Natural gas-focused energy company, Questar Corp. (STR) reported impressive third quarter 2010 results based on superb execution by the business units and lower interest expense. Earnings per share, excluding separation costs, came in at 16 cents, surpassing the Zacks Consensus Estimate of 14 cents. On a year-over-year basis, the result was relatively flat.
Including the effect of separation costs, earnings per share were 15 cents, down 6.2% from the prior-year profit.
Total consolidated revenue for the quarter came in at $145.2 million, up 10.9% from the year-ago level of $130.9 million and also surpassed the Zacks Consensus Estimate of $137 million. The result reflects higher production volumes across all business segments.
During the third quarter, the company’s income from continuing operations of $27.7 million registered a 3.4% increase from prior-year profit of $26.8 million. Excluding the separation charges of $1.7 million, income from continuing operations stood at $29.4 million, up 10% year over year.
Questar Spin-Off
On June 30, 2010, Questar successfully split its unregulated exploration and production (E&P) business from its regulated utility business, thereby creating two independent, publicly traded companies. The newly formed company was named QEP Resources (QEP).
Wexpro
Business segment wise, Wexpro consolidated sales were up 17.3% year over year to $6.1 million while the segment income from continuing operations increased to $22.2 million from $20.6 million in the prior-year quarter.
Wexpro reported a 8.8% rise in quarterly production of natural gas (12.4 billion cubic feet /Bcf from 11.4 Bcf, a year ago).
Questar Pipeline
Questar Pipeline’s consolidated revenues of $49.3 million were up 13.6% from the year-ago quarter while income from continuing operations came in at $16.3 million, an increase of 15.6%. The increased results were attributed to higher transportation commitments and strong natural gas liquids (NGL) sales.
Questar Gas
At $89.8 million, this segment’s revenues inched up 9.1% year over year. However, the segment reported a net loss of $9.1 million, 12.3% wider than the loss of $8.1 million in the third quarter of 2009.
Balance Sheet
As of September 30, Questar’s total long-term debt (including the current portion) stood at $831.1 million. The debt-to-capitalization ratio was approximately 45.8%.
2010 Guidance
Following the company’s above expected performance in the third quarter, management hiked 2010 net income guidance to the range of $181 million to $190 million (from 180 million to $185 million) or $1.02 to $1.07 per average diluted share (from $1.00 to $1.05 per share).
Questar also initiated its 2011 net income guidance at $190 million to $198 million, or $1.07 to $1.11 per average diluted share.
Questar expects to incur capital spending of $358 million in 2010 and 342 million in 2011.
Our Recommendation
Driven by the strong growth prospects of the business segments, we expect Questar to be on the track to deliver satisfactory results over the next few months. Moreover, the company’s stable, low-risk business model, its focus on long-term contracts, reduced commodity exposure along with an efficient managerial team also boost our confidence.
However, we remain highly apprehensive about the weak natural gas prices and the company’s clouded post-split outlook. With the parting of the low cost and high-growth E&P assets (post-split), Questar is demonstrating a weak portfolio compared with its predecessor company.
Questar currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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