Questar Corp.'s long-term strategy will continue to focus on the "three Rs" -- returns, risks and the Rocky Mountains, CEO Keith Rattie said last week.

The Salt Lake City-based producer has "taken the commodity price out of the assumption" as it deals with the natural gas basis blowout in the Rockies, Rattie told attendees at Lehman Brothers CEO Energy/Power Conference in New York City. About 80% of Questar's proved reserves and 64% of its gas-focused production is in the Rockies, but 76% of the output is hedged at prices that are "well above what we're seeing in the current market...Hedging is an important part of our value proposition."

The North American gas market price is an "equilibrium point somewhere between $6 and $8/MMBtu at the Nymex [New York Mercantile Exchange]," he said. "We think that reflects what a typical producer in a typical resource play can earn at cost to capital over the next 12 months. It's not precise, but we believe when prices are in the upper end or above, it's a good time to hedge. But it's also not the level of pricing we should assume for the long term."

When gas prices are in the lower end of the range or below, "we think it's not an appropriate time to hedge," he said. "We think the market forces mainly delay the importation of LNG [liquefied natural gas] and have an impact on supply. All of those will work to put prices back up into the equilibrium range."

Over the last decade Questar has transformed itself to be predominantly a producer. The company's "growth is important, but also to be successful in the commodity business you have to be a low-cost producer," he said. For 2008, Questar already has hedged about 78% of its production "at average net to well prices."

As a "consequence of the hedging policy, we are agnostic about the direction of the market," Rattie told attendees. "We can't predict what's going to happen. We can't do better than the collective wisdom of the market. But when the market is giving us the opportunity to lock in prices in the upper limit of the equilibrium range, we will hedge, with a target of having 70% of the current year's production hedged by March of the current year."

In the second half of 2007, Questar is forecasting Nymex gas prices will be $6.50-7.50/MMBtu, and oil prices will be $70-75/bbl. For the Rockies, Questar is pegging prices at around $3.25/MMBtu. Questar also expects to produce 135-138 Bcfe in the second half of 2007, with about 76% of that amount hedged. On those assumptions, Questar may double its 2004 earnings per share figures, said Rattie.

However, with its focus on the Rockies, things could change, Rattie said.

"In the last few days there's been an important development in the Pinedale [Anticline] operations, and the pace of development could be severely restrained by winter drilling restrictions," Rattie said.

Instead of issuing a record of decision (ROD) regarding drilling operations as expected on the Pinedale Anticline in Wyoming, the Bureau of Land Management (BLM) in Wyoming decided to delay until next year its environmental impact statement and instead is issuing two alternatives that will be open for public comment. (see NGI, Sept. 3). The alternatives follow BLM's draft supplemental environmental impact statement, issued late last year (see NGI, Dec. 25, 2006) and its Pinedale Resource Management Plan, which was issued in February (see NGI, Feb. 19).

Questar, Shell Exploration and Ultra Petroleum Corp. asked BLM to issue a "concentrated development plan to address wildlife concerns, the air...while also allowing us to step up the pace of development" in the Anticline, Rattie said. "Last year we only drilled 51 wells" in a 20-year development program, "and that's too long from my point of view."

BLM's decision to delay the ROD "will delay our drilling plan until February or January next year," he said. "We didn't assume any impact this year, but there could be a modest impact on next year's production...It's a mild negative for us, and it may slow us down...but it shouldn't have much of an impact as long as we get a decision in January or February."

Questar had planned to run eight rigs in the Anticline later this winter and into early next year, but if the ROD is delayed, Rattie said the company may move one of the rigs to another leasehold, including its Vermillion Basin operations also in southwest Wyoming. There, the company is evaluating 146,000 net acres in the Baxter Shale. So far Questar has drilled 19 wells, and as of Wednesday, Rattie said, the operations there were producing 2.6 Bcf/d.

"It's encouraging but it's not definitive," Rattie said.

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