MDU Says It Will Close On Sale Of Fidelity By Year's End -- November 2, 2015

Disclaimer: more than usual, I have interspersed personal commentary within the data points from various sources regarding the MDU sale of Fidelity (oil exploration, production). This is not an investment site; do not make any investment or financial decisions based on anything you read here or think you may have read here. Please feel free to read this but do not quote me on anything. I have no formal background in the oil and gas industry and no formal background in the financial industry. The bulk of my life has been spent enjoying life in the United States Air Force, for whom I would have "worked" for a whole lot less, had I not had a family to support. I think that's accurate.

Updates
 

December 31, 2015: from the MDU message board -

Legacy Reserve and the stocks now in the tank . Numbers are approximate - Legacy Reserve was $14 -15 a year ago this time; now +/- $1 .40. MDU fire sale loss on Fidelity @ $ 725,000,000 confirm # with your own sources.

November 5, 2015: Denver Biz Journal is reporting that Fidelity is shutting down, eliminating 106 employees about 75 of them in Denver. Most of the employees will most likely find work with new companies who bought Fidelity assets.

November 4, 2015: a little more information regarding the oil and gas assets MDU did not yet sell as part of the Fidelity sale (and probably won't sell unless they get a really, really good deal); comments provided by a reader who is familiar with the area:

The Cedar creek NG field is located in southwest ND and is SE of Baker, MT. I believe this to be the first or one of the very first of Fidelity exploration plays. Fidelity has owned it since the mid-1930s. The operational cost is just about nothing, and the 63 ND NG wells consistently  produce approximately 53,000 MCFT per month. I do not follow the MT production. I bet MDU keeps this property.

November 4, 2015: MDU earnings transcript. I think it's going to be nearly impossible for me to get any accurate number on the Fidelity deal. The bits and pieces I've read suggest this was worse than originally posted. From page 4 of the transcript, Q & A:

From a use of proceeds perspective, as we announced $450 million. About $325 million of that is in the cash proceeds; $125 million relates to net operating loss, refunds or carryforwards due to selling certain assets below the tax basis.

So we would anticipate as we announced use of proceeds to repay debt essentially at Fidelity, allocated debt. And a lot of that will happen here in 2015, about $300 million and then the remaining $125 million will happen probably into 2016, potentially 2017, but primarily 2016 as we monetize those NOLs on future tax returns. 

So, of the original $450 million, it looks like MDU will get $325 million cash, but this might not have included all their Fidelity assets, specifically natural gas assets in the southwest part of the state (North Dakota) and in Montana. But putting it altogether it looks like they (or someone valued) their mineral acres, their in-place infrastructure, roads to pads, well sites, pads, on-going production at $325 million in cash; maybe 90,000 acres in total. If so, about $3,600 / acre. 

More excerpts from the transcript at the bottom of this post.

The morning after, November 3, 2015: MDU shares drop 5%. 

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Press release:

The company also announced that it recently entered into five purchase and sale agreements and closed on one of the agreements in October, for the sale of the oil and natural gas assets held by its indirect subsidiary, Fidelity Exploration & Production Company. The other four sale agreements are expected to close before year-end. The aggregate sale proceeds from the five agreements and estimated tax benefits are expected to be approximately $450 million. Debt repayment is planned as the primary use of funds. The company has one remaining property that it continues to market, which represents less than 10 percent of total year-to-date production. 

"We are pleased to be nearly complete with the sale process for our oil and natural gas assets," said David L. Goodin, president and CEO of MDU Resources. "The sale prices are in line with current and prospective market conditions, and exiting the exploration and production business will allow us to focus more fully on our remaining businesses.

If I read this correctly, MDU is in the process of closing or has closed on five separate deals to dispose of its oil and gas exploration and production subsidiary, Fidelity.  Although the deal can't be seen this simply, a first look, $450 million / 120,000 net acres = $3,750 / acre which includes producing acreage, pads, well sites, pumpers, gathering systems. Note that back in July, 2014, they were getting upwards of $45,000 / acre. And that was over a year ago. Despite decreased activity in the Basin this past year, I assume there has been some value added to the Bakken.

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From my "Bakken Operators" page:

MDU Resources (Fidelity)

• 3Q15: announced sale of Fidelity; to close by year-end; five separate purchase agreements; the aggregate sale proceeds from the five agreements and estimated tax benefits is expected to be approximately $450 million; if even as few as 100,000 net acres = $4,500/acre (see bullet dated July, 2014)
  
• November, 2014: in its 3Q14 earnings statement, MDU said it was "marketing" Fidelity
• July, 2014: to sell 4,363 acres in Mountrail County for $200 million. $200 million / 4,363 acres = $46,000 / acre.
• 124,000 net acres (MT and ND); acquired 27K acres in Richland County, MT; announced 1Q12; production record set: 3,500 bopd 
• 5 rigs operating in the Bakken (2Q12); MDU has a total of 9 rigs (down from 10 in previous conference call); 5 is significant increase from 2 rigs 1Q12
• 95,000 net acres -- CEO, 2011 earnings report
• BEXP presentation says MDU has 66,000 net acres; about a month later, up to 90,000 net acres
• June 25, 2011: MDU acquires 20,000 additional Bakken acres in Montana; MDU says they now have "90,000" net acres in the Williston Basin Bakken 
• MDU: WBI
• Of all the operators, the most disappointing (personal opinion); HQ in Bismarck, ND; seemed to have missed the Bakken right in their backyard; "discovered Cottonwood oil field; sold it to Oasis after some disappointing wells; Oasis became "overnight" success with this purchase; MDU re-entering the Bakken in 2011; doing better; MDU (utility) focused on natural gas; waited a bit too long to shift to oil 

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Excerpts And Data Points From The Earnings Transcript

3Q15

From Seeking Alpha

Opening remarks regarding perhaps MDU's most-watched asset sale in quite some time:

We are pleased to be nearly complete with the sale process. We have entered into five separate purchase and sale agreements and closed on one of the agreements in October. The remaining four sale agreements are expected to close before year-end.

The aggregate sale proceeds from the five agreements and estimated tax benefits is expected to be approximately $450 million. The sale prices are in line with current and prospective market conditions and commodity price expectations and we believe are fair when compared with recent oil and natural gas asset sales closed by other companies.

And that was it for opening remarks for perhaps MDU's most-watched asset sale in quite some time.

I think they spent as much time on updating the Spirit Wind Farm, 43 wind turbines, 107.5 MW, at a cost of $220 million = $2 million/MW. [Purchase agreement here.]

It is interesting that when they calculate the Fidelity asset sale they are quick to include the tax benefits, but when providing the "total cost" of a wind farm, it is unlikely that "all" costs are included.

Now to the Q & A.

The first question had to do with MDU's Cedar Creek property in the southwest part of the state, a natural gas field. Their answer: they couldn't find a buyer at the price they wanted. It sounds like this property is generating monthly revenue at almost no cost:
We did have interest in our Cedar Creek net profits interest project asset there. And when we looked at the offers versus what we felt the value of the asset is, we just felt like that we should continue marketing particularly given the fact that what we get is a monthly check which is our net proceeds from the asset. There are no operations or engineering capability requirements and there is no capital investment needed. So we are continuing to market it, and when we get the appropriate – a good price for it, then we'll move forward with that.

MDU cannot name the buyers (five of them) but they can say that they are all private E & P companies. Let's assume Lime Rock Resources is one of them.

MDU will still be spending money in the Bakken but it will be less (I think this is unrelated to exploration and production; this would be to support the "utility" services they provide others. It sounds like $60 million in 2015; and $20 to $25 million in 2016.


I assume this has to do with the brand-new Dickinson refinery, 50% owned by MDU:

Now moving on to our pipeline and energy service group. We had an adjusted loss of $1.2 million for the quarter. Earnings were impacted by operating results of the refinery and lower realized prices at the Pronghorn facility. Partially offsetting this were the regulated transportation pipeline volumes that were up 19% year-over-year.

Our after-tax portion of the refinery's loss was $5.8 million for the quarter, the result of challenging market conditions including low diesel and naphtha prices along with historically narrow local Bakken basis differentials, which affected the crude acquisition pricing.

They certainly didn't sound excited about this investment and didn't talk about the high completion cost or the delay or overrun in cost.

I did not find this conference call particularly enlightening considering all the stuff going on. The seem to be drifting and at sea.