MDU Resources Management Discusses Q3 2010 Results - Earnings Call Transcript

Oct.31.10 | About: MDU Resources (MDU)

MDU Resources (NYSE:MDU)

Q3 2010 Earnings Call

October 28, 2010 11:00 a.m. ET

Executives

Doran Schwartz – VP & CFO

Terry D. Hildestad – President and CEO of MDU Resources

Steven L. Bietz – President and CEO, WBI Holdings, Inc.

William Schneider

John G. Harp – CEO

Analysts

Paul Patterson – Glenrock Associates

Tim Snyder - Citigroup

Jack Moore – [Inaudible] Capital

Paul Riser - KeyBanc

Operator

Good afternoon. My name is Wes, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2010 third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

This call will be available for replay beginning at 2:00 p.m. Eastern Time today through 11:59 p.m. Eastern Time on November 11. The conference ID number for the replay is 13471172. Again, the conference ID number for the replay is 13471172. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

I would now like to turn the conference over to Doran Schwartz, Vice President and Chief Financial Officer of MDU Resources Group. Thank you.

Mr. Schwartz, you may begin your conference.

Doran Schwartz

Thank you, and welcome to our earnings release conference call. Before I turn the presentation over to Terry Hildestad, our President and Chief Executive Officer, I would like to mention that this conference call is being broadcast live to the public over the internet and slides will accompany our remarks.

If you'd like to view the slides, go to our website at www.mdu.com and follow the link to the conference call. Our earnings release is also available on our website.

During the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For a discussion of factors that may cause actual results to differ, refer to Item 1A Risk Factors in our most recent Form 10-K, as well as our Form 10-Q and the risk factor section in our most recent Form 8-K.

Our format today will include formal remarks by Terry, followed by a Q&A session. Other members of our management team who will be available to answer questions during the Q&A session of the call today are; Steve Bietz, President and CEO of WBI Holdings; Dave Goodin, President and CEO of Montana-Dakota Great Dakota Plains Natural Gas, Cascade Natural Gas, and Intermountain Gas; Bill Schneider, President, CEO of Knife River Corporation; John Harp, President and CEO of MDU Construction Services Group; and Nicole Kivisto, Vice President, Controller, and Chief Accounting Officer for MDU Resources.

With that, I'll turn the presentation to Terry for his formal remarks. Terry?

Terry Hildestad

Thank you, Doran, good morning. Thank you for joining us today to discuss our third quarter results and our outlook. For the third quarter we reported consolidated earnings of 77.3 million or $0.41 per common share absent an arbitration charge. Our results are strong considering that an economic recovery is not apparent in most parts of the country. Our diversified business strategy is one of our core strength and is especially valuable in helping offset the market conditions that are affecting the nation’s construction industry, including our construction businesses.

As a result, we continue to have very solid financial performance. We have a strong balance sheet in access to significant liquidity. We will generate good cash flow this year; this has given us the ability to reward our investors to a payment of a competitive dividend in addition to opportunities to grow our company through capital investments and strategic mergers and acquisitions.

I want to move on to a discussion of our operations beginning with the natural gas and oil businesses. They made a solid contribution to earnings for the quarter. We’re quite pleased with the performance of our Bakken acreage which is now our largest oil producing field and most significant cash flow contributor. Production in this field increased 24% for the third quarter; it’s increased 44% year-to-date over last year.

Our operated and non-operated Bakken wells produced approximately 3,700 net barrels per day for the quarter. This compares to production of about 3,300 net barrels per day that we reported earlier in August. With this team’s continued focus on adding acreage and prolific plays, we recently were successful in acquiring an additional 10,000 acres in the emerging Heart River area. That brings our total Bakken acreage to more than 67,000 net acres.

Earlier this month we spun the [inaudible] 31-6 well, this is our first well in the Heart River project, targeting the Three Forks Formation. We plan to drill a total of three wells on this acreage this year. We were pleased to see another producer in adjacent acreage report strong results from two recent wells, approximately 2,000 barrel of oil equivalence in the initial production, per day, per well.

We’re also excited about the opportunities in the Niobrara acreage. Since the acquisition of this acreage, early this year, interest and lease whole cost in the play have increased. To help manage our overall portfolio risk and our capital requirements, we recently signed an agreement to sell 25% working interest to a well-capitalized partner. The sale is expected to be complete in early December, and we expect to begin drilling in the Niobrara next year.

At our natural gas and oil operations, we have a returned driven approach. With the strong oil fundamentals that exist; we are focusing on further increasing our oil portfolio. Our long-term strategy is to increase our oil production to gain a more balanced portfolio mix. Year to date, oil production has increased 5% over last year, oil now represents 28% of our year-to-date total production, this compares to an increase of 24% from the comparable period last year.

This business has a solid portfolio of long-term properties with opportunities for growth. We’re certainly excited about both the Niobrara and the Bakken place where we have a multiyear development program that is expected to deliver long-term value.

Also, in the operations of our existing properties remain strong and we are continuing to look for other growth opportunities.

Now next, we’ll move on to our pipeline group, they experienced a record natural gas storage balances for the third quarter. At September 30, our customer natural gas storage balance was 73.8 million dekatherms, that’s 21% higher than the record levels we had one year ago.

Considering the increase demand for a storage facility, we’re pursuing a project to increase firm deliverability from our Bakken storage field by 125 million cubic feet a day. We perceive commitments for approximately 30% of the total potential projects, and we’re moving forward on this phase with projected in-service date of November of 2011.

This group was impacted by an arbitration charge in the third quarter. This involves a disagreement regarding the terms of operations and pressure of a company-owned natural gas gathering system. We believe the decision is supported by the underlined gathering agreement. We will aggressively pursue all our legal remedies to challenge the outcome of this decision.

The ongoing energy development in the Bakken and other emerging plays are providing great opportunities for this group. We’re pursuing the expansion of our natural gas pipeline in the Bakken, targeted for late 2011, and we continue to work with producers, third-party gathering companies and processors on a number of projects to enhance our position in these areas.

Now, moving on to the utility, it had another good quarter, primarily driven on the strength of our electric, utility earnings. We benefited this quarter from a electric rate case increase, 2.7 million annually in Wyoming that was effective May 1, and an interim electric rate increase in North Dakota 7.6 million annually, that was effective mid-June. Our natural gas distribution business experienced a normal seasonal third quarter loss.

We’re quite pleased that we continued to experience growth at the utility, despite the economic environment in our country. Integration efforts are continuing to produce cost efficiencies, for example, we reduced our work force by 12 1/2% since 2008. Our customer base has grown 1.2% year to date as we move near the 1 million customer mark.

On the trailing 12-month basis, our combined utility posted record earnings of $62 million. This is strong growth, considering just five years ago, the combined utility earnings were only $15 million.

We do have two outstanding electric rate cases, the North Dakota case for 11.5 million annually, that’s a 10% increase, and we have a Montana case for $5.5 million annually at the 13% increase.

Our utility continues to pursue opportunities associated with potential development of high voltage transmission lines and system enhancements. One such project is a $20 million power line in South East North Dakota to move wind generation. We anticipate construction to begin next year on this project.

In addition through [inaudible] we have opportunities surrounding the regional transmission build out, leveraging off our existing transmission system. These projects would provide a regulated return. We continue to see substantial growth opportunities at our utility business.

Moving on to the construction companies, on a combined basis, they earned 46.3 million this quarter despite operating in one of the toughest economic environment since World War II.

We’re pleased with the success our construction material business has realized in this challenging economic environment. The early restructuring this business unit initiated over two years ago, has contributed to this success. We have continued to outperform out peers. Our SG&A cost are down 34% on a trailing 12-months basis compared to the cost in 2006, that was our peak earnings year.

Our September 30 backlog is $464 million, that’s down about 30 million from a year ago, however, we recently added 26 million in backlog for worth of transmission, infrastructure contracts that’s not included in the September 30 backlog numbers.

Our work backlog includes several highway paving projects, airports, bridgework, reclamation work, and a LA Harbor deepening project. We are supplying materials to support the oil industry in the Niobrara play and have similar sales in East Texas.

An update on some of the larger projects we’ve been talking about at Fort Hood, over a billion dollars of projects have been identified over the next several years, a designed contractor has now been selected for the new hospital job. We’re in a good position to bid, to provide Ready Mix and Aggregates on this project. Ground breaking is expected to occur mid-year 2011. Significant Long Beach Harbor deepening and infrastructure improvement project is expected to bid soon, and we remain optimistic that the $5 billion multi-year Light Rail project in Hawaii will be underway in early 2011.

When congress reconvenes after the election, we’re hopeful momentum builds for the President’s quite substantial $50 billion infrastructure investment proposal. While this doesn’t provide a long-term solution it could lay the ground work for a new sizable multi-year transportation bill.

The [inaudible] 6 year transportation bill has been extended to the end of this year; this bill provided 286 billion over 6 years or approximately $48 billion a year. We anticipate another extension to this bill in to 2011, while congress works to pass a new multi-year funding bill.

We expect the challenging economy to continue to affect this business in 2011, but as we look forward, we’re clearly positioned for when the market does turnaround, considering our substantially reduced cost structure.

This construction material business is a top 10 U.S. producer of aggregate, sand gravel and Ready Mix concrete, with our 1.1 billion tons of aggregated reserves this group has positioned to help meet the countries ever increasing infrastructure needs in the future.

Now, turning to the construction service business, the diversity of this business provided 6 million in earnings for the quarter. Quarter-on-quarter margins were up for the outside industrial rental and sales operations. Outside work in the western region has begin to pick up. Demand for equipment rentals and sales increased and we begin preparing for refinery turnaround work.

Work on the [inaudible] line is begun, notice to proceed on the second substation near the Left Bridge Alberta was received in early August and crews are working on setting poles between Great Falls and the Canadian border.

It’s very encouraging to see the opportunities that this could present for additional construction work on wind farms to tie into this transmission line as work continues on the project. Similar to the construction material segments, the economy is expected to continue to impact this business in 2011, however, we’re we’ll positioned to take advantage of profitable opportunities as construction spending begins to recover.

Our cost structures lower on a 12 month trailing basis, SG&A are down 30% from the peak earnings of 2008 reflecting this groups continued focus on cost. Quarter-on-quarter our revenue increased. Our backlog is higher this year by about $53 million. The solar market continues to be strong, there are opportunities to bid larger, high voltage transmission projects, they’re positive indicators in the healthcare field for institutional facilities, and we’re seeking additional opportunities for refinery turnaround work.

Based on our performance to date, and our projections for the fourth quarter, we’re updating and narrowing our 2010 guidance range to $1.10 to $1.25 for common shares. This excludes the third quarter pipeline arbitration charge, and the potential gain from the sale of our Brazilian transmission assets that’s expected to occur in the fourth quarter.

The guidance range remains the same when we include these items as the current estimate for the expected gain would largely offset the arbitrage charge. We believe that weather and commodity prices are factors that will influence where we end up the year, in the upper half of earnings guidance range, or the lower half of that range.

Now we’ll give you our earnings guidance for 2011 when we announce year-end results and that’s in the end of January 2010 results. I want to summarize a few things from my comments today, and our views into next year.

In summary, we believe the economy will continue to create challenging market conditions for construction material businesses in 2011. However, these businesses are well positioned for the economic recovery when it occurs, with much lower cost structures. We have valuable assets and we have talented employees. The natural gas and oil businesses are affected significantly by commodity prices for natural gas and oil. Remember, we’re a return focus company, we won’t spend additional capital just to produce a commodity. Our shareholders want a reasonable return for their investment and we will allocate capital accordingly.

It’s tremendous to have more optionalities than in the past in oil interest. Our team at this business has done a great job [inaudible] substantial lease positions in exciting oil plays at low lease hold cost, and favorable lease terms. With a significant inventory of drilling sites in our development and exploratory acreage, we will pursue a multi-year development program that we expect will deliver long-term value.

Building off the record, trailing 12 month earnings at our utility and our record storage balances at our pipeline, our regulated businesses have solid opportunities for growth, even in today’s environment. Many of these growth prospects are driven by the strong energy development within our geographies region, and as regulated businesses we continue to expect reliable earnings contributions.

Throughout the corporation, we’re working smarter and we’re maintaining the most cost efficient operations to continue being a market leader. This has allowed us to continue to create shareholder value, including our continued emphasis on paying a competitive dividend. This has occurrence yield in excess of 3%. We’re proud of paying a dividend for over 72 years and we raised that dividend to the last 19 years. We view the income from our dividend as a valuable component of our ability to deliver value to the shareholders.

In summary, we believe we’re in the right industry for the long-term. We operate in industries that produce goods and services that are must have for our economy, not nice to have. We expect the valuable assets will hold, we hope will provide a solid shareholder returns into the future, just as they have into the past.

Now with that, thank you for your time today, we’ll open the lines

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Paul Patterson of Glenrock Associates.

Paul Patterson – Glenrock Associates

Morning, guys.

Terry Hildestad

Good morning, Paul.

Paul Patterson – Glenrock Associates

Just to go over the production levels, it looks to me like you guys are expecting 6% decline on MCFE basis, but it looks like you guys have experienced considerably more in the nine months ended. So I guess you guys are expecting to see a strong increase in the fourth quarter?

Steve Bietz

This is Steve Bietz. If you look at our forecast through – we expect the fourth quarter, I guess, to be higher than it was in 2009. And so when you average that out, we’re expecting to be in the range of 6%.

Paul Patterson – Glenrock Associates

Okay. Now you also mentioned in the text about moving from natural gas to oil sale lease holds and not having a short-term product impact. Could you elaborate a little bit more on what that impact might be and how it might affect things like DB&A and lease costs, etcetera?

Terry Hildestad

I guess, Paul, when you step back and look at it, you know, we’ve made a conscious effort to invest more on the oil side. If you go back a few years, or several years, we were much higher a percentage of natural gas as compared to oil. We brought that close to somewhere around 28% as we sit here today and we expect that to continue, to grow kind of on a go-forward basis. Kind of, again, kind of increase on the oil side, proving us the option of – do we invest on the oil side, do we invest on the gas side. It kind of depends upon the situation at the time.

Now, when you think the effects of that certainly looking at today’s environment, when you look at the margin on the oil side versus gas side, much stronger on the oil side. I think that’s a very positive when you look forward into next year and future years.

Other effects, I suppose on a DB&A basis, it could have a little upward pressure on the DB&A rates because the refining costs tend to be higher than what our historic gas finding costs have been.

Paul Patterson – Glenrock Associates

Okay. But the short-term production, I mean, so what are we – what should we think about the product numbers? Is that going to – how is that going to – can you just elaborate a little bit more on that statement in the release about how initial return production will be effected?

Terry Hildestad

We took some of the capital that we were planing to deploy on the gas side in 2010, reployed that into kind of oil lease-hold opportunities. So in the short term, yeah, you know, we’re not going to see that production, but as Terry mentioned, we’re really not looking to chance production, we’re focusing on margin and returns. So taking that capital, deploying it on oil resold really sets us very well. Short term, it hurts the production a little bit, but long term sets us very well as we move forward to add production.

Paul Patterson – Glenrock Associates

Okay, that’s great because that’s my second question, which is we – since you’re going to be increasing production in the fourth quarter, how should we think about production growth in 2011 and beyond?

Terry Hildestad

Sure, so putting together our plans right now, let me just say, in this environment I think part of our strategy, the benefits to that will play themselves out next year on the gas side. You know, you look at the forward strip right now, it’s challenged to where we’re done in the low $4 range. I would expect that we’ll spend a lot of capital deployment on the pure natural gas next year, so you might see that decline. But on the positive side, you’re going to see more dollars being dedicated to the oil side and you’ll see our oil production kind of continue to grow.

Paul Patterson – Glenrock Associates

Okay. And then the DD&A costs, which went up and the lease operating costs, which were seen to spike up this quarter, any sense as to how we should be thinking about those?

Terry Hildestad

Sure. If you – the DD&A rate is just kind of a blending, if you will, with kind of more dollars being invested on the oil side, a little higher finding costs associated with that. That blending with some of our historic low costs DD&A rates just pushes that rate up. So I don’t think anything to be concerned about there.

On the LOE costs perspective, if you look at nine months to nine months, I think we’re essentially flat year to year. I think we’re maybe off $0.02. Basically in the third quarter we had some timing issues on some work-overs, some well cleanouts, some road maintenance. But basically a timing issue for the quarter.

Paul Patterson – Glenrock Associates

Okay, great. And then finally, well not just finally actually, [Inaudible] Creek, is there any ongoing impact, I mean, other than those charges you guys have had that we should be thinking about?

Terry Hildestad

No. I wouldn’t say that there’s much of an impact relative to the arbitration case that we’ve disclosed. No.

Paul Patterson – Glenrock Associates

Okay. And then just finally on the construction services and the construction business in general, you mentioned that the economy is proving challenging, and you also mentioned that you might be getting some benefit from federal legislation. In the absence of the federal legislation, because [inaudible], right, could you just give us a flavor as to, you know, if we don’t get much of anything coming out of the federal government, what things looks like versus if we did. And in general, I mean, are we talking about pretty much a lower results potentially here for 2011?

William E. Schneider

Paul, this is Bill Schneider here. In terms of the highway bill, if the new bill doesn’t pass, keep in mind that the existing legislation will continue to be extended as it has been for the past months. And as has been indicated, that’s about a $48 billion per year fund level. So we’ve got a strong floor there. And next year, of course, we’ve got the remaining part of the Stimulus Bill to deal with, so it’s going to give us some time for Congress and the President to hopefully address the reauthorization; speculating now for a minute that if the republicans take over the House, the Chairman of the House Transportation and Infrastructure committee that writes that will be John Mica from Florida. We’ve worked extensively with him in the past. He’s been on that committee for a number of years and we expect that he will be moving that up on the Republican’s priority list. And what will happen next year, it’s hard to predict.

In addition to the potential of the reauthorization next year, we still have a lot of other good work, as was mentioned by Terry. The Hood Worth, the Miliary work, the energy field work, so it’s not all gloom and doom. There’s options to us besides the highway legislation.

Paul Patterson – Glenrock Associates

Okay. Thanks a lot.

Operator

Your next question comes from Tim Snyder of Citigroup.

Tim Snyder - Citigroup

Hey, guys. How’s going. I jumped on a bit late, so if you’ve already answered this, I apologize. First of all, in timing with respect to the Heart River Exploration Wells, do you think we’ll have some results before the end of the year here?

Terry Hildestad

Tim, we just bought our first well in the Heart River Area in early October. We’re currently just drilling in the horizontal sections there. We should get the well drilled her in the next probably 10, 12 days. I guess our hopes are that we would have some results before year end, or into January. The one item to mention there, it depends on how quickly we can arrange to have that well completed, or get the fracs completed on that well.

Tim Snyder - Citigroup

Got it. As far as your service capacity goes, can you still see constraints there or is that getting better?

Terry Hildestad

No, we’re still seeing constraints there, Tim. It’s a challenge. I know there’s been a few, or at least one other party that’s kind of moved in and is doing some competitions there, but it’s still a challenge to schedule and get fracs done on a timely basis.

Tim Snyder - Citigroup

And then just shifting over to construction materials and services, realistically, how much more room do you guys have to cut costs here. I know you’ve been cutting costs the last couple of quarters. How much more is left?

Terry Hildestad

If you had asked me when we started to slow down early 2008, I would have told you that by this time in the decline is that we would be done. There wouldn’t be any other opportunities. What I will tell you is, we were working hard with our plans, of course, and dealing with the good backlog that we had going into next year. We still are finding opportunities and it could be as simple as some of the plants and facilities, shutting them down. We’ve got plans again to reduce our SG&A and the reason why we’re able to do that is fortunately many years ago we invested in our IT systems, or reporting systems that allow us to be able to ramp up and do that with fewer people.

So although it’s not as big of an amount, Tim, as it was back in 2008, we’re still driving costs [inaudible] the organization ad still have our employees motivated to do so.

Tim Snyder - Citigroup

Got it. And then do you have an update on the Fort Hood Hospital Project and the LA Harbor Expansion Project?

Terry Hildestad

Yes. On both of these projects, Tim, the Long Beach Plans will be out next month and on that, we’re really excited about that job because as you know, we’ve done extensive work right next door at the Port of Los Angeles. In fact, we’ve got a large job going on with the deepened project there and if you recall, we have that large quarry on Catalina Island that is a strategic advantage to us as we go forward and bid the Long Beach job.

That Long Beach job, the total concept of that thing, Tim, is over $1 billion. I mean, it’s a monster project. There’s a lot of competition between the two for us, and Long Beach wants to step it up a little bit. Now, they’ll let that out in pieces. It all won’t go at once, but, Tim, we’re very well position for that.

And regarding the Fort Hood Hospital, we know the contractor that’s been selected, and we’ve provided them pricing and we’ll find out hopefully in the next few weeks of whether or not we’ll have an opportunity to work on that job.

Tim Snyder - Citigroup

Got it. Then lastly, in the construction services side, just a quick commentary, do you – is the Las Vegas market getting better at all, or is that still in shambles I guess?

Terry Hildestad

Well, it’s very challenging from our peaks of 2008, but I can tell you we are still making money in Las Vegas when you consider the unemployment and the foreclosures and all those other pressures and that’s really contributed to our people in that market and we’re managing through a very difficult time, but it’s going to be a while before that market comes back and because of the financial pressure that the communities have particularly on the unemployment and the foreclosures.

But we’ve got good people. Again, we’re still making money in the Las Vegas market and when that market comes back, you know, we’ll be ready to take advantage of that stuff, that opportunity.

Tim Snyder - Citigroup

All right. Thanks. That does it for me.

Operator

Your next question comes from Jack Moore of [Inaudible] Capital.

Jack Moore – [Inaudible] Capital

Good morning, guys.

Terry Hildestad

Good morning, Jack.

Jack Moore – [Inaudible] Capital

Continuing with construction, I was wondering if you could talk a bit about your focus going forward, just projects that you’re targeting, geographic areas you’re targeting and if there’s any new service areas that you could see as a means of growth, and where you see headcount going in construction over the next year or so?

John Harp

This is John Harp. Let me mention a couple of areas that we’re excited about. We continue to see good opportunities in our solar business, particularly in the Las Vegas market. We’ve recently started our mantel transmission job, which is another positive move for us. The other area that we see continued operations, or continues to be demand for additional healthcare facilities, some of our companies really specialize in that area, so we feel very, very optimistic about that prospect.

And probably the last thing I’d like to comment, is over a three or four year period of time, we have really start to develop a very expert group on the turnaround services arena in the refinery businesses. And we are just on the verge of kind of moving that group to a higher level as far as workload and opportunities. It’s a group of people that are recognized in industry as experts, and we certainly have a following with the oil and gas company that we work for. So we see that turnaround service group as a bright spot for us going in the future.

Again, you know, our business is built on people. I’ve said this for six years. We have the best people in the industry and we continue to show that by keeping our customers happy and trying to exceed their expectations.

Jack Moore – [Inaudible] Capital

How many people work in the turnaround business right now, and where do you see that going? Right now we’re currently doing a turnaround service in Oklahoma where we’re running two shifts of 125 men per shift. A lot of these project we work on are very compressed. These refineries that – when they shut down for maintenance, it’s 30 days, approximate, it’s a 24/7 where you’ll have as many as a couple thousand people converge on a refinery and completely try to put that maintenance system back together and up and running.

Just think about a refinery, if you extend that turnaround by a day, it’s absolutely millions of dollars to our customers and there’s been some examples in the past couple of years where we’ve actually been able to give that refinery back two or three days earlier, which is huge. That’s how you build a reputation.

Jack Moore – [Inaudible] Capital

[Inaudible] potential here being that a lot of the refiners like to turn around at the same time, so you can’t really schedule one after the other?

John Harp

Well, it depends on your workforce and your geographic, and exactly how you plan your work. The one thing we’re not going to do is we’re not going to jeopardize, or spread ourselves too thin. This group is very focused, quality management is very important. Safety is absolutely a high priority. We’ve got an extremely good record in those areas and again, if we can turn this plant back a day or two earlier than expected – word of mouth is everything in this business. It’s a very closely knitted group. This group, we originally started as a greenfield in 2006. You know, it takes time. We haven’t tried to move this grouping faster until we felt comfortable that we could perform well and keep our reputation intact.

Jack Moore – [Inaudible] Capital

So where do you see construction and the overall business going – the headcount going?

John Harp

You know, right now we’re – I haven’t really looked at the headcount. You know, we see things probably maintaining where they’re at right now. You know, there’s still challenges out there. We see them every day, but you know, whining probably doesn’t do too much good anymore.

Jack Moore – [Inaudible] Capital

And back to E&P, can you talk about just production profile for 2011 and the reasonable scenario of a low-gas environment? I would expect you’d continue to allocate more resources to oil. What’s the optimal oil/gas split that you could see for 2011 if things go well?

Terry Hildestad

Jack, I don’t know that I can put it in numbers for you, but clearly, you’re right on point. I mean, we’re looking at where we’ve got dollars allocated strictly to gas drilling. We’re not going to see much of that next year. We’re going to push that over to more oil and liquid-based drilling opportunities. We’re going to continue to look for new lease-hold opportunities to expand our position, either in the areas that we are or else in new areas. And so we’ve got a team working on that. I guess I think the takeaways, you should continue to see oil production continue to grow next year, and gas, you know, that may slip some, but based on margins, based on cash flows, I think we view that as a positive thing for our shareholders.

Jack Moore – [Inaudible] Capital

And finally, are you guys looking for any other strategic relationships like the one you just gained last month with respect to kind of freeing you up from a CapEx and brining in folks to perhaps monetize some of your early move?

Terry Hildestad

No. I think we’ll always consider those things. I can tell you that the arrangement we have with [inaudible], we like the situation. I think we view them as a good partner. They’re very well capitalized and they have an interest in continuing to invest in North America. So we’re going to look for opportunities to partner up with them in the right situation as we go forward.

Jack Moore – [Inaudible] Capital

Great. So you do see opportunities for that relationship to grow?

Terry Hildestad

Yeah, I do.

Jack Moore – [Inaudible] Capital

Great. Thanks so much.

Operator

(Operator Instructions). And your next question comes from Paul Riser of KeyBanc.

Paul Riser - KeyBanc

Morning, guys. How are you?

Terry Hildestad

Good, Paul. Thank you.

Paul Riser - KeyBanc

How much, if any, stimulus money do you expect to flow into ’11?

Terry Hildestad

Right now we’re seeking a fault that will have about 2.8 – 2.6 to 2.8 billion will come through in 2011 in the states that we operate in.

Paul Riser - KeyBanc

And how much did they do – or do you think they’ll do in ’10?

Terry Hildestad

Right now, in checking with our backlog, Paul, we’ve got about 150 to 200 million. And the reason why I can’t give you a better number than that is some of the jobs are 100% stimulus funded and some of them just have a portion of the money from stimulus. But we’ve picked up some of that work.

Paul Riser - KeyBanc

Do you think Stimulus spending will be internally positive or negative in ’11?

Terry Hildestad

I think it’s going to be positive.

Paul Riser - KeyBanc

And then, will there be a gain hooked on the [inaudible] transaction?

Terry Hildestad

Paul, no there won’t. That goes into our whole cost pool. There’s no gain on that transaction booked.

Paul Riser - KeyBanc

Can you give any more flavor around – I think at one point you said that you’re early entry made the investment deepen the money. Would you still characterize it that way?

Terry Hildestad

Yeah, Paul, as we released in our earlier press release on that, we – our people got into the play earlier over the year as everybody has had success in that area, least costs went up significantly and we just de-risked our portfolio and we partnered up with a good partner there – a well-capitalized partner and we’re their operating partner.

Paul Riser - KeyBanc

Okay. Thank you.

Operator

(Operator Instructions). This call with be available for replay beginning at 2:00 Eastern Time today through 11:59 Eastern Time on November 11th. The conference ID number for the replay is 13471172. Again, the conference ID number for the replay is 13471172.

At this time, there are no further questions. I would now like to turn the conference back over to management for closing remarks.

Terry Hildestad

Well, thank you all very much for participating on our call today. As I mentioned earlier, we will provide a more detailed guidance around 2011 with our fourth quarter yearend report. That will occur early in February. In the meantime, I certainly hope we have an opportunity to see and visit with you. We’re participating next week at the EEI Financial Conference, so possibly we’ll visit with some of you at that conference.

Thank you very much for your interest in MDU Resources.

Operator

And ladies and gentlemen, this concludes today’s MDU Resources Group conference call. Thank you for your participation. You may now disconnect.

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