BKH 1Q2016 Earnings Note

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Auvila_BKH_Note_2016_1Q_Earnings_2016_05_04

Excerpt:

Market Price (5/4/2016): $61.74/share; ST-Target: $75/share; NIV: $96/share

BKH: Upside potential is titillating, but it’s from E&P, so not w/o risks

SourceGas acquisition closed Feb. 12, 2016. Regardless of SourceGas, moving forward, we believe that the only two things that matter for BKH is its application for cost-of-service gas program (COSGP) and what it does with its Mancos shale play. It is our opinion that BKH not pursue its COSGP program, but if it does then, in our opinion, BKH should buy producing reserves now as a base then methodically and systematically develop its Mancos shale play with the intent of transferring reserves as it is developed into the COSGP as needed. We believe that regulatory decision on COSGP would be due in 2H2016 and may start with a pilot program, which we would argue is a mistake given that securing cheap natural gas reserves is a paramount condition to the success of the COSGP and we do not expect reserve prices to stay at current levels for too much longer. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. Sale of 49.9% interest in Pueblo Airport IPP, a 200MW peaking unit, was announced on February 12, 2016 for $215MM, almost twice the cost to build on a per unit basis.

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