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Oil/Gas, Coal Prove Drag on Black Hills 1Q Results

Three of four Black Hills Corp. nonutility businesses posted red ink in the first quarter, the Rapid City, SD-based energy holding company reported Wednesday, with coal mining, energy marketing and oil/gas exploration and production (E&P) being the biggest drag. Black Hills' multi-state utility operations contributed most of the profits for the quarter, which overall had adjusted net income of $23.3 million, or 59 cents/share, compared to $31.7 million, or 82 cents/share, for the same period last year.

"We're continuing to evaluate our oil and gas business under a program that has been ongoing for about a year now," said CEO David Emery, reporting a loss of $700,000 in the first quarter for that segment along with another $4 million in losses in the coal mining and energy marketing businesses. Shale gas potential in the San Juan and Piceance Basins is a key part of those evaluations, Emery said.

"One of the key decisions in our whole [evaluation] process is evaluating the potential of the shale gas opportunity beneath our acreage holdings in the San Juan and Piceance Basins in New Mexico and Colorado, respectively," said Emery, citing the company's earlier announced intention to drill three horizontal test wells in the two basins, with drilling already under way on the first one in San Juan.

"We expect to drill all three of the test wells in the next couple of quarters and have results by year's end." Black Hills is allotting slightly more capital for the shale drilling and the Bakken crude oil drilling in North Dakota. Despite relatively restrained drilling in its E&P efforts, Emery said overall volumes in the first quarter were up about 3.5% quarter over quarter. Bakken was up 23% quarter over quarter, even with "relative low levels of capital investment," he said.

Emery was decidedly downbeat in brief remarks about Black Hills' energy marketing efforts, which reported a $2.7 million loss for the first quarter compared to $2.3 million in profits the same period in 2010. For all of the nonutility operations, CFO Tony Cleberg said the businesses' first quarter operations "underperformed significantly."

In energy marketing, Black Hills' efforts centered on its Enserco Energy Inc. unit have shown there are some potential opportunities in the natural gas sector that are being looked at, Emery said. "We still think this business overall [coal, electric, gas and environmental trading] will do reasonably well for the full year," he said.

In response to an analyst's question during a conference call, Cleberg said Black Hills is "certainly not seeing an adequate return" from its approximately $150 million investment in the energy marketing space. "We have to really continue to stay on the business, and the outlook sees us starting to make headway toward a better return, but we're certainly not there today.

"We have to improve quite a bit to begin to have adequate returns on our investment in that business."

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