EQT makes its case for acquisition of Rice Energy
Company CEO works to allay misgivings
EQT Corp., whose pending acquisition of Canonsburg-based Rice Energy Inc. was first announced to yield $2.5 billion in synergies, said on Thursday that it could be as high as $10 billion.
The reason for the upward revision is that some investors, namely an activist New York outfit that has made it a goal to foil the $6.7 billion deal, has challenged Downtown-based EQT on its definition of that sacred token of financial jargon.
Not to worry, EQT’s CEO Steve Schlotterbeck assured analysts during a call on Thursday.
“We have spoken with many of our shareholders and other industry experts since the announcement and we are pleased with the positive, enthusiastic feedback received,” he said.
He said the questions around “this compelling transaction” have revolved around the savings that EQT projects will result from the acquisition (synergies) and whether its shareholders would see more value from EQT dropping its pursuit of Rice and splitting itself into an oil and gas firm in one corner and a pipeline company in the other.
Both of those issues were the subject of a not-so-friendly letter to EQT’s board of directors earlier this month from Jana Partners, a hedge fund that was in the process of accumulating EQT stock in order to force a split. When EQT announced its Rice deal in mid-June, Jana pivoted to try to scuttle it.
The echoes of Jana’s taunts — “the majority of (synergies) are questionable or fall outside any common sense definition of synergies” — were obvious on Thursday, both during the analyst call and in a letter that EQT sent to its employees in the afternoon.
EQT acknowledged that its business units likely would be worth more individually and vowed to address the situation by the end of next year.
“Foregoing the Rice transaction, however, is not the answer,” Mr. Schlotterbeck wrote to employees in a memo made public on Thursday. “In fact, the Rice acquisition would actually enhance EQT’s ability to resolve the sum-of-the-parts discount.”
As for how to deal with the widely held belief that the combination of EQT’s business lines is worth less than the individual parts themselves, Mr. Schlotterbeck said the company is analyzing whether it should split apart, sell one of its businesses, buy back stock, or go in a different direction.
“It is very important that we not waste our time speculating on what the outcome of that analysis might be,” Mr. Schlotterbeck wrote in the employee memo.
The Rice acquisition, Mr. Schlotterbeck stressed, will not interfere with those plans as Jana has suggested it might because of tax-implications for deals following a major reorganization.
According to documents filed on Thursday, EQT and Rice have been courting for two years by the time they got engaged. In July 2015, they even had a signed confidentiality agreement to contemplate a merger, but did not pursue it.
The following spring, Rice began to meet with other oil and gas firms interested in buying it and during another meeting with EQT, David Porges — then CEO of EQT — said they should revisit their earlier talks.
Another year passed before they struck a deal, one that both companies are defending in the face of Jana’s campaign.
In a proxy statement, EQT said that given the trend of consolidation in the Appalachian basin, its prospects for picking up acreage that would fit well with its existing holdings was narrowing year by year and forming a bullseye around Rice. In its original announcement of the deal, EQT said that a lot of the synergies would come from being able to drill much longer horizontal wells. Jana wasn’t impressed. “There is no unique science, technology, or knowhow that would be obtained by acquiring Rice that could be applied by EQT to improve operations,” the investment firm wrote in its note to EQT’s board.
In mid-June, EQT, too, was downplaying Rice’s technical prowess. Asked what aspects of Rice’s operations EQT would seek to adopt, given that Rice’s wells consistently ranked among the top producers in the state, EQT replied like this:
“Top producing wells are more a factor of the geology of the shale formation than a company’s operations,” the company said, through its spokesperson Linda Robertson. “Like EQT, Rice has a methodical approach to using science and innovation to improve well results. EQT will have access to Rice’s technical data and best practices and will incorporate them into our development plan where we believe they will create value.”
On Thursday, the value that EQT seems to have placed on that data and those practices is up to $2.5 billion. The company reasoned that by culling the well data that Rice has collected and trying out tricks that have served Rice well, EQT could increase the total amount of gas it pulls from wells up to 5 percent.
EQT also announced it was suspending drilling in the Utica Shale in Pennsylvania because when stacked against the economics of the super long wells that it will be able to drill when it absorbs Rice’s acreage, the Utica doesn’t measure up.