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MDU to Sell E&P Unit, Pursue Second North Dakota Refinery

Bismarck, ND-based MDU Resources Group is putting its oil/natural gas exploration and production (E&P) business unit on the sale block next year to focus more on its utility, pipeline/services and construction units, CEO David Goodin said Tuesday.

Goodin also said MDU is pursuing development of a second diesel refinery in North Dakota.

While reporting decreased quarter-over-quarter profits in 3Q2014, Goodin reported record earnings in MDU's construction businesses, which are approaching $1 billion in backlogged projects. "We're optimistic we will see growth in our construction businesses," he said.

Consolidated adjusted earnings for 3Q2014 were $84.9 million (44 cents/share), compared with $92.3 million (49 cents) in 3Q2013. The E&P business had lower profits -- $16.6 million in the quarter, compared with $25.3 million for the same period last year.

Reporting that the Dakota Prairie diesel refinery is 90% complete and scheduled to start operations around the end of this year, Goodin said there continues to be a high demand for diesel in North Dakota (59,000 b/d average), but only about one-third (22,000 b/d) is refined in the state.

"Given this decidedly under-supplied North Dakota market, we are seriously evaluating the building of a second refinery here," he said. "We have identified a potential site and have begun permitting work, and we would expect a spring 2015 construction start, should be proceed with the project."

He also outlined plans for marketing MDU's Fidelity E&P Co. because of the capital requirements to effectively expand the business. "We feel it would compromise our ability to fund the substantial opportunities we are seeing in our other lines of business," Goodin said. "We expect to grow our utility, pipeline and construction units in a more meaningful way and pursue that growth with a lower overall business risk profile."

Goodin said MDU will use the rest of this year to prepare for the sale with the opening of a data room for prospective buyers in the first part of next year. "We plan to publicly disclose valuation information once we have concluded the marketing process."

In the meantime, Fidelity will continue its E&P activity, which includes single drilling rigs in the Bakken, Paradox and East Texas area. "In the Powder River Basin there are two or three rigs [not operated by Fidelity] that are producing good results," Goodin said.

In response to an analyst's question about the timing for the Fidelity sale, given declining oil prices, Goodin said it came down to a capital allocation question and whether continuing the E&P unit would compromise MDU's ability to grow other businesses.

"Our preference is to sell it as a company, but we'll keep our options open," said Goodin, responding to another question on whether it could be sold in pieces. Fidelity CEO Kent Wells said MDU sees its E&P business as a whole and a "unique opportunity for the right investor" because it is "completely focused on the Rockies now. Putting aside the price of oil -- obviously we would like to see it higher -- it could be a unique opportunity for someone to make a move into the U.S. oil shale play."

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