Questar Corp (IL/A): Pinedale returns strong; 2006 guidance as expected - Goldman Sachs - October 28, 2005
Questar's third quarter highlighted continued positive fundamentals in the Pinedale Anticline, and the company's production and earnings guidance for 2006 is in line with our estimates. Deep potential at Pinedale, further results from drilling in the Vermillion and Uinta Basins and rising recoverable resources have the potential to push Questar shares beyond our $91 traditional peak value. However, going into winter we prefer natural gas-focused E&Ps in East Texas and the Mid-Continent relative to the Rockies, in part due to greater gas price exposure. We rate Questar In-Line relative to an Attractive coverage view.
Key comapny-specific catalysts
(1) Deep Pinedale potential. We continue to see positive momentum toward the ultimate completion of Questar's deep exploration well at Pinedale. The combination of gas flares during drilling, high rates (more than 10 MMcf/d at one point) during the first 1-2 days of completing the deeper Hilliard Shale and Ultra Petroleum's recent decision to drill its own deep exploration test next summer are all positive signs. Because of completion delays, however, not much more will be known until late 2Q 2006 at the earliest. The company's target zone, the Baxter, remains to be completed, and it also remains to be seen whether the obstructions that caused the completion delays iare prevantable in the future or are simply a risk operators will have to contend with in future deep tests. We believe deep success could represent about $12 per share for Questar and $12 per share for Ultra.
(2) Drilling results from the Vermillion Basin. We expect further results from wells in the Vermillion Basin over the next year. Initial results were positive, and we believe the next catalyst will be to what extent probable reserves get booked as proved reserves and any increases in the sum of proved, probable and possible reserves. The basin represents a niche for Questar, as there are few other producers in the region. We already give value to probable and possible reserves in the Vermillion, but greater confidence in the timing of monetization should increase reserve values. Questar plans to drill more than 12 wells in 2006 and needs an estimated 4-5 Bcfe per well for commerciality (about the level expected at this point from the first two completed wells).
(3) Recoverable resource and spacing at Pinedale. We continue to expect full 10-acre spacing at Pinedale in our valuation. Ultra seems to be having success in speeding the pace of drilling at Pinedale, and there is greater optimism towards increased resource and sub-10-acre spacing. This could continue to cement the Pinedale as the top-quality onshore gas basin.
3Q 2005 reported EPS above our and consensus estimates
Questar reported 3Q 2005 EPS of $0.75, higher than our estimate of $0.63 and First Call consensus estimate of $0.66. Lower-than-expected realized commodity prices were offset by higher-than-expected gas production of 279.1 MMcf/d versus our estimate of 257.5 MMcf/d, coming mainly from a sharp increase in the Pinedale Anticline. All-in costs were lower than expected at $2.75 per Mcfe versus our $3.12 per Mcfe due to lower than expected exploration expense. Operating cash flow was $175 million versus our $147 million estimate. Net debt/tangible capital is at 50% versus 42% in Q2 2005. For 2006, we are currently assuming total production of 342 MMcfe/d for 2006 versus newly issued company guidance of 329-334 MMcfe/d. Our EPS estimate is above the upper end of the company's range due to what we believe is management's conservatism (we assume a $10 per MMBtu Henry Hub natural gas price for 2006).
Updated estimates
We have updated our full-year 2005 EPS estimate to $3.67 ($3.58 previously). To reflect increases in gas gathering margins and changes to hedge positions, we are our increasing our 2006 and 2007 estimates to $5.13 ($5.07 previously) and $6.18 ($6.08 previously) respectively. For 2008 (normalized), our EPS estimate is $3.96 ($3.79 previously). Exhibit 1 shows our summary financial model for Questar.
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. |
