2023-11-08 03:49:53 ET
Summary
- Black Hills Corporation is a holding company with 1.33 million natural gas and electricity customers.
- The company's stock price has fallen 24% due to interest rate exposure, making it a bargain, particularly with its 4.9% dividend.
- Black Hills benefits from owning coal-fired electric generation and has a diversified generation base.
Black Hills Corporation ( BKH ) is a South Dakota-headquartered holding company with an eight-state service area shown below. It has 1.33 million natural gas and electricity customers and is a holding company for residential/commercial (weather-variable) gas utilities with growth in its smaller but valuable electric generation and utilities.
Be aware the company is rated as a sell by Seeking Alpha’s quant system “due to declining growth and decelerating momentum.”
Indeed, Black Hills’ stock price has fallen 24% since last year due to the same interest rate exposure that affected the entire utility sector. With gas prices now moderated and projections that most of the rate raises are done, the stock is now more of a bargain.
The company benefits from owning coal-fired electric generation at a time when the reliability of coal has become more highly sought after. Yet its generation base is also significantly diversified across natural gas and wind.
Black Hills may interest dividend hunters with its 4.9% dividend and steady-to-growing Northern Plains and Rockies customer base. Other investors may also like its relatively low (more stable) beta of 0.64.
I rate Black Hills stock a buy.
As shown in the key, in the map above natural gas service areas are blue and electricity service areas are orange.
Third Quarter 2023 Results and Guidance
In the third quarter of 2023, Black Hills’ net income was $45.4 million or $0.67/share. This compares to $35.0 million, or $0.54/share for 3Q22.Nine months’ net income was $182.5 million, or $2.74/share compared to $185.9 million or $2.86/share for the same period in 2022.
The company affirmed full-year 2023 earnings per share ((EPS)) guidance at $3.65-$3.85. It will give 2024 earnings and dividend guidance along with capital expenditure estimates for 2024-2028 in its 4Q23 report in February 2024. Forecasted capital expenditures for 2023-2027 were $3.5 billion.
The company’s long-term EPS growth goal is 4-6% annually and it targets dividend payout ratios of 55-65% .
Operations
The picture above shows a Black Hills project to replace bare steel gas main with polyethylene piping, which better resists corrosion. Maintenance is key for all utilities. Deferred maintenance on pipelines and transmission lines can lead to gas emissions leaks or, for as happened in California and Hawaii, devastating fires.
Black Hills Corporation is headquartered in Rapid City, South Dakota. At year-end 2022, its 1.33 million customers divided as: 1.11 million natural gas customers and 220,000 electric customers.
The company’s natural gas operations are mostly residential and commercial—which vary greatly with weather—and a small slice of industrial demand. Thus, its natural gas segment sees its largest revenues in the fourth and first quarters when weather is the coldest and heating demand the greatest.
Segment Results
The graph below shows nine months’ operating income divided by its two segments: gas utilities and electric utilities.
The operating income for gas utilities is only somewhat less than for electric utilities even though Black Hills has five times as many natural gas customers as electric customers . As is typical throughout the utility sector, per-customer revenue for electricity service is much higher than for natural gas service.
Natural Gas Utilities
Black Hills has 42,222 miles of gas distribution mains and service lines,4713 miles of intrastate transmission pipelines, 515 miles of gathering lines, seven natural gas storage sites, and about 50,000 horsepower of compression.
The company has ready access to natural gas from the Rockies, North Dakota (oil-associated gas), and Appalachia via pipelines.
The first graph shows gas prices have moderated since last year. The second graph illustrates the large portion of US production (of over 100 BCF/D) that is shale gas.
EIA
Black Hills Electrical Generation
At the end of 2022, Black Hills had ownership interest in 1481 megawatts of nameplate generating capacity. The types and amounts are illustrated below.
In 2022, Black Hills’ electric utilities (Colorado Electric, South Dakota Electric, and Wyoming Electric) bought 34.7% of the electricity they delivered (5.1% wind and 29.6% coal, natural gas, oil, and other market purchases).
Black Hills generated the other 65.3% itself with coal (35.1%), wind (11.4%), and natural gas (18.8%). Oil was used as a peaking fuel for natural gas generation.
State Regulators
As a utility holding company, Black Hills does not have direct competitors. However, it has oversight from and reporting responsibilities to public utility commissions in every state in which it operates. In rate cases it answers to and is subject to input from a wide variety of customer-stakeholders. The company is also subject to normal market pressures for its fuel sources and changes in demand for its gas delivery and electricity production.
Governance
At November 1, 2023, Institutional Shareholder Services ranked Black Hills’ overall governance as a 2, with sub-scores of audit (3), board (1), shareholder rights (5), and compensation (1). In this ranking a 1 indicates lower governance risk and a 10 indicates higher governance risk, so the overall rating is near-excellent.
Insiders own a small 0.67% of the stock. On October 13, 2023, 4.7% of the floated stock was shorted.
Black Hills’ beta is 0.64 : like most utilities its stock does not fluctuate as sharply as the overall market, although all have been impacted by higher interest rates.
As of June 29, 2023, most of Black Hills’ stock was held by institutions, some of which represent index fund investments that match the overall market. The top three institutional holders are Blackrock with 14.65%, State Street with 11.9%, and Vanguard with 11.2%.
BlackRock and State Street are signatories to the Net Zero Asset Managers initiative, a group that, as of September 30, 2023, manages $64 trillion in assets worldwide and which limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.
Financial and Stock Highlights
Black Hills’ trailing twelve months EPS (October 1, 2022, through September 30, 2023) is $3.85, for a current price-to-earnings ratio of 13.3. The company expects full-year 2023 EPS to land between $3.65-$3.85/share. Analysts project 2024 EPS similarly at $3.84/share for a forward ratio range of 13.3-13.6.
Black Hills’ market capitalization is $3.5 billion at a November 7, 2023, stock closing price of $51.09/share. This price is 24% below last year’s $67.40/share.
The 52-week price range is $46.43-$73.98 per share, so the most recent closing price is 69% of the 52-week high. The closing price is 84% of the company's one-year target of $61.00/share.
Return on assets is 3.0% and return on equity is 8.6%.
At September 30, 2023, Black Hills had $6.67 billion in liabilities , including $4.93 billion of long-term debt ($1.13 billion in current maturities and $3.80 billion in long-term maturities) and $9.93 billion in assets resulting in a liability-to-asset ratio of 67%. Per its 3Q23 earnings call presentation, a fairly large chunk of Black Hills' debt matures in the next five years.
Black Hills’ dividend of $2.50/share yields 4.9%.
Overall, the company’s mean analyst rating is a 2.4 or between “buy” and “hold” from the eight analysts who follow it. At least one analyst considers it overvalued.
Notes on Valuation
The company’s enterprise value (EV) is $7.83 billion and its EV/EBITDA ratio is 12.0, above the preferred ratio of 10 or less that suggests a bargain.
Book value per share of $46.58 is less than its market price, indicating slightly positive market sentiment.
Positive and Negative Risks
Black Hills’ natural gas revenues are almost entirely weather-dependent.
More concerning is the anti-hydrocarbon bias—with coal a particular target—among many bankers and in both federal and some state administrations, including even Wyoming’s governor.
Potential investors should consider their expectations of regional economic growth (especially Wyoming, Colorado, Nebraska, South Dakota, and Iowa), state regulatory environments, regional population growth, and natural gas prices as factors most likely to affect the company.
Inflation, and thus higher interest rates, continues as a significant risk for utilities and companies with high proportions of debt in their capital structure. At a liability-to-asset ratio of 67%, Black Hills is more exposed to interest rate changes than many companies.
Inflation may also lead to an increase in operating costs without a corresponding ability to recover them through the regulatory mechanism.
Along with this, yields of other investments (bonds, Treasuries, even equities) have risen to compete for investors.
Recommendations for Black Hills
Black Hills may interest investors who want a competitive dividend of 4.9% in a lower-beta stock. Since stock prices typically fall after the ex-dividend date, potential investors may choose to delay purchasing after November 16, 2023.
The company’s natural gas utilities, and the gas-fired portion of its electricity generation, benefit from large, accessible natural gas production throughout and near its service area as well as lower gas costs compared to last year.
However, Black Hills is more weather-dependent on fluctuating residential and commercial demand (rather than levelized industrial demand) even compared to other natural gas utilities. Thus, with few industrial customers, gas demand growth relies on population growth in Arkansas, Colorado, Iowa, Kansas, Nebraska, and Wyoming.
Still, per its 3Q23 investor presentation, growth comes from infrastructure development (electric generation and transmission, natural gas pipeline and storage) and profitability initiatives like service for blockchain, data centers, new technology and cost control.
Like many utilities, Black Hills has the merit of regulatorily-required transparency and modesty about future earnings and dividend growth.
Black Hills Corp
For further details see:
Black Hills Corporation Still In The Black