While it increased earnings slightly in 1Q2012 compared to 1Q2011, Rapid City, SD-based Black Hills Corp. had to overcome a 22% decrease in natural gas prices and a 13 cents/share negative impact on earnings from milder-than-normal winter weather, according to CEO David Emery.

On a conference call with financial analysts Friday, Emery said Black Hills was "working diligently" through various efficiency and cost-reduction programs to mitigate the continued adverse impact of unseasonably warm weather and sustained low gas prices. The energy holding company offset those negatives with substantial first quarter increases in oil and gas sales (23% overall), including a 40% increase in crude oil sales and a 19% increase in gas volumes.

Emery said that in various shale plays, including the Mancos Shale in the San Juan and Piceance basins, Black Hills will not continue drilling at the current $2 gas prices. He described the company's Mancos shale gas holdings as possessing "tremendous upside potential" longer term.

Black Hills' 2012 earnings guidance was "reduced slightly (10%)," Emery said, primarily due to lower gas prices. Citing average wellhead costs at $1.30-1.40/MMBtu, Emery said an ongoing program in the Mancos is "certainly not feasible at $2 gas prices, so we're evaluating if we even want to spend the capital to do the delineation drilling.

"We do see some encouraging signs for the third and fourth quarters for prices to go up to an acceptable level, and if that happens we would like to spend that capital, because we believe it is important for us to spend a little bit of capital in both basins to prove up the value of our holdings."

Emery said Black Hills does not maintain a specific breakeven number for gas prices. "At a $4 gas price that play would be very economic and we would be very encouraged by that. Certainly we would be willing to drill delineation wells at prices lower than that."

While optimizing existing properties in the San Juan and continuing to pursue more oil-focused projects, Emery said "in light of current natural gas prices it is important to emphasize that for our oil and gas segment all of our capital expenditures may vary, depending on the oil and gas pricing environment. We're constantly evaluating project-by-project economics, considering current levels of prices in making decisions, and we'll continue to do that."

Emery said Black Hills plans to continue its Mancos Shale gas project, but it is evaluating it in light of current gas prices. "We haven't made any decisions yet, but certainly if prices continue to fall, we'll have to decide what best to do with that capital [this year]," he said, adding that the company is also assessing its nonoperating properties in the Williston Basin and Bakken Shale, seeking new crude oil opportunities.

Three successful test wells were completed late last year and early in 2012 in the company's Mancos Shale program. Reserves were booked on two of the three. One of the two wells in the Piceance produced condensate and "higher Btu-content gas." More delineation drilling will be done there to better assess the long-term value of the properties, Emery said.

In the Mancos, Black Hills is not under any pressure to drill to keep its leases, Emery said. "If economics don't justify drilling, we don't have to," he said.

For 1Q2012, Black Hills reported income from continuing operations of $28.5 million (65 cents/share), compared with $25.6 million (64 cents/share) for the same period last year.

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