The oil and gas industry has seen a fair number of spinoffs over the past few years. Last year's notable events included Encana's (NYSE: ECA) distributing shares of heavy oil ace Cenovus Energy and Pride International's (NYSE: PDE) shedding its shallow-water stepchild, Seahawk Drilling. The prespin Encana, which at one point priced the Cenovus stake at next to nothing, offered a very nice opportunity for nimble purchasers. The jury's still out on Seahawk.
Turning to the potential spinoff class of 2009, we learned this week that Questar (NYSE: STR) may be bringing an interesting offering to the table. Unlike purer exploration and production companies like Ultra Petroleum (NYSE: UPL) and Forest Oil, Questar is an integrated natural gas player that, in addition to its E&P arm, has a suite of subsidiaries including a pipeline operator and a regulated utility.
There's a lot to be said for a corporate structure that balances cyclical and steady cash flow streams under one roof, but this added complexity also tends to repel investors -- particularly of the institutional variety. It's possible that Questar's consideration of a spinoff might be a matter of bowing to pressure by large funds that want a "pure play" E&P. We saw this happen when Steel Partners pushed contract driller Rowan Companies (NYSE: RDC) to sell its manufacturing division awhile back.
Pushy fund managers aside, there are some strong arguments in favor of separation. Williams (NYSE: WMB) moved its pipeline business into another vehicle earlier this year, arguing for a lower cost of capital for the midstream business and a more growth-focused E&P. I suggested that this could unlock significant value at El Paso (NYSE: EP), and I believe the same is true for Questar.
