Natural gas-focused energy company, Questar Corp. (STR) reported mixed first quarter 2011 results, reflecting strong performances by most of the business units, partially offset by higher operating costs.
Earnings per share came in at 39 cents, failing to meet both the Zacks Consensus Estimate and prior-year quarter result of 41 cents.
Total revenue came in at $470 million, up 13.4% from the year-ago level of $414.6 million and ahead of the Zacks Consensus Estimate of $385 million. The result reflects higher production volumes across all business segments.
Segment Analysis
Questar Gas: The segment generated $413.9 million in revenue, up 14.7% year over year. Net income from the segment was $33.4 million, up a marginal 0.9% from first quarter 2010. The segment benefited from an increase in the number of customers along with higher tariff rates.
At the end of March 31, 2011, Questar Gas served 914,054 customers, up 10,000, or 1.1% year over year.
Wexpro: Wexpro’s consolidated sales were up 25.8% year over year at $7.8 million in the quarter. Segmental income from continuing operations increased to $22.3 million from $21.2 million in the prior-year quarter.
Wexpro reported a 2.3% decline in quarterly production of natural gas (12.7 billion cubic feet /Bcf from 13.0 Bcf in first quarter 2010).
Questar Pipeline: Questar Pipeline’s consolidated revenues of $48.3 million were up 1.3% from the year-ago quarter while income from continuing operations came in at $15.3 million, reflecting a decrease of 11%. The lower income was due to higher operating, maintenance, general and administrative expenses.
Total natural gas transportation volumes in the quarter were 205.6 million decatherms, up 3.0% year over year.
Financials
As of March 31, 2011, Questar had long-term debt (including current portion) of $1,080.5 million, with a debt-to-capitalization ratio of 49.8%.
Questar plans to incur capital expenditure of $349 million in 2011, with $108 million being targeted toward the Wexpro business segment.
2011 Guidance
Management reaffirmed its 2011 earnings guidance at $1.07 to $1.11 per average diluted share, despite an expected higher interest expense and deferred taxes along with lower natural gas liquids revenue.
Our Recommendation
We believe that the business units of Utah-basedQuestar display robust expansion prospects, driving a high growth rate of production and reserve in the years to come. The company is expected to perform well in the coming quarters given its focused and experienced managerial team, manageable debt maturities and long-term contracts.
However, the expected bearish natural gas fundamentals over the next few quarters and excessive domestic gas supplies keep us cautious. Hence, we maintain our long-term Neutral recommendation on the stock. 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).
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