Questar(STR) May Spin Off Exploration And Production Business

Questar(STR) announced on April 21 that it is considering separating its unregulated exploration and production (E&P) business from its regulated utility business,  creating two independent companies. According to that press release, Questar currently consists of six businesses:

• Questar Exploration and Production Company, a diversified natural gas and oil-exploration and production company;
• Questar Gas Management, a midstream field services company that gathers and processes natural gas in the Rocky Mountain region and northwest Louisiana;
• Questar Energy Trading, which markets natural gas and oil on behalf of Questar E&P and operates a natural gas storage facility in western Wyoming;
• Wexpro Company, which develops and produces natural gas on behalf of Questar Gas Company’s utility customers under a 1981 agreement with state regulators;
• Questar Pipeline, which operates interstate natural gas pipelines and storage facilities in the western United States;
• Questar Gas Company, a regulated natural gas distribution utility serving about 900,000 homes and businesses in Utah, Wyoming, and Idaho.

The not-yet-named new company would consist of the unregulated business: Questar E&P, Questar Gas Management, and Questar Energy Trading.  Questar Corp. would retain Wexpro, Questar pipeline and Questar Gas Company, the company’s regulated businesses.

During the company’s recent conference call, after the April 27 , 2010 Q1 earnings release, Keith Rattie, Questar’s Chairman, President and CEO spoke about the potential spinoff. Some highlights:

“The spin-off of our E&P business would create two top-tier companies in their respective market segments…After the E&P spin-off, the new Questar Corp. would have the potential to grow net income at high single-digit rates over the next five years. New Questar should generate significant free cash flow to fund future growth projects while also paying a substantial dividend and growing that dividend at a significant rate. The E&P Co. businesses…have an attractive inventory of future development opportunities and thus good visibility on growth. We’ve raised 2010 production guidance – we’re on track to grow production by at least 12% this year. We believe we can grow production at a compound rate of 12-15% over the next five years – without an acquisition, and with solid returns on capital even at natural gas prices consistent with the current forward curve…[our current price indicates] we may be “stuck in the middle” – too much E&P for many risk-averse investors, but too much non-E&P for many E&P investors.

Additionally, according to Rattie, the spinoff will not require approval from federal or state regulators nor does it require shareholder approval. The spin-off, which could happen H2 2010, is still subject to certain precedent conditions and board approval. The spin-off is proposed to be tax-free to shareholders of Questar. Post separation, current stockholders of Questar will get equal value of shares in each company. It sounds to me that the company believes that the ‘sum of the parts’ is worth more than the whole and that the spinoff will provide investors with more defined investment choices: more risk-averse and yield hunters can turn to the parent company while the E&P entity will appeal to the more speculative types that do not desire any yield. For a more detailed discussion about the proposed spinoff, it is worth taking a look at the transcript.

The stock has popped since the announcement (at one point up over 15%!) and despite the recent market volatility is still up over 6% (current price $48.48). We will continue to monitor this situation as more details are released and SEC filings are submitted, but this looks like a potentially interesting corporate action.

Disclosure: Author has no position in STR

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