EQT outlines plan to ward off takeover
Rice Energy’s former leaders pose challenge
EQT Corp. has a message for its challengers: What may have been good for Rice Energy Inc. won’t play in the big leagues.
In a full-throated defense of the Downtown-based oil and gas firm’s current direction, EQT’s CEO Rob McNally said Tuesday he would not yield power to Toby Rice, who has mounted a challenge to the current leadership and is lobbying to be put in charge of the company.
A war of words between EQT’s board of directors and two-thirds of the trio that formerly led Canonsburg-based Rice Energy Inc. broke out Tuesday, with the two sides slamming each other’s strategies and saying the other side just doesn’t get it.
The remarks highlight just how far apart the two sides are after shaking hands in 2017 on a $6.7 billion deal to merge Rice into the larger EQT operation. Late last year, “The Rice Team” launched a bid to install Toby Rice as EQT’s CEO and add more Rice flavor to the management and board of directors. A New York hedge fund quickly backed the effort.
On Tuesday, EQT said it has
started a search for a chief operating officer, stressing that it was looking for an external candidate. The company has a short list of candidates and plans to announce an appointment before the end of March.
The brothers who helped lead Rice Energy before the acquisition are not on that list.
“We certainly would be open to including them in the process, but it sounds to me that they’re not interested,” Mr. McNally said.
Besides, the position needs to be filled by “somebody who has operated unconventional shale exploration and production resources and done it in an efficient manner at scale,” Mr. McNally said. “It can’t be somebody from an upstart.”
According to a letter EQT sent to investors Tuesday afternoon, brothers Derek Rice and Toby Rice said, “It’s not about plans, it’s about people” and added they would replace all department heads with people from Rice Energy.
EQT’s response: “While that may be true for a smallscale, early stage enterprise, a business of the size and complexity of EQT also requires extensive and thoughtful planning.”
During a call with analysts Tuesday, Mr. McNally portrayed the Rice plan as “not viable,” “fundamentally flawed,” and “lacking in details.”
He said it ignores contractors’ rising costs and the impracticability of EQT piping fresh water to all of its fracking jobs. It also relies on an accounting method that understates what Rice spent to drill wells, EQT charged.
The Rice brothers fired off a response that doubled down on their core claims — “that management lacks the relevant operational experience, track record and vision to realize the value of EQT’s underlying assets.”
They took EQT to task for selling its $6.7 billion Rice acquisition to investors by promising $1.9 billion of well cost synergies that EQT’s management can’t deliver. Not that they can’t be delivered: “We stand ready,” the brothers said.
“In light of EQT’s unwillingness to acknowledge the fundamental change needed to achieve acceptable results for the benefit of all shareholders, we will be asking shareholders to reconstitute the board with new board members who better understand EQT’s industry and business and will support Toby Rice as CEO to lead the transformation.”
On the call with analysts, Mr. McNally didn’t rebut every objection made by the Rice brothers, instead focusing on EQT’s new plan to generate more than $2.7 billion in free cash flow over the next five years.
Sounding defiant, the company’s CEO declared that the operational issues that led to disappointing fourth-quarter results and fueled the Rice brothers’ campaign and the management turnover at the company are all in the past.
“This is a new company with a new leadership team and new focus,” he said more than once during the call.
But, he also acknowledged, “There is more work to do.”
This year’s plan
Last year, EQT spent $2.5 billion on well development. The company had planned to spend $300 million less, but ran into problems hitting targets. It ramped up its drilling, driving up costs.
The plan this year is to spend between $1.9 billion and $2 billion, EQT announced Tuesday.
This year’s plan also dials back EQT’s ambitions for very long laterals — or horizontal wells. The rush to drill these last year was blamed for the cost overruns.
In Pennsylvania, EQT plans to drill 91 net Marcellus wells in 2019. The number of rigs in the field will be an average of seven, with six frack crews, Mr. McNally said. The amount of gas produced will be about the same as last year.
Earlier this month, EQT laid off more than 100 employees in a move projected to save $50 million annually. The company said it can cut another $50 million through efficiencies in water handling, scheduling and other logistics and shave another 10 percent off those costs by the end of 2020.
Mr. McNally didn’t say anything about board chairman Jim Rohr, who has been a target for ouster by shareholder D.E. Shaw & Co. LP, a supporter of the Rice plan. In an interview later, he said the company is “always open” to board changes, but he said he feels the board has recently “been refreshed.”
D.E. Shaw, which owns 4.5 percent of EQT’s stock, issued a sharply worded letter to EQT investors earlier this month saying if it doesn’t reach a resolution with the Rice brothers, shareholders should vote on who gets to lead the company.
Citing a note issued to investors by analysts at Tudor Pickering Holt & Co., D.E. Shaw had appeared confident that the majority of shareholders would back the Rice plan.
“I don’t think that’s an accurate statement,” Mr. McNally said. “The feedback that we’ve gotten [Tuesday] has all been very positive.”
Many changes in the C-suite
EQT’s management team has rotated significantly in the past year.
CEO Steve Schlotterbeck, who was installed in 2016 to move the company from a focus on financial restructuring led by outgoing CEO Dave Porges to a focus on technical prowess, resigned after a year over a pay dispute.
Mr. Porges was brought back on an interim basis but his responsibilities were focused on overseeing the split of EQT’s drilling side from its pipeline business.
Mr. McNally, who served as chief financial officer, was promoted to lead the production company after the spinoff was completed in November.
In the months before that and since, a significant chunk of EQT’s senior management was fired or left, including several top executives in charge of operations, its long-term human resources director, general counsel and others.
On Tuesday’s call, Mr. McNally said the current management team is capable of carrying out the company’s long-term plan.
“We would like to continue working constructively [with the Rice brothers],” Mr. McNally said. But, “We disagree with the Rice claims.”
‘Question mark on execution’
Sameer Panjwani, the Tudor Pickering & Holt analyst who chronicled shareholders’ favorable response to the Rice plan earlier this month, said EQT’s management sounded the right note Tuesday. The few investors he’s talked to seem encouraged by EQT’s direction.
He cautioned that “while the plan they laid out looks good on paper, there’s still a question mark on execution.”
Nevertheless, Mr. Panjwani was impressed with the presentation and said that if EQT’s management team can deliver the same improvements in capital efficiency and free cash flow as were proposed by the Rice brothers, that could somewhat defuse the activist campaign.
“The next thing to watch is, who do they select for the COO position,” he said. That person will be the market’s proxy for confidence in EQT’s ability to deliver on their promises.
EQT’s first-quarter results will be an update on how words match actions, Mr. Panjwani said.