Houston — Two former Rice Energy executives pushed EQT's board on Monday to make significant changes in order to fix problems they see with the largest US natural gas producer's operations since the Northeast drillers' $6.7 billion combination last year, or face a proxy fight over future corporate oversight.
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An open letter sent by brothers Toby and Derek Rice to the company's board laid bare the friction behind the scenes caused by the about 36% drop in EQT's stock price since early July despite the dominant position it holds in the Appalachian Basin following the November 2017 acquisition of Rice Energy.
Stuck with a transaction that is a happy marriage no longer, the Rice family members said that over the past few weeks they had private conversations with EQT Chairman Jim Rohr and CEO Rob McNally about their proposed corporate overhaul, but were rebuffed. The plan they discussed included inserting Toby Rice into a position of operational oversight at EQT.
"EQT has the potential to unlock significant value for all its shareholders, but, to deliver the results this asset base deserves, a course correction is needed," the letter said. "EQT must add proven operational experience to the board and senior management team - in particular, individuals with experience in large-scale operational planning."
EQT shares rose sharply on news of the letter.
The former Rice chief operating officer and former executive vice president of exploration, who collectively own or are potential beneficiaries of 7 million shares of EQT, said that if they do not reach a "mutually agreeable" outcome that materially benefits all long-term investors, they will nominate their own slate of directors for election to the EQT board at the company's 2019 annual meeting. Installing some of their own directors would, presumably, give them more power to make changes in the company's senior leadership.
In an emailed statement, EQT gave no hint of plans to back down.
"EQT is a refreshed company with a new management team, new operating plan and substantially reconstituted board," the email said. "The company is focused on achieving profitable growth by driving operational efficiency, solid free cash flow, balance sheet strength, disciplined capital allocation and the realization of synergies. We are confident that EQT is taking the right steps to deliver superior value."
By absorbing a Rice footprint in the Marcellus Shale that it maintained was largely contiguous to its own, EQT promised to stretch drilling laterals to 12,000 feet so it could produce more gas at a lower cost.
In February, in an effort to unlock further shareholder value, EQT announced plans to spin off its midstream operations into a standalone company.
A month after the announcement, Steven Schlotterbeck unexpectedly stepped down as CEO and left the company and its affiliates "for personal reasons." He had been CEO for only about a year, leading EQT through the acquisition of Rice.
EQT's stock price has been on a roller-coaster ride since the beginning of the year, falling, on a split-adjusted basis, from $31.70 in early January to $25.25 in early April, before closing at $30.83 on July 9. Shares closed at $19.63 on Monday, up 6.6% from Friday.
Toby and Derek Rice, who formed an investment firm with their brothers Daniel and Ryan after the combination, said in their letter to EQT's board that the company's performance in recent months has not been reflective of the underlying value of its assets.
The brothers said they have a plan that would generate an incremental $400-$600 million of pre-tax free cash flow per year above EQT's current plans, equaling greater than $1 billion of free cash flow per year.
The Rice brothers created a website and posted a presentation that said Rice Energy and its peers demonstrated an ability to achieve much lower well costs per foot than EQT has managed. The brothers proposed EQT streamline its organizational structure and break down silos to facilitate inter-departmental collaboration, as well as increasing operational and logistical efficiency to lower well costs and reduce shut-ins and system constraints.
"With the proper authority and board support, our team is willing to oversee the transformation needed to achieve these results," the letter said. "We have executed on it before, and we are ready, willing and able to execute on it again."
-- Harry Weber, Harry.Weber@spglobal.com
-- Edited by Keiron Greenhalgh, firstname.lastname@example.org