With poor results from its exploration and production (E&P) business, Rapid City, SD-based Black Hills Corp. officials said Wednesday the company is narrowing exploration activity to the proposed cost-of-service natural gas reserves programs to serve its utilities (see Daily GPI, Oct. 5, 2015).
Black Hills CEO David Emery told financial analysts during a conference call he expected to eventually have the gas reserves program operating, and noncore oil and gas assets that don't support that effort eventually will be sold when the market is ripe for something other than a "fire sale."
Adjusted net income for 4Q2015 was $34 million (71 cents/share), compared with $35 million (77 cents) for the same period in 2014, but on a generally accepted accounting principles, or GAAP basis, losses totaled $14.2 million (minus 30 cents), including a 94 cents/share impairment of oil and gas properties and 8 cents for acquisition-related expenses tied to the $1.89 billion SourceGas Holding Inc. purchase (see Daily GPI, July 13, 2015).
For 2015, adjusted net income was $135 million ($2.98/share), compared with $131 million ($2.93) in 2014. On a GAAP basis, Black Hills lost $32.1 million (minus 71 cents) in 2015, including $3.54/share in impairments and 15 cents for acquisition expenses.
Emery said the results pointed to "strong operational execution" in Black Hills' electric utilities, and the SourceGas acquisition. He also cited further drilling development in the Mancos Shale of the Piceance Basin, where nine wells were completed and producing and four were being held for completion when adequate processing capacity is in place.
"Overall, the results of the drilling program exceeded our expectations," Emery said.
The company has $209 million in book value for current E&P assets, including $94 million in wells, $68 million in uncompleted wells and infrastructure, and $40 million in related assets in the business unit. This leaves the company with $150-160 million of assets exposed to future commodity prices, executives said.
While overall production from the E&P unit increased 45% last year, average prices received in 4Q2015 dropped by 22% for oil and 38% for gas, said CFO Rich Kinzley. He cited losses of $5.8 million for 4Q2015 and $27.5 million for the year, compared with $4.5 million in 4Q2014 and $11.8 million in 2014. Average prices for the full year, including hedges, decreased by 39% for natural gas and 24% for crude oil.
"While we are pleased with the results from the drilling program in the Piceance Basin over the last couple of years from an operational standpoint, the low commodity price environment in 2015 severely impacted financial results in our oil and gas business," said Kinzley. "Any impairments in 2016 will be much smaller than those reported in 2015 as our full cost of those reserves has been pared down to about $94 million.”
For the utility gas reserves program, Emery said Black Hills continues to evaluate potential properties for inclusion in the program, including the Mancos assets, and the eventual program could include a combination of acquired reserves from a third-party and the Mancos properties. "We hope to finalize our cost-of-service gas program sometime before the end of 2016," he said.
Emery reiterated that the E&P drilling program this year and in 2017 has been "dramatically reduced," and the longer term focus will be restricted to the utility gas reserve program.
"Current commodity prices simply don't support additional investment in oil and gas," he said. He is confident there will be a utility gas program, but did not indicate how many states will participate or how large the program may be.
"We have said that we intend to divest our noncore [E&P] properties, but we don't intend to fire sale them," Emery said. "We can't finalize the gas reserve program until we know what size program we will have."