Although emphasizing its utility assets more in recent years, Rapid City, SD-based Black Hills Corp. has found new life in its oil/gas exploration and production (E&P) unit with the advent of the Mancos shale play in the Piceance and San Juan basins, CEO Dave Emery recently told an energy financial audience in Orlando, FL.

Mancos Shale gas drilling “progressed with encouraging production results” in the third quarter, said Emery in announcing results that included a $10.5 million net loss in 3Q2011 on a GAAP (Generally Accepted Accounting Principles) basis, compared with $12.4 million of net income in 3Q2010. On a non-GAAP basis 3Q2011 was profitable.

With more than 73,000 leased acres held as part of production zones in the Piceance and San Juan basins, Black Hills has three test wells that have been completed or will be completed by the end of this year, according to Linden Evans, COO for utility operations. The company is not under any time constraints with Mancos, and it expects to have at least one production well started next year in the San Juan and another in the Piceance in 2013.

Evans said the company recorded more than 6 MMcf/d of gas flow from a recently completed test well in San Juan’s Mancos play after hydraulic fracturing (fracking). “This is very consistent with what we are seeing from offset operators in surrounding areas that we are watching very closely,” he said during an Edison Electric Institute financial meeting Nov. 8. The first Piceance test well is currently being fracked and the second one will be by the end of this year.

Evans said Black Hills’ estimated well costs are between $1.30-1.40/Mcf, which makes it “very profitable” in a $4 gas market. “This is potentially a transformational opportunity for us,” according to Evans, who cautioned that it is too early to estimate the extent of the reserves that Black Hills might end up with in the Mancos.

In mid-2010 Black Hills decided to reevaluate its oil/gas business, openly expressing disappointment with the results it was getting, said Emery, who noted at that time the company tapped John Vering, an independent board member with extensive E&P experience, to review Black Hills’ operations in the sector. Vering eventually became the interim head of oil/gas operations.

“He helped us conduct a top-to-bottom review,” and helped to identify the upside value of Black Hills’ assets, including “the potential value” of the Mancos shale, Emery said. The review unlocked “huge, huge potential” with estimates of 6-8 MMcf/d for each well on average with 460 potential drilling locations on existing acreage.

“With that in mind, we are staying in the oil/gas business, continuing a Rocky Mountains-focused strategy that is primarily geared to define the value of our Mancos shale opportunity,” said Emery, adding that Black Hills will hire a permanent leader to replace Vering, so he can return to his independent board seat.

“We intend to prove up the value of our acreage relative to what the offset operators are doing outside our acreage and preserve all of our options. We might use one strategy in one basin and another in the other basin. We want to keep our opportunities open and available.”