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Value funds snap up EQT shares ahead of midstream-upstream split

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Value funds snap up EQT shares ahead of midstream-upstream split

Active value investors are taking bigger stakes in some of Appalachia's largest independent shale gas drillers, moving in alongside event-driven hedge funds, according to data compiled by S&P Global Market intelligence.

While the bulk of second-quarter institutional investor activity among the group of drillers involved passive index funds, which regularly neaten their books to account for changes in market capitalization, three value-driven funds were the top institutional investors in Appalachia's flagship exploration and production, or E&P, company, EQT Corp.

The moves into stocks of big Appalachian drillers such as EQT and Southwestern Energy Co. are a signal of confidence at a time when shares in shale gas exploration and production companies are flagging.

Iridian Asset Management LLC, Sound Shore Management Inc. and Scopia Capital Management LP collectively bought more than 3% of EQT's outstanding stock in the second quarter, new stakes for all three funds, according to SEC filings by institutional shareholders. All three advertise themselves as being in the hunt for undervalued companies that will turn around, with Iridian explicitly looking for companies undergoing change.

EQT has a slew of changes underway. Already under pressure to separate itself into midstream and upstream components a year ago, EQT doubled its task with its purchase of neighboring driller Rice Energy in November 2017. EQT has a goal to separate its midstream processing and pipelines from the upstream drilling rigs by the end of 2018, a split that analysts said will add value to the surviving E&P company by reducing its debt and improving its cash flow.

"Depending on standalone upstream leverage following the midstream separation, we wouldn't be surprised to see an accelerated shareholder return program," analysts at energy investment bank Tudor Pickering Holt & Co. said when EQT sold off some conventional upstream operations in June. "We remain buyers of the name in both the near-term and long-term, with line of sight to a significant value unlock coming by the end of Q3 driving upside … and expectations for [free cash flow] generation in the coming years with cash funneled to shareholders via buybacks/dividends."

With the entry of more event-driven shareholders, EQT is building a list of active owners. More than 8% of EQT's shares were held by activist investors at the end of the quarter, including Paul Singer's Elliott Management Corp., which is known for proxy fights.

Southwestern, another large shale gas producer that analysts see as undervalued as it shifts away from dry gas to more NGL and liquids volumes from wells in southwestern Pennsylvania, saw the most institutional buyer interest in the second quarter. Legendary hedge fund manager Ken Griffin's Citadel Advisors LLC increased its stake in Southwestern by more than 650%, buying 9.3 million shares in the second quarter, according to SEC filings. Citadel now owns nearly a 2% stake in Southwestern, the largest stake of any activist investor in the company.

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