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Turnover at EQT increases pressure on shale gas drillers to improve results

While the spotlight will be on newly-minted EQT Corp. CEO Toby Rice's efforts to rapidly cut well costs and produce more free cash flow, the surprisingly large margin of his July 10 proxy fight victory cranks up the pressure on oil and gas drillers to show results or risk being fired by shareholders.

Rice's victory did not surprise gas sector analysts, but the margin of the victory came as a shock and is emblematic of investor impatience with shale oil and gas producers, analysts said. Team Rice received more than 80% of shareholder votes in support for their 12 person board, which, once the results were certified, installed Toby Rice as the head of EQT.

"We think the success that the Rice team had will embolden other activists in the broader E&P [exploration and production] space," energy investment bank Tudor Pickering Holt & Co. analyst Sameer Panjwani said July 11. "These companies have overpromised and under delivered, so there is more change to come. Investors have been vocal about what they want [free cash flow returned to investors]."

After two years of talking about capital discipline, investors' patience has worn thin, Panjwani said. "If you see some success, like Rice, it encourages action," he said.

Rice said he plans a two-week listening tour of EQT's workforce before an "evolution committee" of former Rice managers and current EQT executives kick off a 100-day reorganization of the 130-year-old Pittsburgh gas company. The goal will be to spend a year improving cash flows and lowering well costs. The group is targeting costs of $735/foot creating roughly $500 million per year in positive cash flow. The consensus of analysts compiled by S&P Global Market Intelligence July 11 predicts EQT will have $187 million in free cash flow this year and $236 million in 2020.

"Looking forward, EQT's stock performance will depend on what the new strategy is going to look like along with its implementation," Stifel Nicolaus & Co. shale analyst Jane Trotsenko told her clients after the July 10 vote. "The bears note that the Rice team cannot change the macro backdrop, but re-positioning the company and making it more competitive remains of paramount importance, in our view."

Credit research firm CreditSights said the interests of EQT's bondholders are being lost in the shuffle of the C-suite in Pittsburgh. "The management shakeup raises the question of how the Rice team will treat capital allocation," analyst Charles Johnston told his clients July 10.

A sticking point for CreditSights is the use of EQT's roughly $1 billion stake in its midstream spinoff Equitrans Midstream Corp. The Rice team's "less credit friendly" presentation calls for the stake to be sold and the cash split between stock buybacks and debt reduction. Previous management said the entire stake would go to debt reduction if needed, CreditSights said.

"The ability to generate incremental cash flow is expected given the overwhelming support for the Rice team's plans, but it remains a show me story from a bondholder perspective," CreditSights said.

Like bondholders, stock investors took a "wait and see" stance July 11. EQT shares were down 3.6% in afternoon trading.

The jolt of youth and energy from a takeover of America's largest natural gas producer may not be enough to immediately spark investor interest in cheap natural gas. "The Rice team is in an enviable position, as it has the opportunity to tell a resurrection story and grab attention from investors in a market where others are struggling," SunTrust Robinson Humphreys Inc. shale analyst Welles Fitzpatrick told his clients July 10. "Unless the new board is able to present a credible plan to produce sustainable [free cash flow], there is a risk the company could get lost in the general apathy that plagues the natural gas group."

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