We have downgraded natural gas-focused energy firm Questar Corp. (STR) shares to Underperform from Neutral. Given the weak natural gas fundamentals and the company’s clouded post-split outlook, we see little reason for investors to own the stock.
The specter of a continued glut in domestic gas supplies still exists, with storage levels remaining 6% above their five-year average. Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S. and robust production from dense rock formations (“shale”). These factors translate into a bearish near- to medium-term outlook for natural gas-weighted companies like Questar.
In June 2010, Questar completed the spin-off of its unregulated exploration and production (“E&P”) business as well as its gas gathering and marketing segment into a separate, independent and publicly traded company QEP Resources Inc. (QEP). We believe that transfer of the low cost and high-growth E&P assets (post-split) has left Questar with a slower growth operation that includes a regulated natural-gas utility. As a result, the cash flow and earnings outlook of the reorganized Questar is weaker than that of the predecessor company.
Given these headwinds, we expect Questar, which currently retains a Zacks #5 Rank (short-term Strong Sell rating), to underperform the broader equity markets in general and the oil and gas group in particular.