This might be a pipeline play or a utility play or a energy trading play or a telecommunications play...kind of a mini-Enron but ESPECIALLY a NG E&P play. From a Barron's article this week. I highlighted some startling predictions about the size of the Pinedale discovery. Also a 3% dividend.
September 11, 2000
Paydirt in Pinedale?
For Questar shareholders, drilling success could be a gas
By HARLAN S. BYRNE
The Pinedale region of western Wyoming rarely gets much notice. Poets and writers
seldom rhapsodize about its natural charms. Major-league teams have never called it
home. And when was the last time you heard a big-shot politician worry about "how it'll
play in Pinedale"? Yet, for oil and gas driller Questar, and the company's hopeful
shareholders, much is riding in coming weeks on this obscure patch of the globe. A major
gas-drilling project in the region will soon begin reporting results, and if those findings
match management's exuberant expectations, Questar's shares could resume the joyful
journey that already has lifted them 54%, to 23, this year.
According to company estimates, Questar's two-thirds interest in the Pinedale project
could produce enough gas to double, at least, the company's existing reserves of about
600 billion cubic feet of "non-utility" gas. As a result, some analysts predict the stock also
could double within a year, helped along by surging prices for oil and natural gas
produced in the Rocky Mountain region and Canada. (In keeping with regulatory
agreements, Questar has earmarked another 380 billion cubic feet of booked reserves for
use exclusively by the company's wholly-owned utility.)
To be sure, the Pinedale properties could prove disappointing, yielding mediocre results
or, heaven forbid, dry holes. But, while a desultory outcome might dampen the stock's
near-term prospects, Questar's other operations this year have drawn the kind of attention
typically reserved for the giants of the energy industry, or the hot drilling stock du jour. In
addition to its diverse drilling portfolio and integrated natural-gas operations, the Salt
Lake City-based company operates a profitable gas utility serving Utah and portions of
Idaho and Wyoming. And, like many pipeline companies, Questar's been bit by the
telecom bug.
Still, it's the rosy prospects for Pinedale that have riveted investors most. Lowell Miller, of
Miller/Howard Investments, which manages about $300 million in assets, wagers Questar
might have made the largest gas discovery ever in North America. Consequently, he
thinks the stock, which sat out most of the 'Nineties, could be in the early stages of a
sustained recovery.
CEO Cash has big hopes for gas find.
R. Don Cash, Questar's chairman, president and chief executive, wouldn't quibble with
Miller's drilling assessment. "Pinedale may be one of the largest [gas discoveries]
currently under development," says Cash, a petroleum engineer by training, and the
company's CEO since 1984. "We've been drilling up a storm. We have five drilling crews at
work, and we plan to drill nine or 10 wells this year."
The results should be sufficient to give company engineers a glimpse of the magnitude of
potentially recoverable reserves. If all goes well, Cash anticipates Questar and its partners
could have 130 wells in production in a few years, each producing an average of six billion
cubic feet of gas reserves. Current wells have been drilled 80 acres apart, per government
regulations, but the company may be able to secure permission for 40-acre spacing. Closer
spacing does not necessarily increase reserves, but allows for faster production -- a big
plus if gas prices remain high.
The company's optimistic outlook rests, in part, on several earlier drilling successes.
Results from these test wells indicated reserves per well of as much as 11 billion cubic feet.
Geologically, the region is called the Pinedale anticline. Pay zones are thick, but until
recent years have been difficult to produce because of tight sand formations. Now,
however, multifracturing and other extraction technologies have been perfected enough to
open the pay zones and make them more productive, thus justifying commercial operation.
Further encouragement comes from the discovery a few years ago of the Jonah field,
about 35 miles south of the Pinedale formation.
Pinedale wouldn't have stacked up as such an enticing proposition even a year or two
ago, given the then-depressed prices for natural gas. This year's surge in both gas and oil
prices has made all the difference. And gas prices are likely to remain just as strong in the
next year, if not beyond, given supply constraints and continued strong demand.
Not surprisingly, soaring energy prices have underpinned Questar's solid earnings gains
this year. Thanks to a near-doubling of earnings from oil and gas operations in the second
quarter, the company recorded first-half net of $76.4 million, or 95 cents per diluted share,
on $569 million of revenues, compared with year-ago earnings of $66.4 million, or 80 cents
a share, on revenues of $457 million. Excluding securities sales, first-half profits equaled 82
cents a share, versus 66 cents in last year's like span.
For the full year analysts expect Questar to earn more than $1.50 a share, excluding
securities gains, compared with last year's $1.20 a share. Revenues could top $1 billion,
up from $924 million. Questar's securities holdings, with a market value of $90 million,
consist mainly of stock in Nextel, the communications company, which issued
shares to Questar in connection with the acquisition of telecom properties. The
company's balance sheet, in general, is healthy, with long-term debt accounting for
44% of capital at the end of 1999.
Like most gas and electric utilities, Questar has been dabbling in telecommunications and
other technology fields. The company's Questar InfoComm unit is developing an
integrated package of e-commerce services for small and midsize businesses. Customers
have been seeking physically secure facilities in which to conduct business via the
Internet, and InfoComm has begun to develop such structures. The company's first
facility, a $6 million center on its home turf, in Salt Lake City, rests on structural shock
absorbers. The building is designed to protect both tenants and sensitive communications
equipment from costly disruptions caused by power outages, not to mention earthquakes.
Questar has been studying a possible spinoff of InfoComm.
The company's gas utility, backed by low-cost reserves, has been a steady money maker,
and an eager beneficiary of the fast-growing population and economy in the Western U.S.
But the gas retailer, and other regulated operations such as pipelines, have contributed a
declining portion of Questar's earnings in recent years. (They now account for about a
third of operating earnings.) The big winners have been non-regulated activities, primarily
gas production. And, for investors, Pinedale could wind up the biggest winner of all. |
