EQT Corp. EQT -4.98% on Tuesday rejected a plan by the brothers who sold Rice Energy Inc. to EQT in 2017 to take over running the combined company.
EQT Chief Executive Robert McNally said on a call with investors the Rice team’s plan is based on flawed assumptions and lacks detail. Instead, he announced EQT is taking additional cost-cutting steps, forming a board committee to review its operations and searching for a new chief operating officer.
EQT bought Rice Energy in 2017 for $6.7 billion to become the nation’s biggest natural-gas producer. But the merger has had a lackluster start.
The brothers who founded Rice have said they should run the company and can bring down drilling costs and increase natural-gas production at EQT. Mr. McNally said Tuesday their proposals used different accounting that left out certain well costs and weren’t realistic. He also said Rice hadn’t met its own proposed costs per well before it was acquired by EQT.
In an interview after the call, Mr. McNally said he was willing to engage with the Rice team, who met with management and the EQT board last week, but that the plan he outlined Tuesday was the best course. He said he believed that two activist investors who have expressed support for the Rice plan would “get on board.”
“I think we’ll get to the point where there’s just no need for a proxy fight,” Mr. McNally said.
A spokesman for the Rice team didn’t immediately respond to a request for comment.
Rice Energy was formed in 2007 and run by three brothers, Daniel, Toby and Derek Rice. The Wall Street Journal has previously reported that the Rices—who as a family control roughly 2.7% of EQT’s stock—have the support of activist hedge fund Elliott Management Corp. and at least two top-10 shareholders listed by FactSet, including activist hedge fund D.E. Shaw Group, which has come out publicly in support of them.
Mr. McNally acknowledged to investors Tuesday that EQT experienced operating issues in 2018 but said those issues were behind it.
“We are back on track financially,” Mr. McNally said on the call. “We have gone to a manufacturing mode … and believe that the inefficiencies we saw in 2018 are a thing of the past.”
Mr. McNally said that in addition to a recently implemented restructuring, which EQT expects would save $50 million a year, it had found ways to cut development costs that would save it an additional $50 million a year. Those additional cost cuts would come from rationalizing its fleet, making changes to its drilling and completion process and optimizing its water-handling processes, he said.
EQT also released its 2019 guidance on Tuesday and said it expected capital expenditures of between $1.9 billion and $2 billion—about $700 million less than in 2018, as it reduces the number of drilling rigs and fracking crews it deploys. It also said it would generate around $350 million of free cash flow this year.
The company said it had formed a four-person standing board committee on Dec. 4 that would look at capital deployment and operations on a continuing basis and that it would target an additional 10% in savings by 2020. EQT also said it was looking for a chief operating officer and expected to announce one in the first quarter of 2019.
