With strategic objectives to keep oil and natural gas exploration/production (E&P) as no more than a quarter of its utility-dominated overall business, Rapid City, SD-based Black Hills Corp. is content to take a slow, steady approach to developing its shale and other gas resources, its executives told Wall Street analysts Thursday.

John Benton, vice president and general manager for Black Hill’s E&P, said the company will continue to be a small player in part of the Mancos Shale in the southern Piceance and San Juan basins, drilling with larger spacing between wells than most of the bigger operators are using (160- and 320-acre spacing). After drilling 14 appraisal wells in the next two years, Black Hills hopes to be in full development in 2016 in the southern Piceance, Benton said.

For now there is “limited industry interest” in the Mancos, so there is still not a lot of data on the potential there, he said. Drilling costs continue to come down (60% of 2011 well costs), which helps with longer-term economics for the current low gas price environment, Benton said.

“We get a lot of questions about what gas price makes a certain play economic?” he said. “For us, it is more of a question of how do we make it economic in this current gas price environment. We’re changing our program and cutting costs to be able to achieve that.”

He said recent test wells have given Black Hills insights into managing the costs and having a “line of sight” toward developing a manufacturing approach to the development of its reserves, which are predominantly gas.

In response to a question from analysts about where the E&P business is headed for Black Hills, CEO Dave Emery said it provides “growth opportunities that the utilities do not, but that being said we have made an effort over the last couple of years to be more utility focused.” Emery said there is no specific percentage objective for the oil/gas business, “but in reality we don’t want it getting any bigger than 20%-25%.”

He said the oil/gas portion of Black Hills’ business also gives the company a chance to “capture value for shareholders,” and the most recent example is the company’s sale last year of most of its Williston Basin assets in North Dakota (see Shale Daily, Aug. 27, 2012). Black Hills used its $230 million in net proceeds to essentially build a new gas-fired generation plant in Wyoming, Emery said.

“We had very little value on the books [in Williston] and very little booked reserves, and yet converted it into $230 million [as part of a larger, $1.3 billion purchase by QEP Resources Inc.]. Essentially this allowed us to build a new power plant without having to issue new equity.”

Emery said Black Hills intends to keep growing its oil/gas business, and it has “tremendous resources” on which to grow, but he also wants to consider alternatives in the context of what else is ongoing in the corporation. This means that when Black Hills is ready to develop its resources in the Piceance, it may consider selling half of them, or bringing in a partner, or bringing in more equity. “We want to keep our options open,” Emery said.

 Currently, the company is concentrating on proving up the value it has, which Emery called significant. “We are trying to go about the proving up phase in such a way that we retain as many options as possible,” he said.