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We are maintaining our Neutral rating on Questar Corporation (STR - Analyst Report), given its steady earnings and dividend growth potential in the coming months, partially offset by unstable natural gas fundamentals.

In the recently completed second quarter 2011, Questar reported earnings per share of 22 cents, surpassing both the Zacks Consensus Estimate and last year's 20 cents. Quarterly total revenue came in at $222.9 million, up 10.8% from the year-ago level of $201.1 million and ahead of the Zacks Consensus Estimate of $189 million.

We also believe that all the business segments of Questar exhibit strong development prospects, which are expected to drive higher production and reserves growth going forward. The company is expected to perform well in the coming quarters given its focused and experienced management team, manageable debt maturities and long-term contracts.

In an effort to broaden the market exposure of liquefied natural gas (“LNG”) products and services, Questar formed an alliance with Applied LNG Technologies LLC to jointly explore new market opportunities for LNG in the Rockies. We remain optimistic about this promising collaboration that brings together two eminent natural gas providers.

Despite all these positive aspects, Questar is unable to avoid risks associated with the global economic volatility. The supply-demand imbalance, resulting from the availability of natural gas in the domestic market, continues to weigh down the stock in the near to medium term.

With weak natural gas prices, particularly in the Rocky Mountains and political headwinds in Utah and Wyoming affecting the Wexpro business unit, the company’s growth prospects remain affected.

We also believe that Questar will take some time to fully absorb the outcome of the QEP Resources (QEP - Analyst Report) spin-off.  Until then, the business profile of the company is exposed to greater competitive risks.

We also believe that Questar remains exposed to greater competitive risks from peers such as Cabot Oil & Gas Corporation (COG - Analyst Report) and Anadarko Petroleum Corporation (APC - Analyst Report) and expect it to perform in line with the industry levels.

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