Questar Surges on Expectation of Gas-, Oil-Production Spinoff

Questar Corp., the Salt Lake City- based utility owner, surged as much as 15 percent after saying yesterday it may spin off an oil- and natural-gas production business that accounted for more than 34 percent of net income last year.

Questar rose $3.89 to $49.75 at 9:57 a.m. in New York Stock Exchange composite trading after reaching $52.55. Before today, the shares had gained 10 percent this year.

The new company would also include Questar’s gas-management and energy-trading subsidiaries, in addition to its biggest exploration and production unit, Questar said yesterday in a statement after regular trading had closed.

Questar said it would remain based in Salt Lake City and be comprised of three other subsidiaries, including Questar Gas Co., which is a regulated utility that serves about 900,000 homes and businesses in Utah, Wyoming and Idaho, and Wexpro Co., a production unit that supplies the utility. The spinoff may happen in the second half of 2010 if certain conditions are met and it’s approved by the board, according to the statement.

“It was very undervalued by the market,” Carl Kirst, a Houston-based analyst for BMO Capital Markets, said today in a telephone interview. He rates the shares “outperform” and owns none. “Questar beat production guidance in the third quarter and at year-end, yet the discount persisted.”

At yesterday’s closing price, Questar traded at 5.9 times estimated earnings before interest, taxes, depreciation and amortization for next year, compared with a rate of 8 times for similar oil and gas producers and as much as 9 times for utility owners, Kirst said. In the current market, investors are willing to pay more for companies that specialize either in producing gas or delivering it, he said.

Williams Cos. Sale

Questar would be following a parallel path to Williams Cos., the U.S. gas producer that sold most of its pipeline assets to an affiliated partnership this year after increasing production ninefold in the past decade, Kirst said.

Before today, Williams shares had risen 11 percent since the Jan. 19 announcement of the sale, while publicly traded affiliate Williams Partners LP has gained 35 percent.

Questar’s gas-management operations gather and process the fuel in the Rocky Mountain region and northwestern Louisiana. The energy-trading unit markets gas and oil on behalf of the exploration and production subsidiary and operates a gas-storage facility in Wyoming.

In addition to Questar Gas, the existing company would include Questar Pipeline, which operates interstate gas pipelines and storage facilities in the western U.S.

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