Questar May Have Hit a Gold Mine - UP Play:
BY GUY BOULTON
THE SALT LAKE TRIBUNE
Questar Corp. may be sitting on the biggest natural-gas discovery in its recent history.
The company, based in Salt Lake City, owns an estimated 60 percent interest in a field near Pinedale, Wyo., that has the potential to double the company's natural-gas reserves.
More wells must be drilled before the field's true potential is known. And for now, Questar is wary of touting the discovery.
"We will just see how this thing develops over time," said Curt Burnett, a company spokesman.
Questar, which had revenues of $906.3 million last year, is a cross between a traditional utility and an exploration-and-production company. One business generates relatively steady profits; the other business is the company's best hope for growth. And Questar has made increasing its oil and gas reserves a priority.
That's why the potential discovery near Pinedale is important.
It also looms at a time when Questar is getting some grief for making a bad bet on oil prices. The company committed to selling more than 60 percent of its oil production at the equivalent of about $16 a barrel -- only to watch oil prices jump to more than $20 a barrel.
The misstep cost the company more than $5 million.
"With [price] hedges, you are damned if you do and damned if you don't," Burnett said.
In the company's defense, OPEC's sustained success in cutting production, and the subsequent jump in oil prices, surprised much of the oil industry.
"Just about everybody was convinced prices weren't going to come back up for a while," said Louis B. Gagliardi, an analyst with John S. Herold Inc. in Stanford, Conn. "If prices had stayed low or fallen, they [Questar executives] would have looked like geniuses."
Most of the commitments end in January. Besides, that's yesterday's news. More important is the potential of the natural-gas play called the Pinedale Anticline. (An anticline is an arch-like underground formation.)
Ultra Petroleum, a small oil and gas company based in Toronto, and its partners drilled the first successful wells in the area in an arrangement similar to a sublease. The arrangement gave Ultra and its partners a stake in the field in exchange for bearing the risk of drilling the initial wells.
The existence of the natural gas was well known, but the gas was trapped in so-called tight sands that prevent it from flowing to a well. Ultra used a technique that created multiple fractures throughout the rock. Questar estimates the field has potential reserves of 3 trillion cubic feet of gas, of which about 80 percent could be economically produced. If the estimates prove accurate, Questar's 60 percent interest in the field would translate into as much as 1.4 trillion cubic feet of gas.
The company's natural-gas reserves, excluding those owned by Questar Gas, its utility, were estimated at 489 billion cubic feet at the end of last year.
The typical residence, by comparison, uses about 115,000 cubic feet of gas a year.
Questar, which holds leases on 13,500 acres in the area, expects to drill 135 to 350 wells. The number depends on whether a well is drilled every 80 or every 40 acres.
Wexpro, the affiliate that develops reserves owned by Questar Gas, the company's regulated utility, also holds leases in the area.
The wells, about 13,000-feet deep, cost about $2.5 million to drill. Questar plans to drill 10 to 20 wells next year. Developing the field would cost Questar an estimated $325 million. The balance would be borne by Ultra and its partners.
The Anschutz Corp., based in Denver, also is drilling in the area.
"The gas is there. There isn't any doubt about that," said Stuart Wagner, an analyst with Petrie Parkman & Co. in Denver. "The cost is the factor. They need to keep the costs down to make the play economical."
If natural-gas prices average $2 for 1,000 cubic feet, though, Questar can earn a 20 percent return on its investment, he estimates.
"Knowing the conservatism of Questar, my guess is they can get the [drilling] costs down lower than they project," Wagner said.
The potential discovery also could generate revenues for Questar's gathering and marketing operations as well as for its pipelines. And it comes at a time when energy stocks have been battered.
Questar sells what has become an abundant commodity. The company also has the taint of being perceived as a utility -- typically conservative investments that most investors have shunned in the high-flying market of the 1990s.
"When you are a commodity-driven business, like energy, your growth prospects are limited," said Gagliardi, the analyst with John S. Herold Inc.
Questar stock, which trades around $16 a share, has been a lackluster performer for nearly four years. And several analysts consider the company undervalued. But the company also has failed to achieve its stated goal of increasing earnings by 10 percent a year.
The Pinedale Anticlime -- if the projections are right -- could help change that.
"It's really one of our most important projects going out the next five years," Burnett said.
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