Questar Corporation (STR) is a natural gas holding company based in the Rockies, USA. The company operates three wholly-owned subsidiaries: Wexpro, Questar Pipeline, and Questar Gas. Wexpro is engaged in natural gas and oil E&P and in the past twelve months has produced ~58Bcf of natural gas and ~657,000BOE. It has an investment base of approximately $531M and enjoys the highest return on assets (ROA) among the three segments (~19%). Wexpro contributes the least in terms of revenue streams to the firm but provides more than half of Questar Gas's supply requirements. Questar Gas's share of total revenues attributable to the holding company approaches 80%. This subsidiary represents a gas-distribution utility that operates mainly in Utah, where 97% of its customers live. The company has been adding an average of 8.4K customers since 2008 and now approaches a customer base of one million people (the current number is about 931K). Questar Gas, according to the company's 2012 10-K, keeps its costs 30% below the national average partially because of Wexpro's dedicated and continuous production. Questar Pipeline provides natural gas-transportation and underground-storage services in three states: Utah, Wyoming, and Colorado. The company operates 2,638 miles of pipeline with a total daily capacity of 5,039K decatherms. In 2013, the company plans to add another 7.5K dth/d to the existing capacity. In 2012, Questar Corporation earned almost $1.1B in revenues and $568M in Adjusted EBITDA. Since 2008 the company has generated approximately $350M in Free Cash Flows. It offers a dividend of $0.72 per share with an effective yield 2.95%. Recently, the company has declared its 275th consecutive dividend payable on September 9th, 2013.
Current Price/Earnings ratio equals to ~20X and has remained on the rise since 2010. It falls within the 10-year range and has slightly climbed above 2003-04 levels. The historical EV/EBITDA multiple has been 12.0X on average for the past five years:
In 2013Q2 presentation, the management has given the following guidance for the year:
Historical Data and Margins
Questar Corporation has been growing EBITDA at a CAGR of 3.4% for the past 5 years, while revenues have been generally flat. Wexpro has the highest revenue growth at almost 7% CAGR for the same timeframe:
Quarterly results are also supplied:
The latest ROE metrics for the segments are available:
The following valuation method uses historical data and the most conservative assumptions in data projections. First of all, let us determine the current Enterprise Value and its compositions:
At the current EV of ~$6B the effective multiple is 10.7X, eleven percent below the 5-year average. Market capitalization represents over 70% of the total firm value, while total financial debt is less than a quarter, at 22.5%. The rest goes to asset-retirement obligations and pension-related liabilities.
Important valuation Assumptions:
1. Long-term revenue growth rates for Wexpro, Questar Pipeline, and Questar Gas are 5%, 1.2%, and 1%, respectively.
2. Consolidated EBITDA margin remains at 50%
3. Terminal EV/EBITDA at the historical average of 12.0X
4. Discount rate at 5% (actual WACC is below 4% due to a significantly low beta of 0.47)
5. Interest Expense remains at $58M; tax rates are locked at 38%
6. CAPEX consumes 30% of revenues for the next 5 years with a one-time hike of $565M as per management's forecast
The output of the model is following:
Adding valuable components such as the present value of dividend streams and effects of share repurchases, we obtain the following results:
Now let us look for a moment at the distribution of value factors and analyze them:
- Terminal Value makes up four-fifths of the total value. This is the most sensitive value factor and, therefore, makes the investment more risky
- Dividends represent one-eleventh part of the fair value. Dividends are cash returns to investors and make up an important component of the total experience
- Share buybacks have the smallest impact on the valuation, standing at 2% of per share value. Management should consider using these funds to pay dividends. On the other hand, management's plans to repurchase 1 million shares annually also indicate that the stock is deemed undervalued
- Adjusted Free Cash Flows (dividends subtracted from normal Free Cash Flows) are projected to be negative for the next 5 years because of the high capital investment levels (pipeline expansion, increase in investment base for Wexpro: more than $1B of development opportunities). As a result, there is a drag on the valuation. (click to enlarge)
Buy and sell signals have been provided by Recognia Inc. through TD Waterhouse brokerage. Readers can see the output below:
The readers can see medium-term resistance levels at around $24.90-$25.50, while support levels are as low as $22.50. Also, not pictured clearly on the graph, is the developing cup-and-handle pattern, which, if supported by the fundamentals, can indicate a medium-term rally.
At current price levels Questar Corporation is valued fairly, which means investors cannot exploit price inefficiencies. Nevertheless, investors may consider the ~3% dividend yield and an after-dividend ROE of about 8% (in other words, if P/E remains stable, the price will appreciate by 8% annually). The company seems to have weather the slump in natural gas futures pretty well during the past two-three years. This is an indicator that the firm is not extremely exposed to the futures market.
I issue a "HOLD" rating on this company. Potential investors should keep in mind that the stock offers razor-thin margin of error and remains at the middle of the fair value range.