Black Hills Corp. announced that its oil and gas subsidiary, Black Hills Exploration & Production, Inc., signed a definitive agreement to sell approximately 85 percent of its Bakken and Three Forks shale assets in the Williston Basin for approximately $243 million, subject to customary pre-closing and post-closing adjustments. The sale has an effective date of July 1, 2012, with an estimated closing date on or before Sept. 30, 2012.
The sale includes all of Black Hills' interests in the Williston Basin assets owned jointly with Helis Oil & Gas and others, including approximately 73 gross wells and 28,000 net lease acres. As of the end of the second quarter, net year-to-date production from these properties totaled approximately 149 thousand barrels of oil and 171 thousand Mcf of natural gas. Total proved reserves for these properties, as of Dec. 31, 2011, were 2.2 million barrels of oil and 3.4 BCF of natural gas. The properties represent approximately 15 percent of Black Hills' oil and gas production for the first six months of 2012 and 13 percent of year-end 2011 proved reserves.
"Upon the conclusion of our oil and gas strategic review in late 2011, we announced our intent to optimize the substantial upside value of our existing oil and gas properties, primarily by proving up the probable and possible reserve potential," said David R. Emery, chairman, president and chief executive officer of Black Hills. "The divestiture of these assets has effectively and immediately captured the future potential value that we projected for this portion of our oil and gas portfolio."
Helis, as operator of the properties, engaged Tudor, Pickering, Holt & Co. to market its interests in the properties. It offered the non-operated working interest owners in those properties the opportunity to market their interests in conjunction with Helis. Helis, and its working interest co-owners, including Black Hills, accepted the offer of QEP Resources, Inc.'s wholly-owned subsidiary, QEP Energy Company.
"Net sale proceeds, expected in the range of $230 million to $240 million, will be used for debt reduction and general corporate purposes," Emery said. "This sale will strengthen our balance sheet and enhance our ability to self-fund planned growth projects, such as the $237 million Cheyenne Prairie Generating Station, without issuing equity.
"This sale demonstrates the substantial value of our oil and gas business, and the ability of our oil and gas team to identify and develop quality assets. The $243 million sales price for only 13 percent of our proved reserves exceeds the value currently assigned to our entire oil and gas business by the street. We remain focused on realizing the significant upside opportunity of our remaining oil and gas assets, including the Mancos shale gas potential in the San Juan and Piceance basins," Emery concluded.
Under the full cost accounting method, Black Hills anticipates booking a one-time, pre-tax gain of approximately $20 million to $40 million and will apply the remainder of the sales price as a reduction to its oil and gas full cost pool. The reduction to the cost pool will result in an expected depletion rate for the remainder of 2012 in the range of $1.30 to $1.45 per Mcfe. The assets sold will be reflected in the company's financial and operational results through the transaction close date. Although the transaction will result in a substantial tax gain, the company has sufficient net operating loss carry-forwards that will enable the deferral of income tax payments.
Black Hills reaffirms its 2012 earnings guidance, previously issued on May 3, 2012. Earnings per share from continuing operations, as adjusted, are expected to be $1.90 to $2.10 per share. Although the sale of the Helis-operated assets will result in some special accounting items, the company expects earnings, as adjusted, to remain within the guidance range.
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