It’s about “realizing EQT’s potential” and the current leadership isn’t doing it, say brothers Toby and Derek Rice.
A year after selling their successful oil and gas company, Rice Energy Inc., to Downtown-based EQT Corp. for $6.7 billion, “The Rice Team,” as they are calling themselves, has 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 that has challenged the EQT board on prior issues offered its full support to Rice.
“As EQT shareholders for nearly three years, we are thrilled at the prospect of having the Rice team lead the company forward,” said Quentin Koffey, portfolio manager at D.E. Shaw, which controls 3.6 percent of EQT stock. “Shareholders clearly want change at EQT, and we are lucky to have the Rice leadership team available at this critical moment for the company.”
Their disappointment with the company crystalized after EQT announced operational problems during its last earnings release in late October.
The company said it had stumbled a bit up the learning curve of drilling very long (longer than 15,000 feet) horizontal wells — the kind that were made possible by combining EQT’s land position with Rice’s.
But that was only part of the story.
It also ramped up its drilling and fracking activity earlier this year to make up for lost time caused by winter weather- and pipeline-related delays. That drove up its costs so much that in October, EQT said it was increasing its capital budget for the year by $300 million.
CEO Rob McNally acknowledged at the time that investors were disappointed by the news.
“It certainly is a disappointment to me and this team as we underperformed our asset base in 2018,” he told analysts on the earnings call in October.
But he promised a more stable path forward — one focused on how much it costs to produce the gas, rather than how much gas is produced. EQT executives called it manufacturing mode.
The move didn’t come fast enough for the Rice brothers, who signed an investor letter released Monday morning saying a “course correction is needed” and promising a “Rice Plan” to generate between $400 million and $600 million in free cash flow a year on top of what EQT is already projecting.
“We have executed this plan before and we are ready, willing and able to execute it again,” they wrote in a presentation.
The brothers said that after concerned investors repeated approached them for help, they tried talking with EQT’s current leadership, including Mr. McNally and Chairman Jim Rohr.
But, citing a “lack of reciprocal engagement,” they launched the push for new leadership instead. If it comes to that, they’re ready for a proxy fight, they warned. That would involve nominating a slate of directors for EQT’s board this spring in an effort to tilt the board’s majority toward the Rice Plan and to remove Mr. Rohr from his leadership role.
Daniel Rice IV, former Rice Energy CEO and current EQT board member, did not sign the letter. Neither did Ryan Rice.
The four Rice brothers earlier this year started the Rice Investment Group, a $200 million fund for oil and gas investments. Toby and Derek Rice’s slide deck for the EQT bid carries the logo of the family’s new investment venture.
So far, the market is responding positively to the news, noted Sameer Panjwani, an analyst at Tudor Pickering Holt & Co. EQT’s stock price finished the day 6.5 percent higher than its previous close.
“All the investors that we’ve talked to today seem to be supportive of the proposal,” he said. “The biggest question is just the likelihood that this is going to happen.”
Mr. Panjwani said the Rice brothers’ criticism — that EQT had been inefficient in its operations and wasn’t delivering the kind of value that shareholders expected — was warranted and not even controversial. It’s what EQT has admitted to in its latest earnings call, he said.
It’s the timing of the proposal that Mr. Panjwani found surprising. EQT's new leadership roster has been in place for less than two months, he said.
EQT has been through a series of leadership changes since CEO Steve Schlotterbeck resigned suddenly over a pay dispute with the board in March. In late October, EQT rolled out its new slate of executives, including its first female vice president of production, Erin Centofanti, and officially transitioned its former CFO Rob McNally to the company’s top post.
“EQT is a refreshed company with a new management team, new operating plan and substantially reconstituted board,” EQT spokeswoman Linda Robertson said in a statement. “We are confident that EQT is taking the right steps to deliver superior value.”
In November, analysts at JP Morgan gave the company’s new management a cautious nod of approval.
In a report to investors after EQT presented its new plan to analysts, JP Morgan analysts said the company is on the right track but cautioned that “patience will be required” to see the fruits of its capital program.
If EQT’s stock performance on Monday is any indication, patience may not be shareholders’ goal in this case.
“If I put myself in the shoes of the shareholder, it doesn’t really matter who’s running the company as long as operational issues get taken care of,” Mr. Panjwani said.
Whether Toby Rice becomes the new CEO of EQT will ultimately be decided by the board of directors. And who serves on that board may be decided at EQT’s annual meeting, the date of which has not yet been announced.
EQT had previously scheduled a call with analysts on Thursday to outline its capital plan and budget for 2019.
On Tuesday morning, the company said that call is being postoned “in light of scheduling conflicts resulting from the passing of a family member of EQT’s CEO, Robert McNally.” EQT said it plans to announce a new date and time for the call soon.
Anya Litvak: alitvak@post-gazette.com or 412-263-1455.
Updated at 9:25 a.m. Dec. 11, 2018.
First Published: December 10, 2018, 1:44 p.m.
