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Questar Looks to Midcontinent as Units Set Net Income Records

Questar Corp. saw sharply improved results during the second quarter as the company continues to shift more of its focus toward the Midcontinent where it expects margins to be stronger than those available in the Rocky Mountain producing region.

Like a number of its peers, Questar is dipping its toes into the emerging Haynesville Shale play of northwest Louisiana and is awaiting results from early wells there.

Questar net income grew 54% in the second quarter of 2008 to $172.6 million (98 cents/share) compared to $112.2 million (64 cents/share) for the second quarter of 2007. For the first half of 2008, Questar net income was $358.4 million ($2.03/share) compared to $263.3 million ($1.50/share) for the 2007 period, a 36% increase. "All Questar business units posted record net income in the first half of 2008," said CEO Keith O. Rattie. "Questar E&P grew natural gas and oil-equivalent production 14% in the first half, driven by a 27% increase in Midcontinent production."

In the second quarter, E&P grew production to 40.6 Bcfe compared to 35.5 Bcfe in the year-ago period. Natural gas comprised 88% of production. Average realized gas prices increased $1.49/Mcf, or 23%, and average realized crude oil and natural gas liquids (NGL) prices increased $28.93/bbl, or 57%. Natural gas hedges decreased reported revenues by $44 million, while oil hedges decreased revenues by $15.7 million. Net mark-to-market gains on natural gas basis-only hedges increased net income $10.1 million in the 2008 quarter compared to a loss of $4.1 million in the year-earlier period.

During a conference call with financial analysts last Tuesday, Rattie and COO Charles Stanley were coy about sharing their outlook for natural gas prices. When asked about the potential for shutting in some production in the event of further price erosion the executives reiterated their plans to direct more capital to regions offering the greatest netbacks, the Midcontinent, for instance. They did allow that further gas price weakness could result in "supply response" among producers.

More long-haul pipeline capacity out of the greater northwest Louisiana area will be needed in the years ahead as well as more capacity out of the Rockies, another 1 Bcf/d from a new export pipeline by 2012, the executives said.

Questar's Wexpro unit , which develops reserves for Questar Gas, grew its investment base 30% to $346.4 million at June 30. Wexpro produced 10.9 Bcf of cost-of-service gas for delivery to affiliate Questar Gas compared to 10.2 Bcf in the 2007 quarter.

Gas Management net income grew 46%, driven by higher gathering and processing margins. Net processing revenues increased 40% to $24 million due to a 29% increase in fee-based volumes and higher keep-whole processing margins.

Energy Trading net income decreased 17% to $4.8 million as a result of reduced margins caused by narrower regional basis differentials and lower overall commodity-price volatility compared to the 2007 period. Gross marketing margin totaled $7.1 million compared to $9.3 million in the year-ago period.

Questar Pipeline grew net income 27% over the prior-year period, to $12.7 million, driven by higher transportation revenues from expansion projects completed in the fourth quarter of 2007.

Questar said it now expects full-year 2008 net income to be $3.50-3.60/share compared to previous guidance of $3.25-3.40/share. Revised guidance assumes that the Nymex-Rockies basis differential will be $3.50-4.50/MMBtu for the remainder of 2008, compared to $2.50-3.00/MMBtu assumed previously. The guidance assumes that the Nymex natural gas price will be $10.00-11.00/MMBtu for currently unhedged 2008 production for the rest of the year, and the prompt-month Nymex crude oil price will be $120.00-130.00/bbl for unhedged volumes.

Questar E&P has hedged about 79% of forecast gas and oil-equivalent production for the remainder of 2008 with fixed-price swaps. Additionally, the company has hedged about 2% of forecast remainder of 2008 production with natural gas basis-only swaps. The company estimates that a $1.00/MMBtu change in the average Nymex price of gas for the remainder of 2008 would result in about a 2-cent change in earnings per diluted share. Questar estimates that a $10.00/bbl change in the average Nymex price of oil for the remainder of 2008 would result in about a 3-cent change in earnings per share.

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