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EQT officials to gain from Rice merger in 'perverse' pay scheme, investor says

EQT Corp.'s management is being propelled to complete a "value-destroying" $6.7 billion merger with neighbor Rice Energy Inc. because a "perverse" compensation scheme at the Appalachian shale gas driller would put millions in the pockets of its CEO and former CEO, activist hedge fund JANA Partners LLC said in an Aug. 14 letter to the board of directors. Analysts disagreed with JANA's assessment of the deal.

EQT CEO Steven Schlotterbeck and Chairman David Porges would split the bulk of $50 million in compensation awards if EQT's production between now and 2020 grows 25%, JANA Managing Partner Barry Rosenstein said. With current production growth estimates from EQT alone in the midteens, the addition of Rice's volumes would change the cumulative annual growth figure to 36% and 37% for the two compensation periods in question, Rosenstein's letter said.

In addition to the $50 million going to top executives, adding Rice and affiliate Rice Midstream Partners LP's EBITDA to EQT and affiliate EQT Midstream Partners LP's EBITDA would trigger an additional $130 million in cash awards for senior EQT managers, Rosenstein claimed.

JANA came out against the merger of Rice and EQT in June, claiming EQT was worth more in parts and should not use its undervalued stock to buy another company. JANA and Rosenstein, who own 5.8% of EQT's outstanding stock, have threatened to launch a proxy fight for three board seats at EQT's 2018 annual meeting unless the deal is called off and EQT splits into separate upstream and midstream companies.

"We believe it is clearer than ever that EQT shareholders should reject the proposed Rice acquisition, unless of course EQT management is willing to forsake the millions in additional compensation they would receive for this value-destroying transaction and accept a substitute incentive plan based on the percentage of the far-fetched synergies they have promised that they actually deliver," Rosenstein's latest letter to the board said. But, they contended, "EQT’s perverse compensation structure in fact incentivizes management to pursue this suboptimal, dilutive acquisition, no matter the cost to EQT shareholders."

When the deal was announced, EQT management said it had identified $2.5 billion in immediate savings from synergies. Schlotterbeck and other executives spent the bulk of the company's July 27 earnings conference call detailing another $7.5 billion in savings over the next decade. JANA called those claims "specious."

"Rice is an outstanding strategic and operational fit for EQT, which as a single entity we anticipate will benefit from a world-class inventory at the bottom of the cost curve and deliver even stronger returns to shareholders," EQT spokeswoman Natalie Cox said in an email.

In addition to up to $10 billion in eventual savings, the merger deal "is expected to be immediately accretive to cash flow per share in excess of 20% in 2018 and 30% in 2019, and accretive to net asset value per share," Cox said.

Cox noted that EQT's compensation plans were approved by 98% of shareholders at the 2017 annual meeting. Only 50% of the annual rewards are in cash, and the rest is in restricted and deferred EQT shares, Cox said.

Oil and gas analysts are firm in their conviction that EQT will shrug off JANA's interference and complete what they see as a good deal by the end of the year.

"Management's analysis around its base $2.5 billion of synergies was well defended and we think there is a high likelihood the combination with Rice occurs due to majority investor support," RBC Capital Markets LLC analyst Scott Hanold told his clients on July 31.

"Rice continues to deliver stellar performance on quarterly earnings, operationally and portfolio optimization, which creates more value to Rice and ultimately to EQT shareholders," Stifel Nicolaus & Co. analyst Karl Chalabala said told his clients on Aug. 8. "Rice's recent acquisition, leasing and royalty consolidation will drive long-term value. As the company stopped [providing] guidance and largely exited the stage to a N'Sync tune from 2000, we reiterate our view the EQT-Rice merger closes and is accretive to EQT."

"It might sound crazy, but it ain't no lie. Baby, bye, bye, bye," was how Rice CEO Daniel Rice ended what he thinks will be Rice's last earnings call Aug. 3.