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Questar Lags by a Penny, Tops Rev

STR WES

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Natural gas-focused energy company, Questar Corp. (STR - Analyst Report) reported mixed first quarter 2012 results, reflecting higher contributions from all business segments, partially offset by steeper operating and maintenance costs.

Earnings per share came in at 42 cents, missing the Zacks Consensus Estimate by a penny. However, comparing year over year, earnings improved 7.7% from 39 cents.

Total revenue came in at $425.7 million, surpassing the Zacks Consensus Estimate of $422.0. On a year-over-year basis, revenue dropped 9.4% from the year-ago level of $470.0 million due to the weak Questar Gas result.

Segment Analysis

Questar Gas: The segment generated $366.0 million in revenue, down 11.6% from the prior year, hurt by soft residential and commercial sales of natural gas. The segment registered an income of $34.9 million, up 4.5% from $33.4 million in first quarter 2011.

As of March 31, 2012, Questar Gas served 923,272 customers, up 9,218, or 1.0% year over year.

Wexpro: Consolidated sales were up 17.9% year over year at $9.2 million in the quarter. Segmental income from continuing operations increased to $24.3 million from $22.3 million in the prior-year quarter, attributed to a higher average investment base.

Wexpro also reported an 18.1% growth in quarterly production of natural gas (15.0 billion cubic feet (Bcf) from 12.7 Bcf in first quarter 2011).

Questar Pipeline: Consolidated revenue of $50.5 million was up 4.6% from the year-ago quarter and income from continuing operations came in at $16.6 million, reflecting an increase of 8.5%. The quarter’s performance was influenced by high transportation revenue associated with the well performing Overthrust pipeline that came into service in March, last year.

Total natural gas transportation volumes in the quarter were 227.2 million decatherms, up from the prior-year level of 205.6 decatherms.

Financials

As of March 31, 2012, Questar had $8.1 million in cash and cash equivalents and long-term debt (including current portion) of $1,124.6 million, with a debt-to-capitalization ratio of 51.0%.

During the quarter, the company bought back $6.6 million shares and intends to conduct more repurchases in the coming months.

2012 Guidance

Management reiterated its 2012 earnings guidance in the range of $1.15 to $1.19 per average diluted share.

Questar expects to register strong growth in the coming months with a high investment base at Wexpro, a multi-year pipeline-replacement program and strong customer growth.

Our Recommendation

We believe business units of Questar demonstrate strong development prospects, which are expected to drive a high growth rate of production and earnings in the years to come. The company is also expected to gain substantially from its various collaborations, cost-cutting initiatives and long-term contracts.

However, the expected bearish natural gas fundamentals over the next few quarters and excessive domestic gas supplies have made us cautious on the stock. Hence, we maintain our long-term Neutral recommendation on Questar. We also believe that Questar remains exposed to greater competitive risks from Copano Energy LLC and Western Gas Partners L.P. (WES - Snapshot Report) among its other peers.

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