➤ Biden administration could be good for natural gas
➤ When "everybody seems to have the same strategy," environmental, social and governance factors will drive how investors pick among oil and gas companies
➤ After a merger, winning over a legacy workforce required sticking to detailed plan to make shale work
EQT President and CEO Toby Rice
Before Rice Energy Inc.'s November 2017 $6.7 billion merger into EQT Corp., Toby Rice was COO at Rice. Three years later, after leading a shareholder revolt, he is the CEO of the 130-year-old Pittsburgh gas company.
With shale gas exploration and production companies pursuing similar strategies to generate free cash to pay down debts accumulated during the shale gas "rush" a decade ago, climate change and ESG issues will guide investors' decisions, Rice said. EQT recently announced it would pursue the goal of reducing greenhouse gas emissions from its own operations to zero.
Rice recently talked with S&P Global Market Intelligence about the path forward for the nation's largest natural gas producer and the outlook for further consolidation in the sector of the Appalachian basin.
The following is an edited transcript of that conversation.
S&P Global Market Intelligence: Do you think President-elect Joe Biden's incoming administration is going to be a positive for natural gas, or neutral, or negative?
Toby Rice: One thing that we will see is probably acceleration on the retirement of coal. It's going to be an emphasis on energy and understanding how people think about how they get their energy. This really presents a big opportunity because people will start understanding that 20% of our electricity is coming from burning coal. There's a better way.
When we step back and we think about emissions across the globe, we still burn [coal for] 40% of our electricity on a global level. That creates a tremendous opportunity for us to replicate the success we've had with low-cost shale gas … that lowered emissions in the United States. We can recreate that story on a world stage.
When you are competing for the investors' dollar, who is your toughest competitor? Other independent producers? Other Appalachian shale drillers? Tech companies?
I think in [exploration and production], there's just a lot of peers, and I think it's challenging for investors to sift through the noise. One of the benefits that we'll see from consolidation is a smaller playing field, and it will be an easier assessment for investors to pick the best team to create value for shale.
It's not just about producing results. It's about the way you produce those results. And this certainly is a big theme now with ESG. That is the representation of people caring about how you produce results, which is great because we don't just focus on getting results, we focus on the way we do it. We don't just drill the wells. We lay the process down to drill wells and drill the next a little better.
Let's talk about consolidation in Appalachia. How many producers ought to be in Pennsylvania or West Virginia or Ohio?
Right now, it's a little over 30 rigs. And there's around 50 different operators. So, I think the real question is, what does it take to run 30 different rigs?
It's a unique time in the industry, where everybody seems to have the same strategy. That strategy is: maximize free cash flow, strengthen your balance sheet and return on capital to shareholders. The days of operators having different strategies … those days are pretty much behind us.
When we think about consolidation, it's really looking at what we did with the Chevron Corp. acquisition find opportunities that are accretive on free cash flow per share, [net asset value] per share and allow us to deleverage our business. One of the things this could do is really accelerate the returns that we are delivering to shareholders. I think that's something that will be very well received by shareholders who have been patient with shale.
We know you want to get your investment-grade rating back. Is there a choice between investment grade and mergers and acquisitions? Or can you do both?
We can do both. I think you look at the Chevron transaction as an example of how a transaction done at the right price can accelerate the deleveraging plans. The Chevron deal — that's going to have the impact of reducing our leverage by 0.2 to 0.4 turns. So, it's not just a small thing.
It was not quite a hostile takeover when you took charge at EQT, but there were a lot of people who had known each other for a long time who were being shown the door. How were you able to win over the workforce? Or did you?
One of the things that we did was really focus on the plan. I think in any leadership position, your job is to show the vision, set the vision and then come up with a detailed plan on how we're going to organize and execute. That plan is really helpful. That really kept people focused on the things that needed to get done for our shareholders.
We went from a company that was staring down the barrel of little bit over $3 billion debt maturity wall to having an organization that's got a vision of investment-grade metrics by the end of 2021. The workforce is now seeing the benefits of all the hard work they've been doing.
In July 2019, when you came in, the perception of you was that you were the brash kid taking over a 100 year-old-plus company. Was it harder or easier than you thought?
It was hard. I think we knew it was going to be difficult coming in. I think people wanted to label us as brash kids, but let's look at the track record during our time as a public company [at Rice Energy]. We outperformed peers by 90%. During our time as a public company, we built what I think was a really great culture. We were called the top workplace in Pittsburgh. I think we had a lot of confidence in our abilities to do it.
What's exciting about EQT is that there's still a lot to do. We are still a rate of change story, and it seems like every week we're coming up with new ideas that are going to allow us to continue to boost our capital efficiency. It's not just one person; it's an entire team that's really the spirit of shale.
We've gone away from the era of the wildcatters. … Now to be successful in shale, it's an entire team. We have a certain approach that blends in the strategy, the process, the technology, the culture and the values and comes up with an approach that is designed to create a significant amount of value in shale.
How good is Chevron's rock? Is their leasehold in Fayette and Westmoreland counties as good as EQT's is in Washington and Greene counties to the west?
When it comes to the game plan with the Chevron assets, we're not planning on converting any new undeveloped leasehold. ... What we are going to do is, we're going to take advantage of the work-in-progress wells — finishing those and turning those into production. Surprisingly enough, these wells-in-progress compete with our core combo development projects, and that's largely due to the fact that there's $270 million of [capital expenditure] that has already been spent. It's a very small amount of dollars that we need to bring these wells into production. That's really the game plan.
On an overall basis, these assets are actually going to make us more capital efficient. We're increasing our production 10% with this acquisition. And we're only increasing our maintenance capex by about a little over 7%. The reason we're able to be to see that gap as efficient is just because we're playing off the sunk capital.