Questar Corp. (STR): Strong 1Q08; revised FY production guidance seems conservative - Goldman Sachs - April 29, 2008
What's changed
Questar reported 1Q 2008 adjusted EPS of $1.01, in-line with our estimate but higher than First Call consensus of $0.94. Total production was 435 MMcfe/d versus our estimate of 405 MMcfe/d. Operating cash flow was $362 million versus our $329 million estimate. The company raised production guidance to 166-169 Bcfe from 160-163 Bcfe.
Implications
Despite the upward revision to production guidance, we believe management is being conservative, and we have raised our 2008 production estimate to 161 Bcfe, representing 15% organic growth. We believe Questar shares assume very little for drilling potential in the Uinta Basin, East Texas and the Bakken, and we expect an update from management on these plays on the conference call. While not expected this year, we believe Questar is closer to pursuing a restructuring that would separate Questar Market Resources from the company’s other subsidiaries. Consistent production growth, midstream performance and greater confidence in value creation from restructuring are positive catalysts going forward.
Valuation
Questar trades at 8.5x 2009 EV/debt-adjusted cash flow, versus 9.3x for pure play unconventional/repeatable E&Ps. Our Neutral rating (versus an Attractive coverage view) reflects our preference for higher beta leverage to our bullish view on natural gas. However, we continue to warm to the stock, due to strong operational performance and attractive relative valuation. We see 20% upside to our $77 12-month discounted cash flow based target price versus 13% for E&Ps.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
