Questar Corp. (OP/A): Positive risk/reward from deep Pinedale well, non-Pinedale exploration
Goldman Sachs July 27, 2005
We continue to recommend shares of Questar Corp. (OP/A) and believe there is significant upside to both Questar and Ultra Petroleum (IL/A) from any success at Questar's deep Pinedale exploration well, which is currently drilling and is nearing its targeted depth. We believe that the risk/reward for the shares of both companies in terms of reaction to any news is favorable. News could be forthcoming either later this quarter or in 4Q 2005. While there is still risk that the well could prove uneconomic, we do not believe any value is being afforded either Questar or Ultra shares for deep Pinedale potential in our view. Success could increase Pinedale present values by 40% (assuming a 50% reserve increase and similar all-in costs), which would represent about $12 per share for Questar and $12 per share for Ultra.
NON-PINEDALE DRILLING ALSO ENCOURAGING
We are encouraged by initial data points on Questar's drilling outside the Pinedale Anticline, and we continue to believe that there is upside to Questar shares from success in the Uinta and Vermillion Basins. Initial Vermillion wells seemed to be in-line with Questar's minimum requirement of 3 Bcfe a well, though more data is needed before the play is deemed commercial. The company announced that two wells showed initial 15-30 day production of 2.4 MMcf/d and 3.3 MMcf/d, which we believe would translate into 3 Bcfe wells at normal decline rates. Further results are expected in the next two quarters. In the Uinta Basin, the company indicated it plans to build a gas gathering system on the Flat Rock area, land in which it recently began drilling as part of a joint venture with the Ute Indian Tribe. We believe Questar's willingness to build a gathering system is a sign it is optimistic about production opportunities.
2Q 2005 REPORTED EPS ABOVE OUR AND CONSENSUS ESTIMATES
Questar reported 2Q 2005 EPS of $0.70, higher than our estimate of $0.67 and First Call consensus estimate of $0.68. Lower-than-expected realized oil and gas prices were offset by higher than expected gas production of 257.3 MMcf/d versus our estimates of 248.3 MMcf/d, coming mainly from a sharp increase in the Uinta Basin. Costs were generally in-line, with the exception of exploration expense which was slightly higher than expected. Notably, SG&A came in much lower-than-expected at $1.86 per BOE versus our $2.31 per BOE estimate, in contrast to many peers that saw rising costs. The better-than-expected EPS was mainly due to higher gathering/processing/marketing margins and greater-than-expected gathering/processing volumes. Operating cash flow was $147 million versus our $145 million estimate. Net debt/tangible capital is at 42%.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
