Questar Corp. (STR): Stock undervalued, Uinta development key near-term catalyst - Goldman Sachs - February 14, 2008
What's changed
Questar reported 4Q 2007 adjusted EPS of $0.74 versus First Call consensus of $0.72 and our $0.78 estimate. Total production was 388 MMcfe/d, above our estimate of 364 MMcfe/d. Operating cash flow was $313 million versus our $282 million estimate. All-in finding and development costs were $1.94 per Mcfe versus $2.32 in 2006. Management raised 2008 production guidance to 148-151 Bcfe from 146-150 Bcfe, excluding the recently-announced Mid-Continent acquisition.
Implications
We continue to believe management production guidance is conservative, although we suspect the Street does as well. We see drilling results from the Uinta Basin deep play and to-be-acquired Mid-Continent assets as the key catalysts for the stock, in addition to receiving regulatory approval expected this summer to accelerate Pinedale Anticline activity. The Uinta deep play appears to be working, though greater visibility is needed on rates of return, especially in the deeper northwest portion of the play.
Valuation
Questar trades at 8.3x 2008 EV/debt-adjusted cash flow versus 11.3x for Southwestern Energy, 6.2x for Bill Barrett and 15.5x for Ultra Petroleum, 13.1x for Quicksilver Resources, 12.0x for SandRidge Energy and 8.5x for Cabot Oil and Gas. We see valuation as attractive at these levels, though among E&P stocks we generally favor those with greater overall natural gas exposure at present. We see 32% upside potential to a $70 discounted cash flow based 12-month target price. We rate Questar Neutral relative to our Attractive coverage view. Our 2008-2010 EPS estimates now are $3.63 ($3.60 previously), $4.41 ($4.50 previously), and $4.58 ($4.55 previously).
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
