Black Hills' (BKH) pending merger with NorthWestern Energy (NWE) has an underappreciated strategic value as the combination will likely offer a larger scale, stronger balance sheet, and wider jurisdictional diversity, BofA said in a note Thursday.

The merger will likely also offer a "larger infrastructure runway across data centers, transmission, generation and gas," the note said, adding that merger risk is manageable and Black Hills' shares are not reflecting the "potential EPS growth, financing and valuation benefits."

Meanwhile, Wyoming is also emerging as a "credible, but underappreciated" market for data centers, BofA said, adding that the state has "active sites, additional development underway and broad political/regulatory support for large-load growth."

The investment firm highlighted Wyoming's Project Jade data center campus as the "most visible opportunity" for Black Hills, a project which BofA sees as "progressing versus paused."

"We reflect only partial value for Project Jade in our updated price objective, leaving a potentially meaningful upside option not fully captured in the stock," the note said.

BofA upgraded Black Hills to buy from neutral and increased the company's price target to $78 from $76.

Price: 73.28, Change: +1.34, Percent Change: +1.86