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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Bearcatbob who wrote (38634)	2/7/2005 8:35:11 AM
From: Dennis Roth	Respond to of 206209

Questar Corp. (OP/A): Continue to recommend with greater EPS volatility expected Goldman-Sachs February 03, 2005 We continue to strongly recommend Questar Corp. shares and believe that any weakness related to a potential reduction to the company's EPS guidance, which would be a likely function of natural gas price volatility, would not be lasting. We believe the Street's confidence in Questar's Pinedale Anticline assets will be the key driver of stock performance, measured by production outlook, the level of probable and possible reserves, the results of the high risk/high potential deep exploratory test and the ability to improve the service rig crew quality. Questar reports 4Q 2004 results on February 10, and we feel comfortable adding to positions both ahead of earnings and on any potential weakness. We rate Questar Outperform relative to an Attractive coverage view. LOWER STRIP GAS PRICES COULD CAUSE REDUCTION TO EPS RANGE While we recognize the importance of EPS guidance as a normal practice among natural gas distribution companies, we believe that Questar's EPS guidance will become increasingly more volatile and less meaningful due to the rising importance of its E&P business (53% of expected 2005 EBITDA). The company's most recent EPS guidance of $3.25-$3.45 for 2005, released on October 26, was based on a natural gas strip price of $7.23 per MMBtu and an oil strip price of $48.93 per bbl on October 18. The company's guidance, in our view, was conservative considering these prices. Current strip prices (based on February 3 data, combined with the actual average to date) are about $6.40 per MMBtu for natural gas and $46.60 per bbl for crude. Thus, we see reason why the company could lower guidance as a part of its earnings release. Assuming these prices, we would be surprised to see a decrease greater than $0.17, as we generally see about a $0.20 sensitivity per $1 Mcfe move in commodity prices. Our 2005 EPS estimate is $3.28 using lower commodity price assumptions. For 4Q 2004, we expect $0.82 versus Street consensus of $0.81. PROBABLE/POSSIBLE RESERVES EXPECTED LATER IN FEBRUARY; PINEDALE BOOKINGS SEEM CONSERVATIVE We believe that Questar management is preparing to quantify probable and possible reserves in addition to proved reserves, but that the probables and possibles may not be announced until later in February. The company has already provided greater detail on its expectations for probable Pinedale Anticline locations, and we expect total proved reserves of 745 Bcfe and a proved + probable reserves of 1.1 Tcfe. We would note that we expect Questar and its reserve engineer Ryder Scott to continue to assume gross reserves per 20-acre Pinedale location of 6 Bcfe, less than the 8 Bcfe generally assumed by others in the region. While there is general agreement over expected well performance during initial years, Questar is assuming a more consistent later-year decline and shorter productive life versus others. Regardless of whether this can be attributed to Questar's conservative reserve bookings versus others' aggressive reserve bookings versus others' superior asset quality, from a net present value perspective there is a more limited impact as the discrepancy is in the later years of production rather than initial production. Outside the Pinedale, we would not expect significant probable reserves in the Uinta Basin or in the Mid-Continent, but we would expect probable reserves in Questar's other Rockies areas. ANY INCREASES TO PRODUCTION GUIDANCE WOULD BE A POSITIVE SURPRISE While the company has highlighted the potential for year-round drilling in the Pinedale Anticline to raise production for 2005 beyond its 112-114 Bcfe guidance, we are not expecting management to raise its production targets. We are currently assuming 112.4 Bcfe, at the lower end of the range. While the company does have one rig running through this winter, we are not expecting a significant additional uplift in Pinedale production from year-round drilling until 2006. We are assuming 26% production growth from the Pinedale in 2005 and 4% growth from production in other areas, leading to 9% growth overall. DEEP PINEDALE TEST RESULTS LIKELY IN MAY; IMPROVING RIG CREW QUALITY EXPECTED Questar plans to re-enter its delayed deep Pinedale exploration test in May and we believe that a successful well would be a significant catalyst for Questar shares as well as those of other Pinedale players. While a dry hole could cause a short-term pullback, we believe this would be a buying opportunity as we do not believe there is any value in Questar's share price for deeper Pinedale potential. Part of the delay on the well was due to drilling crew that was sub- par, an issue that has faced Questar and the Pinedale as a whole due to the high drilling seasonality in the region. We expect that rig crew quality will begin to improve, in part because of more stable year-round drilling and in part as Questar gains more experience in the region. VALUATION: QUESTAR'S E&P BUSINESS UNDERVALUED RELATIVE TO UNCONVENTIONAL GAS PEERS We believe that Questar shares are undervalued and see 19% upside to an estimated $61 peak value. We see a significant discrepancy in valuation and upside between Questar and other unconventional gas companies, and we continue to believe that Questar will outperform Western Gas Resources (U/A) due to Questar's better free cash flow and near-term growth. Questar's E&P business trades at 6.2x 2006E EV/debt-adjusted cash flow, versus 9.4x for Western Gas, 10.2x for Quicksilver Resources and 13.0x for Ultra Petroleum. We assume 2007 mid-cycle midstream EV/EBITDA multiples of 7.8x for Questar and 8.0x for Western Gas. 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. , , ("\''/").___..--''"`-._ `o_ o ) `-. ( ).`-.__.`) (_Y_.)' ._ ) `._ `. ``-..-' _..`--'_..-_/ /--'_.' .' (il),-'' (li),' ((!.-'