Hi Paul -
Here is a brief analysis I did on BKH. I convinced myself that even with a high forward PE, it's still a hold up to $38.50/share.
RE: Black Hills Corporation (BKH)
I am looking at perhaps reducing my position in this utility. The play was a reversion to the mean (5 year avg) back around to $35/share. My average cost is around $20.00/share bought in May 2009. The stock is close to a recovery high at $31.86/share.
The company is still profitable and pays a good dividend now yielding 4.8% down from 7.2% based on my avg cost (reflects a 64% payout ratio). Their trailing PE is 14.26 and the forward PE is 16.25 based on the analysts estimates. However, the analysts have EPS for 2010-2011 falling 7% after reporting a 7% increase in EPS for FY 2009-2010. After 2011 EPS should move higher again as their new Colorado unit comes online w/ new revenues helping to pay down the new debt.
The only long term positive for their utility business I see is that their Colorado utility subsidiary has been approved and they began construction of a new 200 megawatt twin gas-fired power plant at a cost of about $250 million. The plants will serve 93,300 new southern Colorado customers. This should create a new income stream for the utility. However in July 2010 the company sold $200 million of a 10-year unsecured note at 5.875% to help finance this new project. Thus creating more LT debt for the company.
To reduce some current LT debt its electric utility subsidiary, Black Hills Power, in July 2010 sold a 23 percent ownership interest in their Wygen III power generation facility to the City of Gillette for $62 million. They still maintain a 52% ownership interest in this facility.
Therefore, I am not too sure if there is too much upside left in BKH shares (maybe 12% back to $35.00/share) considering their new capital projects and LT debt obligations. Their utility business may be fairly priced at current levels.
The wild cards are their three non-regulated subsidiary businesses which accounted for 13% of their 2009 Revenues but only contribute about 4% to their EPS:
(NOTE; From 2005-2009 these business have grown their Asset base by 10%(about 2% annualized) and according to their 2009 Annual report represented 28% of their total company assets)
(1) Black Hills Exploration & Production subsidiary w/ oil and gas reserves located in the Rocky Mountain region basins including the San Juan Basin of northwestern New Mexico, the Powder River Basin of Wyoming, and the Piceance Basin of western Colorado ( bhep.com );
(2) Wyodak Resources Development Corp subsidiary which is their surface coal mine operation ( wyodak.com );
(3) Enserco Energy subsidiary w/ Oil & NG distribution with operations that manages 260,000 MMBtu/day of interstate pipeline capacity and firm storage in excess of 7 Bcf ( enserco.com ).
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I believe the $NAV/share for these unregulated subsidiary units are still significantly undervalued based on the recent market purchase of NG assets by CNX and XOM (ie. Consol Energy buying NG assets from Dominion; XOM buyng NG assets from XTO Energy) AND the current market valuation (ie. $P/BV) of U.S. coal reserve assets from MEE, ACI, BTU & CNX (as a sample industry average).
The value in the BKH subsidiary assets are mainly from their oil, coal & ng "mineral rights" (including proven & unproven reserves). They do own some "other" capital assets in the form of storage tanks, pipe line(s) and machinery equipment.
If you just use their reported 2009 BV/share of $27.84*, $7.80/share (28% of the total) is the reported BV of their non-regulated energy subsidiary businesses. Their largest subsidiary business is Wyodak Resources Development Corp, their coal mining business w/ Black Hills Exploration & Production subsidiary the next biggest.
CONSOL Energy Inc. Common Stock(NYSE: CNX)is probably the most similar company to the group of BKH non-regulated subsidiary businesses based on the Coal & NG companies:
Extrapolating the Industry BV for these companies:
Company Name P/BV
---------------------------------------
Massey Eng (MEE) 1.6
Arch Coal (ACI) 1.7
Peabody (BTU) 3.1
Consol Energy (CNX) 2.37
Estimated BKH unregulated subsidiaries total $NAV/share value:
low - $7.80/share x 1.60 P/BV = $12.48/share potential value
high - $7.80/share x 2.37 P/BV = $18.49/share potential value
Therefore, one could make the argument that their unregulated subsidiaries should be worth between $12.48/share - $18.49/share.
The market has already priced the company's stated BV of $7.80/share into the BKH common share price BUT there could be as much as another $6.50/share - $10.69/share of value not reflected in the BKH common shares.
*(Note: BKH stock only has about $7.80/share [28% of the total BV of $27.84] priced into their 2009 non-regulated energy Business Group Assets "reported" value as detailed in their 2009 annual report see pg-5- blackhillscorp.com )
My BKH price target range is $38.15/share - $42.34/share. I guess I will continue to hold my shares even if I feel their utility business is now fairly valued. I put a GTC order in to begin to peel off some shares at $38.50/share.
EKS |
