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Questar Uses Drill Bit to Grow Gas-Rich Output 15% in Final Quarter

Natural gas-focused Questar Corp. last week reported quarterly earnings were up 42% on stronger production results and higher realized prices for gas, oil and natural gas liquids (NGL), as well as increased gas gathering and processing volumes and margins. However, the company warned the recent decline in gas prices will impact 2006 earnings.

Questar earned $104 million ($1.19/share) in 4Q2005, compared with $73.6 million (85 cents) in 4Q2004. Thomson First Call analysts were expecting earnings of $96.1 million ($1.11). Quarterly and full-year results were hurt by an impairment charge of $10.4 million (12 cents). Revenue rose by 55% to $941.4 million. In the final quarter, gas production rose 15% and realized prices increased 33%.

"Like other natural gas producers, Questar exploration and production (E&P) benefited from higher natural gas and oil prices," said CEO Keith O. Rattie. "But the real story is the growth in our E&P and gathering and processing businesses. Against the backdrop of three straight years of declining U.S. natural gas production, we grew production 15% in the fourth quarter and 10% for the full year to 114.2 Bcfe. We did it with the drill bit, not acquisitions -- and we did it despite seasonal drilling restrictions in the Rockies and an industrywide shortage of rigs."

Questar E&P output in 4Q2005 grew 15% to 31.7 Bcfe, versus 27.6 Bcfe in 4Q2004. Production for the year grew 10% to 114.2 Bcfe, compared with 103.5 Bcfe in 2004. On an energy-equivalent basis, natural gas comprised about 88% of Questar E&P 2005 production. Production from the Pinedale Anticline in western Wyoming grew 41% in 2005 and comprised about 29% of Questar E&P total production for the year.

In the Uinta Basin of eastern Utah, production was up 3%, "despite production constraints related to 3Q2005 construction and maintenance on an interstate pipeline that serves the area," the company said.

Output from Rocky Mountain legacy properties fell 7% in 2005 because of normal decline from older wells, seasonal access restrictions that delayed the drilling and completion of new wells and payout of a high-volume well that reduced the company's working interest. Legacy assets include all of the company's Rockies-producing properties except the Pinedale and the Uinta Basin. In the Midcontinent, production rose 4% to 38.7 Bcfe, driven by ongoing development drilling in the Elm Grove field in northwest Louisiana.

Questar's year-end 2005 proved reserves increased 3% to 1,480 Bcfe versus 1,434 Bcfe a year earlier. The company replaced 141% of its production, with most of last year's drilling focused on proved undeveloped locations at Pinedale Anticline and the Uinta Basin.

Rattie said the company now expects 2006 earnings to range between $4.30 and $4.60/share, compared with earlier guidance of $4.50-5, reflecting "the recent sharp drop in natural gas prices and significantly wider basis differentials in both the Rockies and the Midcontinent, slightly offset by increased forecast production from Questar E&P."

Rockies and Midcontinent basis differentials are expected "to be wider than previously assumed because existing pipelines are expected to operate at or near capacity in both regions for much of the year," Rattie said. "New pipelines are needed to transport growing regional natural gas production, particularly in the Rockies."

Questar said E&P's "controllable" production costs (the sum of depreciation, depletion and amortization expense, lease operating expense, general and administrative expense, and allocated interest expense) per unit of production increased 9% in 2005.

"Depreciation, depletion and amortization increased due to higher costs for drilling, completion and related services, increased cost of steel casing, other tubulars and wellhead equipment, and the ongoing depletion of older, lower-cost reserves," the company said. "Lease operating expense rose due to increased costs of materials and consumables and increased workover expense in the legacy, Uinta Basin and Midcontinent divisions."

The company has hedged about 70% of its forecast 2006 natural gas and oil-equivalent production and estimates that a $1/MMBtu change in the average New York Mercantile Exchange price of gas for the remainder of 2006 will result in about a 14 cents/share change in earnings. Similarly, a $10/bbl change in the average price of oil for the remainder of 2006 will result in about a 3 cents/share change in earnings.

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