Questar Corp. (STR): Long-awaited acquisition reloads Mid-Continent portfolio - Goldman Sachs - February 01, 2008
What's changed
Questar announced a $655 million acquisition of natural gas properties in Northwest Louisiana from multiple private entities.
Implications
Questar management had indicated to the Street for more than a year that it was seeking a Mid-Continent acquisition, so this deal is not surprising to us. The sales price of $2.37 per Mcfe is generally in line with other comparable recent transactions. Strategically, we believe management has several rationales for undertaking this transaction, including: (1) a desire to diversify production away from the Rockies, where management seems confident in its underlying asset quality but eager to mitigate exposure to regional basis differentials and the regulatory risk inherent to having as much acreage on federal lands as Questar does in Wyoming; (2) add additional drilling inventory to personnel from its Mid-Continent business unit, which has shown success at the nearby Elm Grove Field, and further exploit expertise in drilling the Cotton Valley and Hosston formations. We are updating estimates to reflect the acquisition and minor other adjustments. Our 2008/2009 EPS estimates go to $3.60/$4.50 from $3.52/$4.25.
Valuation
Questar shares have underperformed other E&Ps over the past three months, which we believe is overdone. Given that Questar has not been an acquirer in recent years, the Street may be hesitant to give full credit for the rampup in production from these assets that management expects. We would view weakness as a buying opportunity. We see 38% upside potential for Questar shares to our $70 12-month DCF-based target price, versus 29% for E&Ps. We maintain our Neutral rating though the shares increasingly seem attractive to us. We are above consensus for 4Q2007 EPS.
Key risks
Commodity price volatility, drilling results, cost pressures, and government pronouncements. |
