Top Picks 2016: Questar

01/22/2016 7:00 am EST

Focus: STOCKS

Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

As regulatory momentum pushes electric utilities toward renewables, natural gas-fired generation will become the reliable backbone of our nation’s energy infrastructure, explains Ari Charney, chief investment strategist, Utility Forecaster.

Consequently, deep-pocketed utility giants have made aggressive bids to acquire natural gas distributors. Their strategy is to add a regulated earnings stream with a growth kicker from the coming infrastructure buildout.

Given all the attention, most publicly traded gas utilities command premium valuations. But one well-run firm still trades at a reasonable price: Utah-based Questar Corp. (STR).

The $3.3 billion company’s lower valuation may be due to the fact that it isn’t quite a pure-play gas utility.

While Questar is primarily a natural gas distributor, this vertically integrated utility also develops and produces most of the natural gas it sells to customers.

Fortunately, the company has long-standing arrangements with state regulators that allow it to earn utility-like returns from gas production.

While we’d be happy to own Questar for the long-term, we can’t ignore its takeover potential in the present environment.

And based on overlapping service territories, the most logical suitor would be PacifiCorp, one of the electric utility subsidiaries of Warren Buffett’s Berkshire Hathaway Energy.

Not only does Questar generate the kind of strong returns on equity that Buffett likes to see, it also has a connection, the president of Questar’s pipeline segment was previously the CEO of PacifiCorp.

With a quarterly dividend that’s grown 9.2% annually over the past five years and a current yield of 4.4%, Questar is a buy below $22.

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