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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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From: Dennis Roth	10/25/2007 7:50:59 AM
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Questar Corp. (STR): Strong 3Q 2007; 2008 guidance conservative, valuation attractive - Goldman Sachs - October 25, 2007 What's changed Questar reported 3Q adjusted EPS of $0.59 versus our $0.55 and First Call consensus $0.53. Operating cash flow was $253 million versus our $215 million. Production was 369 MMcfe/d versus our 361 MMcfe/d. Operating income for pipeline, gas distribution and Wexpro each was better than expected. Questar released 2008 guidance of 8% production growth and $2.85-$3.00 in EPS. Our 2007/2008 EPS is $2.89/$3.50 from $2.80/$3.42. Implications We believe there has been concern that Questar could miss the quarter and that guidance would disappoint. It seems difficult to put a negative spin on the quarter. To us guidance for 2008 is very conservative, and we are assuming production growth of 14% with EPS of $3.50. On the conference call, we expect management to discuss strong results from the Uinta Basin, which could become an industry theme in 2008. We do not expect a positive update from the Vermillion Basin. We believe the stock should trade higher, and a pullback whether based on guidance or Vermillion concerns represents a buying opportunity. Valuation Questar (Neutral rated versus an Attractive coverage view) trades at 8.7x 2008 EV/debt-adjusted cash flow, at the low end of the 9x-14x range of unconventional gas peers. We see 28% upside to a $66 discounted cash flow based 12-month target price versus 22% upside for peers. Key risks Commodity price volatility, drilling results, cost pressures, government pronouncements. Impact on related securities We believe Questar’s better-than-expected production growth in the Pinedale Anticline bodes well for Ultra Petroleum (Buy rated) to meet its production guidance for the quarter.

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