Following what have been characterized as disappointing results, Rapid City, SD-based Black Hills Corp. is rethinking its overall oil and gas exploration and production (E&P) strategy, according to CEO David Emery.

E&P reported income of $2.1 million for 1Q2010 compared with a loss of $25.7 million in 1Q2009. Black Hills reported first quarter profits from continuing operations of $31.4 million (81 cents/share) compared with $25.6 million (66 cents) for the same period last year. In a conference call with analysts Friday Emery characterized the results as strong.

Noting Black Hills “firmly believes” in a diversified strategy and its expects excellence in all six business groups, Emery said the E&P business has not been delivering the value the company’s shareholders expect. He said shareholders expect “exceptional value.” During almost 25 years in the business, E&P has delivered, Emery said, but not of late.

On May 3, Emery announced that Director John Vering, a veteran of 37 years in the oil and gas business, was becoming interim president/general manager for Black Hills E&P operations (see Daily GPI, May 5). He will report directly to Emery, who said that he expects the assignment to run for 12-18 months before Vering returns to being an outside director.

“In recent years our performance in E&P has been disappointing and not up to our expectations,” said Emery, who added that the unit will continue to reduce its capital spending while it takes the time “to take a long, hard look at our strategy.” The goal is to redo the long-term strategy to add more long-term shareholder value.

“When oil/gas prices improve to the point where Black Hills can increase capital spending, we will increase it in that segment,” Emery said. Vering is tasked to take a fresh look at the whole business, looking at the long-term strategy while also figuring out ways to improve ongoing performance.

Emery did not rule out acquisitions or sales, but he said Black Hills needs to figure out a way to optimize its existing assets, which he said include proven, probable and possible reserves, the latter two of which would not bring any proceeds if the properties were to be sold.

While there won’t be any big announcements in the near term and it will take Vering some time to get fully up to speed, Emery said Black Hills intends to “gradually start increasing our disclosures related to oil and natural gas, trying to offer more background [to the financial community] as we work on some of these plays in the future.”

In response to a question on production levels, Emery said there might be “a little more activity” later in the year than what took place in the first quarter.

“Certainly all options are open for E&P,” Emery said. “Clearly by putting someone in charge like John [Vering], who has a wealth of experience in the Rockies and some of the other plays that we are involved in, he offers a fresh set of eyes on all the different play activities in which we are involved, ones we are considering being involved in, and still others that we may want to become involved in.

“I would say everything is on the table. Certainly drilling and optimizing the properties we have now is on the list, but would we consider additional opportunities if the economics warranted it? Yes, we would. Low price times particularly provide opportunities and we wanted a fresh set of eyes and a new twist on our leadership there to help us look at things a little more objectively. We want to decide what activities to focus on when prices do improve.”

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