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EQT management dispute escalates as investor D.E. Shaw backs Rice brothers

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EQT management dispute escalates as investor D.E. Shaw backs Rice brothers

Saying it is disappointed with EQT Corp.'s "poor execution," investment firm D.E. Shaw & Co. LP threw its weight behind the efforts of the former Rice Energy management team that wants to have a direct role in running America's largest natural gas producer.

"We support the Rice Team because they are seasoned operators with a proven track record of delivering peer-leading results on the exact assets that EQT owns today," D.E. Shaw portfolio manager Quentin Koffey wrote in a Jan. 11 letter to EQT's board. Shaw, which owns a 4.5% stake in EQT, and other major investors are united in wanting EQT's board and management overhauled, Koffey wrote.

Toby and Derek Rice, who ran Appalachian driller Rice Energy before EQT purchased it in November 2017, are pushing for one or both of them to be hired back to use Rice's template for drilling future wells. The Rice family owns a 2.7% stake in EQT, stock they received when the $6.7 billion deal closed.

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D.E. Shaw's Koffey scoffed at EQT's most recent move to improve its performance by laying off workers and trimming management layers. "Management's January 7th letter announcing a "New EQT" is little more than an announcement of layoffs," Koffey wrote. "Despite using the word "new" fourteen times in the letter, the truth is that all management positions are filled by legacy EQT employees who have been promoted to their respective roles despite bearing responsibility for the execution mishaps to date."

EQT said it is continuing to engage with shareholders to hear their strategy for the company. "The board and management team remain open-minded and singularly focused on advancing the best interests of shareholders, and in that regard, the board has invited Toby and Derek Rice to present later this month," EQT management said earlier this week in a letter to investors.

The letter from D.E. Shaw said EQT's leadership has spent billions post-merger buying land to try to drill the more efficient longer horizontal well laterals with little improvement in efficiency. "No matter how well-intentioned, current management has not only failed to deliver on the potential of EQT's asset base, but also lacks the relevant operational experience to deliver going forward, which we believe has resulted in a severely depressed stock price."

Over the last 12 months, EQT shares have lost 39% in value, more than the 26% loss in an equally weighted index of Appalachia's top 10 publicly traded exploration and production companies, according to S&P Global Market Intelligence. EQT shares rose 1.6% to $20.10 per share on light volume by noon on Jan. 11.

EQT's three largest investors are passive index fund managers The Vanguard Group Inc., BlackRock Inc. and State Street Global Advisors Inc. The three fund managers own about 24% of EQT's shares, according to S&P Global Market Intelligence data.

If the board does not bring the Rice team on board, D.E. Shaw wants a shareholder vote on the Rice proposal at the company's traditional April meeting. The Rice brothers said they have a detailed business plan that could generate an incremental $400 million to $600 million of pre-tax cash flow above EQT's current plans. Key to executing the Rice plan is to put Toby Rice to work inside EQT to "break down silos" and coordinate operations, all with a view towards lowering costs, the Rice brothers said. Toby Rice was the head of production at Rice Energy's drilling unit before the merger into EQT.

If their plan is not adopted, the Rice brothers have said they will start a proxy fight for up to four seats on EQT's board at the next annual meeting. Daniel Rice IV, another Rice brother, already sits on EQT's board.

The amount of Rice family participation in EQT has been a sticking point ever since the deal was proposed to the father, Daniel Rice III. Rice wanted three board seats for his family but eventually settled for one. All the Rice brothers signed three year non-compete agreements with EQT when the sale closed.