Questar Corporation
/ (STR-NYSE)/ Equity Research / Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 01/22/2012
Current Price (03/18/15) / $23.86
Target Price / $25.00
SUMMARY
We believe Questar will be able to generate meaningful earnings and dividend growth in the coming years through strong operational performances by its business units. Other positives for Questar include its focus on long-term contracts and an efficient management team. An above-average credit quality adds to the bullish sentiment. However, we remain worried about the current volatile natural gas price environment that is likely to restrict near-term growth prospects at Questar Pipeline. As such we are maintaining our Neutral recommendation on Questar shares./ Equity Research / Page 1
SUMMARY DATA
52-Week High / $26.2952-Week Low / $21.59
One-Year Return (%) / 3.86
Beta / 0.47
Average Daily Volume (sh) / 1,035,193
Shares Outstanding (mil) / 175
Market Capitalization ($mil) / $4,187
Short Interest Ratio (days) / 1.71
Institutional Ownership (%) / 76
Insider Ownership (%) / 2
Annual Cash Dividend / $0.84
Dividend Yield (%) / 3.52
5-Yr. Historical Growth Rates
Sales (%) / -12.8
Earnings Per Share (%) / -8.4
Dividend (%) / 8.3
P/E using TTM EPS / 18.6
P/E using 2015 Estimate / 18.5
P/E using 2016 Estimate / 17.4
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Util-Gas Distr
Zacks Industry Rank * / 166 out of 267
OVERVIEW
Founded in 1922, Salt Lake City, UT-based Questar Corporation (STR) is a natural gas-focused energy company with three principal subsidiaries – Wexpro Company, Questar Pipeline, and Questar Gas Company.
- Wexpro Company: A unique regulated exploration and production (“E&P”) company that develops and produces natural gas on behalf of Questar’s gas distribution utility (Questar Gas) customers for delivery and sale across Utah and Wyoming. Wexpro earns an authorized return for developing and producing cost of service gas.
- Questar Pipeline Company:Questar’s pipeline division operates interstate natural gas pipelines and storage facilities in the westernU.S. and provides other energy services. It owns more than 2,500 miles of pipeline in the RockyMountain area, reaching out to the Uinta, Greater Green River and PiceanceBasins.
- Questar Gas Company: This unit offers retail natural gas distribution to more than 900,000 customers spread over 277 cities in Utah, southwestern Wyoming and a portion of Idaho.
In Jun 2010, Questar completed the spin-off of its unregulated E&P business as well as its gas gathering and marketing segment into a separate, independent and publicly traded company QEP Resources Inc. (QEP). The new entity includes erstwhile Questar subsidiaries; Questar E&P Company (now known as QEP Energy Company), Questar Gas Management (now known as QEP Field Services Company), and Questar Energy Trading (now known as QEP Marketing Company).
REASONS TO BUY
Questar, after the QEP Resources spin-off, has transformed itself into a natural gas-operated energy company, which focuses exclusively on exploring natural gas resources while serving customers domestically and worldwide. The company is expected to perform well in the upcoming quarters given its focused and experienced managerial team, manageable debt maturities and long-term contracts.
Questar pays an annual dividend of $0.84 per share, yielding astable3.5%. The company increased its dividend payout by 11% in Feb 2015, marking the 43rdyearly dividend increase. Questar has a long and consistent dividend paying record. The company has paid dividends in each of the last 281 quarters. As such, we believe Questar’s dividend to be safe and reliable.
Questar plans to invest $50–$55 million annually in its gas segment and $550–$700 million in the Wexpro business unit over the next five years. This will drive annual earnings growth of 7–9% for Questar Gas and 4–8% for Wexpro through 2016. We believe that this planned investment strategy will enable the company to accomplish long-term earnings growth of 4–6% even amid low natural gas and liquids prices.
Apart from solid growth prospects and rising dividend income, Questarenjoys one of the best credit ratings in the utilities sector. This provides the company with a competitive advantage in accessing capital at a reasonable cost
REASONS TO SELL
Questar’s extensive natural gas exposure raises its sensitivity to the commodity’s price, which continues to be volatile. This makes the medium-term outlook for the company uncertain.
An adverse decision by the Federal Energy Regulatory Commission (“FERC”) in pending rate cases may negatively impact Questar’s earnings. Its inability to comply with various laws and regulations and obtain fair and timely rate relief and requisite regulatory approvals could hamstring future earnings and growth.
Returns fromQuestar’s regulated businesses (interstate natural gas transportation and storage and retail gas distribution) continue to suffer from disallowance of costs and lower usage, thereby pulling down the company’s overall growth. Moreover, political headwinds in Utah and Wyoming might affect the Wexpro business unit, adversely affecting the growth prospects of the company.
We remain worried about the current volatile natural gas price environment that is likely to restrict near-term growth prospects at Questar Pipeline. Additionally, with El Paso’s Ruby pipeline up and running along with other competitors expanding infrastructure in Questar’s operational regions, we see surplus pipeline capacity in the Rockies increasing competition.
RECENT NEWS
Questar Arm Closes Eagle Mountain's Natural Gas Asset Buy
On Mar4, 2015, Questar Corp.declared the completion of the acquisition of Eagle Mountain City’s natural gas system by its affiliate Questar Gas Company.
The 15-year old system comprises a high-pressure steel pipeline that spreads over six miles along with intermediate high-pressure main and service lines, covering another 120 miles.
With this acquisition, Questar Gas has significantly enhanced its customer base. Moreover, we believe that the growing need for gas in Utah’s third largest city will help the company efficiently utilize its distribution asset base to serve new customers and generate additional cash flow.
Questar Corporation added that 73% voters of the Eagle Mountain city were in favor of the transaction.
Fourth Quarter 2014 Results
On Feb18, 2015, Questar Corp.reported adjusted fourth-quarter earnings of $0.35 per share, lagging the Zacks Consensus Estimate by $0.03. The bottom line was also lower than the year-ago quarter level of $0.39 per share. Lower natural gas production and transportation volumes pulled down the results, in addition to a substantial decline in liquids realizations.
Questar reported fourth-quarter revenues of $373.2 million, down 6.2% from a year ago. Moreover, quarterly revenues failed to meet the Zacks Consensus Estimate of $478 million.
However, in some good news for investors, the utility raised its quarterly dividend by 11% to $0.21 per share (or $0.84 per share annualized).
Segment Analysis
Questar Gas: The segment generated $318.9 million in revenues, down 5.5% from the prior-year quarter, owing to lower natural gas transportation volumes. Despite this, the segment reported operating income of $48.8 million, slightly above the year-ago quarter profit of $46.6 million. This was possible due to solid customer growth, the effects of cost-containment measures, and higher general rates.
As of Dec 31, 2014, Questar Gas served 962,200 customers, up 1.7% from the year ago.
Wexpro: Segment revenues decreased 53.4% year over year to $6.1 million in the quarter. Lower production volumes led to the decline. Segmental operating income from continuing operations also fell to $41.8 million from $45.8 million in the prior-year quarter, hamstrung by sharply lower liquids realizations.
Quarterly production of natural gas was down 24.2% to 11.9 billion cubic feet (Bcf) from 15.7 Bcf.
Questar Pipeline: The segment reported revenues of $46.8 million against $47.2 million in the comparable quarter last year. Deterioration in transportation volumes adversely affected the result. Income from continuing operations came in at $28.3 million versus $29.8 million reported in the fourth quarter of 2013.
Total natural gas transportation volumes were $208.6 million decatherms, compared with 225.9 million decatherms in the fourth quarter of 2013.
Expense Summary
The general and administrative expenses for the quarter increased 29.6% from the prior-year period to $39.9 million, while depreciation, depletion and amortization costs fell 1.2% to $50.8 million. Total operating expense of $261.1 million marked a decline from the year-ago period level of $275 million owing to lower cost of sales in the reported quarter.
Financials
As of Dec 31, 2014, Questar had long-term debt (including current portion) of $1,283.6 million, with a debt-to-capitalization ratio of 50.7%.
2015 Guidance
For 2015, Questar projects earnings per diluted share in the range of $1.20–$1.30, while fixing a capital budget of $370 million.
VALUATION
Questar is characterized by a cost-effective business strategy that generates lucrative return on equity. The company isconsistently broadening its customer base and enjoys an enviable market share.Overall, we believe the companywill be able to generate meaningful earnings and dividend growth in the coming years. An above-average credit qualityadds to the positive sentiment.
However, uncertain natural gas fundamentals have made investors cautious toward the stock. As such, we continue to rate shares of Questar as Neutral.
Questar’s current trailing 12-month earnings multiple is 18.6X, compared with the 18.5X industry average and 18.1X for the S&P 500. Over the last five years, Questar’s shares have traded in a range of 7.0X to 21.2X trailing 12-month earnings.
Our $25 price objective reflects a 2015 P/E multiple of 19.4X, within historical trading ranges.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of STR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform - 15.0%, Neutral - 75.2%, Underperform – 8.9%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan ChoudhuryQCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / 4Q’14 Earnings Update
/ Equity Research / Page 1