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| STR > SEC Filings for STR > Form 10-Q/A on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
The following information updates the discussion of Questar's financial condition provided in its 2007 Form 10-K filing, and analyzes the changes in the results of operations between the three- and six-month periods ended June 30, 2008 and 2007. For definitions of commonly used gas and oil terms found in this report on Form 10-Q as amended, please refer to the "Glossary of Commonly Used Terms" provided in Questar's 2007 Form 10-K.
RESULTS OF OPERATIONS
Following are comparisons of net income (loss) by line of business:
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
(in millions, except per share amounts)
Exploration and Production
Questar E&P $116.8 $ 66.7 $50.1 $213.3 $143.9 $69.4
Wexpro 18.8 14.7 4.1 35.0 28.6 6.4
Midstream Field Services -- Gas
Management 21.7 14.9 6.8 40.2 27.3 12.9
Energy Marketing - Energy Trading
and other 4.8 5.8 (1.0) 12.9 11.8 1.1
Market Resources Total 162.1 102.1 60.0 301.4 211.6 89.8
Interstate Gas Transportation -
Questar Pipeline 12.7 10.0 2.7 28.6 21.2 7.4
Retail Gas Distribution - Questar
Gas (2.0) (1.1) (0.9) 28.6 28.0 0.6
Corporate (0.2) 1.2 (1.4) (0.2) 2.5 (2.7)
Net Income $172.6 $112.2 $60.4 $358.4 $263.3 $95.1
Earnings per diluted share $ 0.98 $ 0.64 $0.34 $ 2.03 $ 1.50 $0.53
Average diluted shares 176.3 175.9 0.4 176.3 175.7 0.6
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EXPLORATION AND PRODUCTION
Questar E&P
Following is a summary of Questar E&P financial and operating results:
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
(in millions)
Operating Income
REVENUES
Natural gas sales $284.6 $199.6 $85.0 $524.4 $395.0 $129.4
Oil and NGL sales 63.4 38.0 25.4 121.8 71.1 50.7
Other 1.4 1.4 2.9 2.7 0.2
Total Revenues 349.4 239.0 110.4 649.1 468.8 180.3
OPERATING EXPENSES
Operating and maintenance 30.2 22.0 8.2 58.2 42.7 15.5
General and administrative 16.1 15.8 0.3 30.3 28.0 2.3
Production and other taxes 32.0 14.6 17.4 59.0 30.8 28.2
Depreciation, depletion and
amortization 76.4 60.7 15.7 148.2 119.7 28.5
Exploration 3.8 3.1 0.7 7.3 5.1 2.2
Abandonment and impairment 3.6 2.1 1.5 6.2 4.1 2.1
Natural gas purchases 0.1 0.7 (0.6) 0.5 1.4 (0.9)
Total Operating Expenses 162.2 119.0 43.2 309.7 231.8 77.9
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Questar 2008 Form 10-Q/A 14 Net (loss) from asset sales (0.4) (0.1) (0.3) (0.6) (0.6) Operating Income $186.8 $119.9 $66.9 $338.8 $237.0 $101.8 Operating Statistics Production volumes Natural gas (Bcf) 35.8 30.9 4.9 70.6 61.8 8.8 Oil and NGL (MMbbl) 0.8 0.7 0.1 1.6 1.4 0.2 Total production (Bcfe) 40.6 35.5 5.1 80.1 70.4 9.7 Average daily production (MMcfe) 446.4 389.9 56.5 440.1 389.1 51.0 Average realized price, net to the well (including hedges) Natural gas (per Mcf) $7.94 $6.45 $1.49 $7.43 $6.39 $1.04 Oil and NGL (per bbl) $79.48 $50.55 $28.93 $76.85 $49.63 $27.22 |
Questar E&P reported net income of $116.8 million in the second quarter of 2008, up 75% from $66.7 million in the 2007 quarter. Net income for the first half of 2008 rose 48% to $213.3 million compared to $143.9 million a year earlier. Higher realized natural gas, crude oil and NGL prices and growing production more than offset a 21% increase in first-half average production costs.
Questar E&P production volumes totaled 40.6 Bcfe in the second quarter of 2008, a 14% increase compared to the year-earlier period. For the first six months of 2008 production volumes increased to 80.1 Bcfe, a 14% increase compared to the year-earlier period. Natural gas is Questar E&P's primary focus and comprised approximately 88% of 2008 production on an energy-equivalent basis. A comparison of natural gas-equivalent production by major operating area is shown in the following table:
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
(in Bcfe)
Pinedale Anticline 12.5 11.5 1.0 25.8 23.6 2.2
Uinta Basin 6.1 6.6 (0.5) 12.8 12.6 0.2
Rockies Legacy 5.0 4.9 0.1 9.9 9.4 0.5
Rocky Mountain Total 23.6 23.0 0.6 48.5 45.6 2.9
Midcontinent 17.0 12.5 4.5 31.6 24.8 6.8
Total Questar E&P 40.6 35.5 5.1 80.1 70.4 9.7
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Questar E&P production from the Pinedale Anticline in western Wyoming grew 9% to
25.8 Bcfe in the first six months of 2008 as a result of ongoing development
drilling. Pinedale seasonal access restrictions imposed by the Bureau of Land
Management limit the ability to drill and complete wells during the mid-November
to early May period.
In the Uinta Basin, first-half production grew 2% to 12.8 Bcfe in 2008 as the Company completed and turned 19 new wells to sales in 2008. Second quarter production volumes were adversely impacted by connection of new, deep, high-pressure wells to the existing gathering infrastructure. Connection of the new deep wells resulted in high gathering-system pressure that negatively impacted production from existing shallower and lower producing-pressure Wasatch/Mesaverde wells. Gathering infrastructure improvements are underway to address the situation, but permitting could delay installation until early 2009.
First-half 2008 Rockies Legacy production was 9.9 Bcfe, 0.5 Bcfe higher than the year-ago period. Increased production volumes were driven by new wells and the acquisition of additional interests in the Wamsutter area and a new well in the Williston Basin. Questar E&P Rockies Legacy properties include all Rocky Mountain region properties except the Pinedale Anticline and the Uinta Basin.
First-half 2008 Midcontinent production was 31.6 Bcfe, a 27% increase over first-half 2007 volumes. Midcontinent production growth was driven by leasehold acquisitions and ongoing infill-development drilling in northwest Louisiana, and the continued development of the Granite Wash/Atoka/Morrow play in the Texas Panhandle.
Realized prices for natural gas, oil and NGL at Questar E&P were higher when compared to the prior year. In 2008, the weighted-average realized natural gas price for Questar E&P (including the impact of hedging) was $7.43 per Mcf compared to $6.39 per
Questar 2008 Form 10-Q/A
Mcf for the same period in 2007, a 16% increase. Realized oil and NGL prices in 2008 averaged $76.85 per bbl, compared with $49.63 per bbl during the prior year period, a 55% increase. A regional comparison of average realized prices, including hedges, is shown in the following table:
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
Natural gas (per Mcf)
Rocky Mountains $ 7.36 $ 5.83 $ 1.53 $ 6.85 $ 5.85 $ 1.00
Midcontinent 8.76 7.58 1.18 8.34 7.37 0.97
Volume-weighted average 7.94 6.45 1.49 7.43 6.39 1.04
Oil and NGL (per bbl)
Rocky Mountains $82.39 $51.81 $30.58 $78.44 $50.01 $28.43
Midcontinent 75.69 48.21 27.48 74.75 48.88 25.87
Volume-weighted average 79.48 50.55 28.93 76.85 49.63 27.22
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Questar E&P hedged or pre-sold approximately 83% of gas production in the first half of 2008 and hedged or pre-sold 70% of gas production in the comparable 2007 period. Hedging decreased Questar E&P gas revenues by $37.1 million in 2008 and increased revenues $90.1 million in 2007. Approximately 53% of 2008 and 64% of 2007 Questar E&P oil production was hedged or pre-sold. Oil hedges reduced oil revenues by $23.1 million in 2008 and $0.7 million in 2007.
Questar may hedge up to 100% of forecasted production from proved reserves to lock in acceptable returns on invested capital and to protect cash flow and net income from a decline in commodity prices. During the second quarter of 2008, Questar E&P hedged additional Rocky Mountain natural gas basis through 2011. The Company uses basis-only swaps to protect cash flows and net income from widening natural gas-price basis differentials that may result from capacity constraints on regional gas pipelines. Derivative positions as of June 30, 2008, are summarized in Item 3 of Part I in this Quarterly Report on Form 10-Q/A.
Questar E&P production costs (the sum of depreciation, depletion and amortization expense, lease-operating expense, general and administrative expense, allocated interest expense and production taxes) per Mcfe of production increased 25% to $4.21 per Mcfe in the second quarter of 2008 versus $3.36 per Mcfe in 2007. First half 2008 production costs per Mcfe increased $0.70 or 21% compared to the 2007 period. Questar E&P production costs are summarized in the following table:
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
(per Mcfe)
Depreciation, depletion and amortization $1.88 $1.71 $0.17 $1.85 $1.70 $0.15
Lease operating expense 0.74 0.62 0.12 0.73 0.61 0.12
General and administrative expense 0.40 0.44 (0.04) 0.38 0.40 (0.02)
Allocated interest expense 0.40 0.18 0.22 0.33 0.18 0.15
Production taxes 0.79 0.41 0.38 0.73 0.43 0.30
Total Production Costs $4.21 $3.36 $0.85 $4.02 $3.32 $0.70
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Production volume-weighted average depreciation, depletion and amortization per Mcfe (DD&A rate) increased due to higher costs for drilling, completion and related services, increased cost of steel casing, other tubulars and wellhead equipment. The DD&A rate also increased due to the ongoing depletion of older, lower-cost reserves and the increasing component of Questar E&P production derived from recently acquired, higher-cost fields in the Midcontinent. Lease operating expense per Mcfe increased due to higher costs of materials and consumables, increased produced-water disposal costs and increased well-workover activity. General and administrative expense per Mcfe decreased as production growth outstripped increases in expenses. Allocated interest expense per Mcfe of production increased primarily due to financing costs related to the first-quarter acquisition of significant natural gas development properties in northwest Louisiana. Production taxes per Mcfe were higher due to higher natural gas and oil sales prices in the 2008 periods. Production taxes are based on a percentage of sales prices before the impact of hedges.
Questar E&P exploration expense increased $0.7 million or 23% in the second quarter of 2008 compared to 2007. Abandonment and impairment expense increased $1.5 million, or 71% in 2008 compared to 2007. For the first half of 2008, Questar E&P exploration expense increased $2.2 million or 43% compared to 2007. Abandonment and impairment expense increased $2.1 million, or 51% in 2008 compared to 2007.
Questar 2008 Form 10-Q/A
Major Questar E&P Operating Areas
Pinedale Anticline
As of June 30, 2008, Market Resources (including both Questar E&P and Wexpro) operated and had working interests in 276 producing wells on the Pinedale Anticline compared to 213 at the end of the second quarter of 2007. Of the 276 producing wells, Questar E&P has working interests in 254 wells, overriding royalty interests in an additional 21 Wexpro-operated wells, and no interest in one well operated by Wexpro. Wexpro has working interests in 81 of the 276 producing wells.
In 2005, the Wyoming Oil and Gas Conservation Commission (WOGCC) approved 10-acre-density drilling for Lance Pool wells on about 12,700 acres of Market Resources 18,208-acre (gross) Pinedale leasehold. The area approved for increased density corresponds to the currently estimated productive limits of Market Resources core acreage in the field. At December 31, 2007, Questar E&P had booked 355 proved undeveloped locations on a combination of 10- and 20-acre density and reported estimated net proved reserves at Pinedale of 1,033.9 Bcfe, or 55% of Questar E&P total proved reserves. The Company is evaluating the economic potential of development on five-acre density at Pinedale. In January 2008, the WOGCC approved five-acre-density drilling for Lance Pool wells on about 4,200 gross acres of Market Resources Pinedale leasehold. If five-acre-density development is appropriate for a majority of its leasehold, the Company currently estimates up to 1,500 additional wells will be required to fully develop the Lance Pool on its acreage.
On June 27, 2008, the United States Bureau of Land Management issued a Final Supplemental Environmental Impact Statement (FSEIS) for proposed long-term development of natural gas resources in the Pinedale Anticline Project Area (PAPA). Under the FSEIS, Questar E&P and Wexpro would be allowed to operate and drill and complete wells year-round in one of the three Concentrated Development Areas in the PAPA. The final Record of Decision, which will contain the detailed regulations governing ongoing development of the PAPA, is expected during the third quarter of 2008.
Uinta Basin
As of June 30, 2008, Questar E&P had an operating interest in 885 producing wells in the Uinta Basin of eastern Utah, compared to 861 at June 30, 2007. At December 31, 2007, Questar E&P had booked 123 proved undeveloped locations and reported estimated net proved reserves in the Uinta Basin of 301.2 Bcfe or 16% of Questar E&P total proved reserves. Uinta Basin proved reserves are found in a series of vertically stacked, laterally discontinuous reservoirs at depths of 5,000 feet to deeper than 18,000 feet. Questar E&P owns interests in over 250,000 gross leasehold acres in the Uinta Basin.
Rockies Legacy
The remainder of Questar E&P Rocky Mountain region leasehold interests, productive wells and proved reserves are distributed over a number of fields and properties managed as the Company Rockies Legacy division. Most of the properties are located in the Greater Green River Basin of western Wyoming. In aggregate, Rockies Legacy properties comprised 158.6 Bcfe or 9% of Questar E&P total proved reserves at December 31, 2007. Exploration and development activity is planned for 2008 in the San Juan, Paradox, Powder River, Green River, Vermillion and Williston Basins.
Midcontinent
Questar E&P Midcontinent properties are distributed over a large area, including the Anadarko Basin of Oklahoma and the Texas Panhandle, the Arkoma Basin of Oklahoma and western Arkansas, and the Ark-La-Tex region of Arkansas, Louisiana, and Texas. With the exception of northwest Louisiana and the Granite Wash play in the Texas Panhandle, Questar E&P Midcontinent leasehold interests are highly fragmented, with no significant concentration of property interests. In aggregate, Midcontinent properties comprised 373.9 Bcfe or 20% of Questar E&P total proved reserves at December 31, 2007.
Questar E&P continues infill-development drilling in northwest Louisiana and as of June 30, 2008, had 9 operated rigs drilling in the project area. As of June 30, 2008, Questar E&P operated or had working interests in 386 producing wells in northwest Louisiana compared to 263 at June 30, 2007.
Wexpro
Wexpro reported net income of $18.8 million in the second quarter of 2008 compared to $14.7 million in the 2007 quarter, a 28% increase. For the first half of 2008, net income was $35.0 million compared to $28.6 million a year earlier. Wexpro results benefited from a higher average investment base compared to the prior-year period. Pursuant to the Wexpro Agreement, Wexpro recovers its costs and receives an unlevered after-tax return of approximately 19% to 20% on its investment in commercial wells and related facilities - adjusted for working capital and reduced for deferred income taxes and depreciation (investment base). The Wexpro investment base at June 30, 2008, was $346.4 million, an increase of $79.2 million or 30% since June 30, 2007.
MIDSTREAM FIELD SERVICES - Questar Gas Management
Following is a summary of Gas Management financial and operating results:
Questar 2008 Form 10-Q/A
17
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
(in millions)
Operating Income
REVENUES
Gathering $35.6 $28.8 $ 6.8 $70.8 $56.4 $14.4
Processing 42.1 24.7 17.4 75.8 45.4 30.4
Total Revenues 77.7 53.5 24.2 146.6 101.8 44.8
OPERATING EXPENSES
Operating and maintenance 27.2 21.4 5.8 51.3 43.2 8.1
General and administrative 5.6 4.1 1.5 10.7 7.2 3.5
Production and other taxes 0.5 0.4 0.1 0.8 0.7 0.1
Depreciation, depletion and
amortization 6.6 4.8 1.8 12.9 9.1 3.8
Total Operating Expenses 39.9 30.7 9.2 75.7 60.2 15.5
Operating Income $37.8 $22.8 $15.0 $70.9 $41.6 $29.3
Operating Statistics
Natural gas gathering volumes (in
millions of MMBtu)
For unaffiliated customers 54.7 44.3 10.4 106.0 83.9 22.1
For affiliated customers 38.0 31.4 6.6 75.3 68.9 6.4
Total Gas Gathering Volumes 92.7 75.7 17.0 181.3 152.8 28.5
Gas gathering revenue (per MMBtu) $0.31 $0.32 ($0.01) $0.31 $0.31
Natural gas processing volumes
NGL sales (MMgal) 24.8 20.2 4.6 46.2 38.0 8.2
NGL sales price (per gal) $1.41 $0.95 $0.46 $1.32 $0.92 $0.40
Fee-based processing volumes (in
millions of MMBtu) .
For unaffiliated customers 17.7 12.1 5.6 42.4 20.7 21.7
For affiliated customers 25.5 21.3 4.2 51.0 43.3 7.7
Total Fee-Based Processing
Volumes 43.2 33.4 9.8 93.4 64.0 29.4
Fee-based processing (per MMBtu) $0.15 $0.15 $0.14 $0.15 ($0.01)
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Gas Management, which provides gas-gathering and processing-services, grew net income 46% to $21.7 million in the second quarter of 2008 compared to $14.9 million in the same period of 2007. Net income was $40.2 million in the first half of 2008 compared to $27.3 million in the 2007 period. Net income growth was driven by higher gathering and processing margins.
Total gathering margins (revenues minus direct gathering expenses) for the second quarter of 2008 increased 66% to $28.8 million compared to $17.3 million in 2007 and for the first six months of 2008 increased 64% to $55.8 million compared to $34.1 million in 2007. Gathering volumes increased 17.0 million MMBtu, or 22% to 92.7 million MMBtu in the second quarter of 2008 and 28.5 million MMBtu, or 19% to 181.3 million MMBtu in the first half of 2008 compared to the 2007 periods. Operations of Rendezvous Gas Services, formerly an unconsolidated affiliate, were consolidated with Gas Management beginning in 2008 and contributed 10.9 million MMBtu in the second quarter and 20.0 million MMBtu in the first half to the increased volumes. Rendezvous Gas Services provides gas gathering services for the Pinedale and Jonah producing areas. Expanding Pinedale production, new projects serving third parties in the Uinta Basin and the consolidation of Rendezvous Gas Services contributed to a 26% increase in third-party volumes in the first half of 2008.
Total processing margins (revenues minus direct plant expenses and processing plant-shrink) for the second quarter of 2008 increased 48% to $21.7 million compared to $14.7 million in 2007 and increased 62% to $39.5 million compared to $24.4 million in the first half of 2008 compared with the 2007 period. Fee-based gas processing volumes were 43.2 million MMBtu in the second quarter of 2008, a 29% increase compared to the 2007 quarter and 93.4 million MMBtu in the first half of 2008, a 46% increase compared to the first half of 2007. For the second quarter of 2008, fee-based gas processing revenues increased 31% or $1.5 million, while frac spread from keep-whole processing increased 44% or $5.2 million. Fee-based gas processing revenues increased 41% or $3.9 million in the first-half comparison, while frac spread from keep-whole processing increased 58% or $10.7
Questar 2008 Form 10-Q/A
million. Approximately 75% of Gas Management first half 2008 net operating revenue (revenue minus processing plant-shrink) was derived from fee-based contracts, down from 78% in the 2007 period.
Gas Management uses forward sales contracts to further reduce margin volatility associated with keep-whole contracts. Forward sales contracts reduced first-half NGL sales by $1.4 million in 2008 and by $0.1 million in 2007.
ENERGY MARKETING - Questar Energy Trading
Energy Trading net income was $4.8 million in the second quarter of 2008, a decrease of 17% compared to the year-earlier period. Lower natural gas-price volatility combined with lower transportation and storage margins led to the decrease from the 2007 quarter. For the first half of 2008, net income was $12.9 million, a 9% increase compared to the first half of 2007. Higher trading and storage margins related to gas-price volatility in the Rockies during the first quarter of 2008 drove the increase in net income in the first half of 2008. Gross marketing margin (gross revenues less costs for gas and oil purchases, transportation and gas storage), for the first six months totaled $19.1 million for 2008 compared to $18.2 million for the 2007 period, a 5% increase. Gross marketing margin for the second quarter of 2008 was $7.1 million a 24% decrease from the 2007 period. Revenues from unaffiliated customers were $387.4 million in the first half of 2008 compared to $290.0 million in the 2007 period, a 34% increase, primarily the result of higher natural gas prices. The weighted-average natural gas sales price increased 60% in 2008 to $7.74 per MMBtu, compared to $4.85 per MMBtu for the 2007 period.
INTERSTATE GAS TRANSPORTATION - Questar Pipeline
Questar Pipeline, which provides interstate natural gas-transportation and storage services, reported second quarter 2008 net income of $12.7 million compared with $10.0 million in 2007. For the first half of 2008, net income was $28.6 million, compared with $21.2 million in 2007. Operating income increased $2.2 million, or 10%, in the second quarter 2008 compared to the year-earlier quarter. For the first half of 2008, operating income was 24% higher compared to the year-earlier period, due primarily to transportation-system expansions that were placed in service in late 2007. Following is a summary of Questar Pipeline financial and operating results:
3 Months Ended June 30, 6 Months Ended June 30,
2008 2007 Change 2008 2007 Change
(in millions)
Operating Income
REVENUES
Transportation $43.2 $31.3 $11.9 $87.4 $62.2 $25.2
Storage 9.3 9.4 (0.1) 18.9 19.0 (0.1)
Gas processing 1.0 2.1 (1.1) 2.7 4.1 (1.4)
NGL sales 3.4 1.6 1.8 7.4 4.1 3.3
Energy services 4.3 3.6 0.7 7.8 8.3 (0.5)
Other 0.8 1.7 (0.9) 2.0 4.3 (2.3)
Total Revenues 62.0 49.7 12.3 126.2 102.0 24.2
OPERATING EXPENSES
Operating and maintenance 9.9 9.5 0.4 20.9 18.8 2.1
General and administrative 8.6 7.8 0.8 16.2 14.9 1.3
Depreciation and amortization 10.5 8.6 1.9 21.3 17.2 4.1
Asset impairment 10.6 10.6 10.6 10.6
Other taxes 2.1 1.9 0.2 4.3 4.1 0.2
Cost of goods sold 0.6 0.7 (0.1) 0.8 2.3 (1.5)
Operating Expenses 42.3 28.5 13.8 74.1 57.3 16.8
Net gain from asset sales 3.9 0.2 3.7 4.0 0.5 3.5
Operating Income $23.6 $21.4 $2.2 $56.1 $45.2 $10.9
Operating Statistics
Natural gas-transportation volumes
(MMdth)
For unaffiliated customers 157.7 84.0 73.7 287.5 160.9 126.6
For Questar Gas 30.1 25.4 4.7 73.3 67.5 5.8
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Questar 2008 Form 10-Q/A 19 For other affiliated customers 1.5 3.9 (2.4) 2.4 8.6 (6.2) Total Transportation 189.3 113.3 76.0 363.2 237.0 126.2 Transportation revenue (per dth) $0.23 $0.28 ($0.05) $0.24 $0.26 ($0.02) Firm daily transportation demand at June 30 (Mdth) 3,124 2,240 884 Natural gas processing NGL sales (MMgal) 1.5 1.4 0.1 4.0 3.9 0.1 NGL sales price (per gal) $2.24 $1.20 $1.04 $1.85 $1.05 $0.80 |
Revenues
Following is a summary of major changes in Questar Pipeline revenues for the
second quarter and first half of 2008 compared with the same periods in 2007:
Change in Revenues
6 Months
3 Months Ended Ended June
June 30, 2008 30, 2008
(in millions)
. . .
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