Black Hills Upgraded to Strong Buy on Good Fundamentals - Analyst Blog

On Oct 17, 2014, Black Hills Corporation (BKH) was upgraded to a Zacks Rank #1 (Strong Buy) by Zacks Investment Research.
 
Why the Upward Revision?

Black Hills posted positive earnings surprises in three of the last four quarters although missing out in the most recent quarter by 6.38%. The average earnings beat of the company in the last four quarters is 6.96%.

Strategic drilling and exploration programs have helped the company to boost its production. The company's drilling project in Piceance Basin is progressing well. Black Hills has commenced drilling of two wells and plans to complete drilling of four more wells in 2014 and another six wells in 2015 in the Mancos Shale formation. Black Hills' ceaseless efforts to acquire and develop oil resources will be accretive to its long-term earnings.

Rapid City, SD based Black Hills projects capital expenditure of $1.3 billion in the 2014–2016 period, with 68% of the expected expenditure directed to improve and strengthen its utility operations and 29% towards upgrading its oil and gas operations.

Apart from investing in infrastructure, Black Hills apportions a part of its profit to its shareholders. The company has a history of increasing its dividend and has raised the payout by 4 cents each year from 2012. Moreover, its debt ratings are favorable and the company has no significant debt outstanding apart from $275 million in 2015.

Recently, Black Hills inked two acquisition agreements with two subsidiaries of Gas Natural, Inc – Energy West Wyoming, Inc. and Energy West Development, Inc. According to the deal, Black Hills will take over pipeline assets from Energy West Development including a 30-mile gas transmission pipeline and a 42-mile gas gathering pipeline. Black Hills will also purchase the shares of Energy West Wyoming.

The company's earnings are expected to be marginally accretive after the first full year of its ownership of these two assets. Black Hills strongly follows an acquisition-driven growth strategy to expand its operations. In the first quarter of 2014, the company acquired gas systems, adding around 70 customers to its portfolio (read: Black Hills (BKH) Inks Two Back-to-Back Acquisition Deals).

In addition, Black Hills retired three of its oldest power plants in the first quarter of 2014 to comply with the Environmental Protection Agency's latest air emissions regulations. Instead, the company commenced operations of the natural gas based Cheyenne Prairie Generating Station in October. This initiative by the company and its subsidiaries, Black Hills Power and Cheyenne Light, Fuel & Power, will ensure long-term reliable services to its customers.

Other Stocks to Consider

Apart from Black Hills, well-ranked stocks in the same industry include IdaCorp, Inc. (IDA) and Korea Electric Power Corp. (KEP) with a Zacks Rank #1 (Strong Buy) and American Electric Power Co., Inc. (AEP) with a Zacks Rank #2 (Buy).

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