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Introduction

Questar Corporation (STR) is a $10.28 billion company in the oil & gas operations industry. Market capitalization competitors in this industry include Range Resources, Newfield Exploration, and Dynegy. The oil & gas operations industry is up 33.39% over the past year compared to the S&P 500 which is down 6.05% during the same period. Over the past month, the industry has been up 8.61%, while the S&P 500 has been up 8.64%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, oil seems to be a great asset class to place capital in during uncertain times; therefore Questar will benefit. Also Questar’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Questar produces. According to Reuters, Questar “is a natural gas-focused energy company with four major lines of business: gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution.” Through its subsidiaries, Questar is active in looking for natural gas, managing cost reserves for utilities, and aiding in the trading product of oil equities and commodities. As oil prices have reached the commodity’s respective record high, before an active, summer, more demand (both domestic and foreign) has the potential to boost prices even further. This will be a positive impact to Questar’s financial reports.

More specific into the business model, Questar does most of its oil exploration in the South and Western parts of the United States. In fact, about 66% of all the company’s sales come from this business division. Questar also has a lot of inventory in terms of drilling areas locked up, making consistent revenue evident for investors. In addition to the exploration division, Questar also operates in other areas including midstream field services, energy marketing, interstate gas transportation (to a hub near the Rocky Mountains), and retail gas distribution.

Growth

Questar has illustrated solid growth prospects over the past year. According to Reuters, Questar reported a $2.73 billion revenue product last year. This number is down over 3.84% than it was the previous year. Compared to the industry’s average of 20.05%, however, investors may question Questar’s performance. However, this company has historically reported sales at a rate of 17.83% which is respectable compared to the rest of the industry. Moreover, Questar’s earnings growth at 13.80% is actually positive and nearly four times higher than the industry average of 4.90%. The number is also higher than competitors like Range Resources, which only reported a negative 20.06% increase. And this statistic coincides with Questar’s strong history of earnings. This argument is supported with Questar’s five year average earnings figure of a number respectable to the industry’s 54.91% average. Moreover, Questar’s current earnings report beat out other competitors like Newfield Exploration (-73.18%) as well.

In addition, Questar has kept its costs under control. According to Reuters, Questar has reported gross, operating, and net profit margins of 55.41%, 30.89%, and 18.61% respectively over the past year. Moreover, these numbers are above the company’s five year averages of 53.12%, 24.83%, and 14.47%. This comparison illustrates a history of strong cost controls. The current averages are also better (business model respected) than competitor Dynegy’s respective gross, operating, and net income averages of 35.13%, 19.50%, and 3.74%. Therefore, Questar has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Sunoco reported respective gross, operating, and net income margins last year of 6.15%, 3.15% and 1.99%. Therefore, Questar is not only growing very well, but keeping its costs contained.

Compiling all this information together and investors comes across ROE. Over the past year, Questar reported an ROE of 21.22%. Therefore, out of all shareholder equity, more than 21% come from earnings instead of debt or stock. This number is great to the industry average of 17.01% and competitor averages of 11.19% (Range Resources) and 3.43% (Dynegy). Not to mention, Questar’s current year ROE is much better than the company’s five year average of 20.27%. Therefore, Questar has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Questar cannot continue its success. The same logic applies to Questar’s 9.22% ROA (above industry average) and 10.88% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Questar has a forward P/E ratio of 18.21 and a price to sales ratio of 3.75 compared to the industry’s respective 32.84 and 8.51, which shows an undervalued status. In comparison, market-cap competitor Range Resources has a P/E of 32.84 and a price to sales ratio of 8.51. And Dynegy has a high P/E ratio of 36.08. What makes these remarks even more enticing is these firms that aren’t growing so greatly but have higher multiples. That idea shows overvaluation, not the mainframe that Questar is currently in. Moreover, Questar has a low PEG ratio compared to other competitors’ numbers as well.

Efficiency

Questar is efficient. Inventory turnover at 9.73 is strong compared to other industry market-cap rivals (Range Resources: 8.00). Moreover, asset turnover is also strong at 0.50 compared to competitor figures. Receivables turnover also illustrates a number of 6.72, illustrating cash received every 54 days. In terms of liquidation, Questar’s current ratio is 0.66. This number is a bit risky, but the company’s capital expenditures have increased (32.36%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 74.46% of all Questar shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Questar performed well in the past year. The company’s share price has increased 26.24% year-to-year. This type of growth is excellent for a recessionary-type economy, especially considering the fact that other gas and oil companies have performed far worse. There seems to be some support at the 48 dollar share price range dating back to earlier January 2008. The last time Questar reached this amount the company rebounded and appreciated 25%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Questar illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.45, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Questar according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Questar is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
April 11th, 2008