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MDU Weathers Storm, Finds Lifeboat in Bakken Shale

Although all of its businesses were affected by historic flooding in the second quarter, Bismarck, ND-based MDU Resources Group Inc. saw its production in the Bakken Shale play in its home state jump 10% as part of quarter-over-quarter results that were down slightly.

CEO Terry Hildestad praised MDU employees' flood-related responses in a conference call Tuesday with financial analysts, reaffirming 2011 earnings guidance despite the foul weather's widespread impact.

For the quarter, MDU's consolidated net income was $44.9 million, or 24 cents/share, compared with $48.4 million, or 26 cents/share, for the second quarter in 2010. Exploration and production (E&P) through its Fidelity E&P unit accounted for nearly half of the profits ($21.3 million in the second quarter vs. $24 million for the same period last year).

Calling the weather conditions "harsh" for E&P operations throughout the first half of this year, Hildestad said MDU experienced short-term drilling delays but still saw Bakken oil production increase 10% quarter over quarter, and he reiterated that the company is bullish about its growth plans in the shale play. "We have two wells operating in Mountrail County [ND] and are very pleased with our most recent wells in that area," Hildestad said.

Overall, the results were more somber as MDU acknowledged that the average prices it realized for natural gas production in the second quarter declined 9%, and oil production stayed essentially flat compared with a year ago. "In large part, this was the result of weather that impacted producers throughout the Bakken," a company spokesperson said.

Analysts were interested in the Bakken, and particularly MDU's recent acquisition of 20,000 acres of leaseholds in that play. When asked, MDU senior executives were circumspect about the acquisition, refusing to say how much was paid for the new acres and emphasizing that they will look for more leases, although the area is getting extremely competitive.

In response to questions, Fidelity E&P CEO Kent Wells called the Bakken "arguably the more prolific and economic" of the shale basins right now. "It is highly contested, but I think we understand this basin really well and are focused on certain areas," Wells said. "We're continuing to pursue other blocks in the area, but we won't go where we think it is too expensive. There are still some opportunities, but overall it largely tied up at this point."

Hildestad earlier in the call said MDU is eyeing E&P expansion plans, and he sees similar expansion opportunities for the company's pipeline businesses. He cited forecasts of Bakken natural gas as a byproduct of oil drilling "doubling over the next several years." This means compressor and pipeline construction opportunities for MDU units," he said.

In its utilities business, profits were up, said Hildestad, noting that retail natural gas sales overall were up 11% quarter over quarter, reflecting colder-than-normal temperatures in many of the areas it serves.

E&P will command a lot of MDU's capital expenditures in the years ahead, with $2.1 billion slated for developing existing assets in that business during the next five years, Hildestad said. "We're also prepared to invest in new and producing properties."

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