6% year over year at $8.0 million in the fourth quarter. Segmental income from continuing operations increased to $22.7 million from $21.5 million in the prior-year quarter.
Wexpro reported a 5.8% rise in quarterly production of natural gas (12.7 billion cubic feet /Bcf from 12.0 Bcf in fourth quarter 2009).
Questar Pipeline: Questar Pipeline’s consolidated revenues of $52.0 million were up 16.1% from the year-ago quarter while income from continuing operations came in at $18.0 million, reflecting an increase of 25%. The improvement was attributable to higher transportation commitments (coming from Overthrust Pipeline compression-expansion project) and strong natural gas liquids (NGL) sales.
Balance Sheet
As of December 31, 2010, Questar had cash and cash equivalents of $21.8 million and long-term debt (including current portion) of $1,080.5 million, with a debt-to-capitalization ratio of 51%.
Dividend Hike
Board of directors of Questar announced a quarterly dividend of 15.25 cents (an annualized payout of 61 cents), up 9% from 14 cents (or 56 cents annually) in the first quarter of 2011.
2011 Guidance
Management reaffirmed its 2011 earnings guidance at $1.07 to $1.11 per average diluted share, expecting reduced NGL sales in the Questar Pipeline segment as well as increased deferred taxes at Wexpro in 2011.
Our Recommendation
We believe that Utah-based Questar will be able to generate steady earnings and dividend growth in the coming years through strong operational performance across all its business units. The company’s sole emphasis on natural gas markets, focus on long-term contracts and an efficient managerial team are expected to drive production and reserves higher.
However, we remain highly apprehensive about weak natural gas prices, domestic imbalance of supply/demand and political headwinds in certain regions. We also believe that Questar remains exposed to greater competitive risks, coming from peers such as Cabot Oil & Gas Corporation (COG) and Anadarko Petroleum Corporation (APC), until it has fully reaped the benefits of the spin-off.
We maintain our long-term “Neutral” recommendation on the stock. Questar currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
ANADARKO PETROL (APC): Free Stock Analysis Report
CABOT OIL & GAS (COG): Free Stock Analysis Report
QEP RESOURCES (QEP): Free Stock Analysis Report
QUESTAR (STR): Free Stock Analysis Report
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