Questar: 2Q Earnings Preview

Jul.26.10 | About: Questar Corporation (STR)

Click to enlargeNatural gas-focused energy company Questar Corp. (NYSE:STR) is expected to report its second-quarter 2010 earnings on Tuesday, July 27, 2010, after the market closes. The Zacks Consensus Estimate for the second quarter is 36 cents per share, with a downside potential of 33.3%.

Previous Quarter Recap

Questar reported first-quarter 2010 earnings per share, excluding losses from non-core asset sales and certain other one-time items, of 73 cents, below the Zacks Consensus Estimate of 75 cents and the year-ago profit of 86 cents. The weak result was due to lower realized natural gas prices.

Revenue for the quarter was up 6.7% year over year to $984.0 million based on higher production volumes but came below the Zacks Consensus Estimate of $1,027 million.

As of March 31, Questar’s total long-term debt stood at $2.0 billion with a debt-to-capitalization ratio of 34.4%. The company incurred a capital expenditure of $349.4 million during the quarter. (See conference call transcript here.)

Questar Spins Off

In recent times, Questar has successfully split its unregulated exploration and production (“E&P”) business from its regulated utility business, thereby creating two independent, publicly traded companies. The newly formed company was named QEP Resources (NYSE:QEP) and comprises QEP Energy Company (previously Questar Exploration and Production), QEP Field Services (formerly Questar Gas Management) and QEP Marketing Company (the former Questar Energy Trading).

Agreement of Analysts

Over the last 7 days and 30 days, the analysts have showed a negative sentiment toward Questar’s second-quarter 2010 outlook. In the last 30 days, out of the 11 analysts covering the stock, only 1 analyst has raised the estimate for the second quarter of 2010, while 5 analysts slashed their estimates for the same quarter.

In the last 7 days, 2 analysts have revised their estimates downwardly, while none of the analysts has increased it. The analysts remain concerned about the company given that it will likely take some time to absorb the outcome of the spin-off and the unstable natural gas fundamentals.

Magnitude of Estimate Revisions

Taking into effect the analysts’ downward earnings revision, the Zacks Consensus Estimate for the second quarter of 2010 plunged to 36 cents from the earnings estimate of 51 cents given 30 days ago and the earnings estimate of 42 cents provided 7 days ago.

Surprise History

Questar shows a history of mixed earnings surprises in the last 4 quarters varying over a wide range of negative 2.7% to positive 17.7%. However, on an average basis, the earnings surprise was a positive 7.2%. Based on the current post spin-off scenario, we expect the company to post weak results in the upcoming quarter.

Our Recommendation

With an expectation that the stock will perform below the broader US equity market over the next one to three months, Questar is currently rated as Zacks #4 Rank (Sell).

Although we continue to appreciate Questar’s strong upstream asset base, robust margins, attractive hedges and low cost structure, we maintain our Neutral recommendation on the stock in the long run, reflecting an uncertain macro backdrop and commodity price volatility.

Disclosure: No positions