Credit Suisse Downgrades Black Hills, Returns May Be Challenged

In a report published Thursday, analysts at Credit Suisse downgraded Black Hills Corp BKH from Outperform to Neutral. The price target was lowered from $63 to $55. The analysts expressed their concerns regarding the well data from the first three wells in the Mancos basin. "Looking at the well data from the first 3 wells and the plan for additional drilling, we think the returns are more challenged than we had hoped, leaving the best outcome for the Mancos to be eventual inclusion into utility rate base, which will take some work," Credit Suisse explained. Although there might not be a downside due to this, the upside doesn't seem as much as the analysts had earlier expected. The analysts believe there could be favorable opportunities for both the Mancos basin and the company at large via regulatory approval for the gas reserves in rate base for use in Black Hills' utilities, eventually fulfilling almost half the company's utility needs. "Mgmt is actively meeting with stakeholders on the merits of gas in rate base and seem to be waiting on formal proposals until the fall, when they likely have more confidence in their Mancos play," the analysts added. According to Credit Suisse, Black Hills' reserve sizes, well costs and production plans do not justify the continuing reinvestment of $120 million annually in a negative free cash business.