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Black Hills Narrows E&P Focus, Proceeding With NatGas Reserves Utility Program

Saddled with more impairment charges for its exploration and production (E&P) business, Rapid City, SD-based Black Hills Corp. senior executives said Wednesday they plan to narrow their focus to the Piceance Basin. The company also is moving forward on its plan to use natural gas reserves programs for its utilities in eight states.

CEO David Emery said Black Hills has begun transitioning its E&P operations toward "primarily serving our utilities through a cost-of-service gas reserves program while preserving the upside value potential of our oil/gas properties.” This was discussed by executives last month (see Daily GPI,Oct. 5).

The transition follows impairments to the E&P unit because low commodity prices forced it to write down the value of the portfolio (see Daily GPI,Oct. 9). Black Hills’ book value of its E&P assets fell to $281 million as of Sept. 30, compared to $332 million the end of 2014.

"The impairments are due to low natural gas and crude oil prices, and are noncash charges that are not reflective of ongoing operational results," CFO Richard Kinzley said during a conference call with financial analysts.

Net income was $29 million (64 cents/share) in 3Q2015, compared with $27 million (61 cents) for the same period last year. Impairments on the value of oil and gas reserves led to a one-time writedown of $9.9 million (22 cents/share).

Additional impairments are expected in the fourth quarter, Kinzley said, “if oil and gas prices remain at current depressed levels.”

Production was up 17% year/year, but average receipt prices were down 27% for crude oil and 37% for natural gas, compared to receipts in the same period in 2014, Kinzley said. Average realized prices dropped to $48.31/bbl for oil and $2.78/Mcf for gas, compared to year-end 2014 prices of $94.99 and $4.35, respectively.

Despite the commodity price crash, the senior executives reiterated optimism surrounding the Mancos Shale play in the Piceance, which is expected to drive the utility gas reserves program, if approved. Regulatory approval is pending in six states.

"We hope to pursue and gain approvals for the six programs in 2016," Emery said. "We are continuing to evaluate producing properties and prospects for inclusion in the program, and it already includes are Mancos Shale properties in the Piceance in Colorado." Aside from the utility-based drilling program, Black Hills plans to focus on minimizing other capital expenditures and operating costs in its E&P operations.

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