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Oil Price Crash Forces Black Hills to Cut Back

While the bulk of its profits come from a network of natural gas and electric utilities in seven states, Rapid City, SD-based Black Hills Corp. nevertheless has a modest oil/gas exploration and production (E&P) business and it has been hit hard by the oil price crash, the company's top executives confirmed Tuesday.

Earnings guidance for this year was dropped 10 cents/share and the losses in the E&P business doubled in 2014 compared to the previous year, Black Hills CEO David Emery told analysts on an earnings conference call. While the drop in guidance was solely tied to oil prices, Emery said the company's outlook for oil/gas long term is unchanged.

Black Hills still is looking to launch a strategy later this year in which it attempts to get regulators in most of the states where its utilities operate (Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming) to approve utility ratepayers buying into reserves developed by the E&P unit in the Mancos Shale in the Piceance and San Juan basins.

Emery said he expects three new gas wells to be placed in production later this month and another three wells drilled from a single pad in the second quarter. Black Hills also still plans to drill six additional horizontal wells in the play this year. Last fall, Emery reiterated his bullishness about the Mancos, while acknowledging that the company's drilling program was lagging behind schedule (see Shale DailyNov. 7, 2014).

In reporting increased profits for the company overall for the last quarter and full-year 2014 -- $34 million (76 cents/share) in 4Q2014 compared to $31 million (70 cents) in the same period in 2013, and $129 million ($2.89) for 2014 compared to $109 million ($2.45) the previous full year -- Emery said losses grew in the quarter and full year for the E&P business (a negative $5.3 million for 4Q2014 and a loss for the full year of $15.1 million, more than double the red ink in 2013).

For the full year in 2014, natural gas production was up 8% to about 10 Bcfe, according to CFO Richard Kinzley, and oil production was down 11%. Both Emery and Kinzley said there are no plans for increased oil production this year, and if current price levels remain the rest of 2015, Black Hills probably will take an impairment charge for its oil/gas operations.

"At lower prices we plan to reduce oil-related drilling activity, lowering the expected range of oil/gas production [in 2015], " Kinzley said. "If crude oil and natural gas prices remain at current levels, it is probable we will have a noncash ceiling test impairment charge to our oil/gas reserves in 2015." Nevertheless, he said Black Hills still expects to increase its earnings this year, compared to 2014, despite the depressed crude oil price environment.

Because it is pursuing the utility supported gas reserves program in multiple states, Black Hills is pursuing potential purchases of new producing properties and/or drilling prospects that could be included in a utility backed program, Emery said. The potential properties include the company's Mancos Shale gas play in Colorado and New Mexico.

Emery continues to contend that the company's oil/gas properties provide "substantial value upside" in the long term, but the current "short-term prices definitely have an impact on short-term value." He reiterated that Black Hills has not changed its long-term oil/gas strategy, "but due to the current oil prices, the focus this year will be on executing our Mancos Shale drilling program."

While it plans to complete 12 gas wells in the Mancos this year, Black Hills is "carefully evaluating" any new oil drilling activity, Emery said. "We expect real minimal activity" for oil and any non-Mancos gas drilling, he said, adding that at current prices, "oil plays are simply not economic."

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