Rice Team Urges EQT Shareholders to Vote for Transformational Change on White Universal Proxy Card
EQT Has Squandered Benefits of Rice Energy Acquisition, But
Value-Creation Potential Can Still Be Realized
Rice Director Nominees Committed to Transforming EQT Into Modern
and Efficient Energy Producer Capable of Driving Improved Shareholder
Returns
Toby Z. Rice and Derek A. Rice, shareholders of EQT Corporation
(NYSE:EQT), with an approximately 3% ownership interest, today filed a
definitive proxy statement and sent a letter to EQT shareholders
outlining their comprehensive plan to transform EQT into a modern and
efficient energy producer capable of driving improved shareholder
returns.
Shareholders are urged to vote on the White
universal proxy card for the Rice Team’s slate of seven highly qualified
nominees for election to EQT’s Board of Directors at the Annual Meeting
of Shareholders on July 10.
The letter and other related materials can be viewed at www.eqtpathforward.com.
The letter follows:
Dear Fellow EQT Shareholders,
Toby Z. Rice, Derek A. Rice, J. Kyle Derham and William E. Jordan
(collectively, the “Rice Team”), together with the other participants in
this solicitation, beneficially own more than 3% of the common stock of
EQT Corporation. We received most of our EQT stock when EQT purchased
Rice Energy Inc. in November 2017. Toby Z. Rice co-founded Rice Energy
with his brothers and served as its President and Chief Operating
Officer.
It has been 18 months since EQT acquired Rice Energy and EQT has yet to
deliver the cost savings and synergies it promised shareholders, or even
to provide a detailed plan for doing so. EQT’s current guidance and its
aspirational goals will leave EQT as the highest cost operator in the
Appalachian Basin.
As large shareholders in EQT, we are disappointed with this woeful
performance. We believe EQT’s business and financial results can be
substantially improved and the original benefits of the Rice Energy and
EQT combination can still be realized.
Our track record of value creation speaks for itself.
As many of you know – and as EQT said at the time of the merger – Rice
Energy was a high-performing natural gas producer that generated
exceptional returns for its shareholders. Unlike many of the century-old
oil and gas companies that were Rice Energy’s peers (including EQT),
Rice Energy took a decidedly 21st Century approach to producing energy:
we digitally enabled our operations for maximum efficiency, reduced our
environmental impact and inspired and empowered our employees.
As a direct result of our modern approach to operations and values, Rice
Energy led its peers with the highest productivity and lowest cost
structure and was named the Number One Workplace in Pittsburgh.
Our shareholders did very well, too. Rice Energy’s stock outperformed
its Appalachia E&P peers by 95% over Rice Energy’s life as a public
company and outperformed EQT’s stock by 70% during this same period.1
We sold Rice Energy to EQT (and took 80% of the acquisition
consideration in EQT stock) because we believed the resulting scale of
our combined assets would enable lower development costs and translate
into continued, peer-leading shareholder returns.
During the integration, it became apparent that EQT was inefficient,
traditional and stodgy. And while we were surprised by the extent of
EQT’s old-school approach to operations and organization, we were
assured by EQT leadership that the Rice Energy transaction was going to
be a catalyst for change.
The fact is that Rice Energy outperformed EQT on almost every relevant
metric prior to the transaction. We built our core acreage position in
EQT’s backyard, often buying land adjacent to their assets. We set
drilling and completion records, pioneered innovative well designs, and
created technology solutions that drove our efficient, market-leading
operations. And, we instilled a team spirit and collaborative culture
among our employees. Lest there be any doubt, EQT justified paying a 40%
premium to our stock price on the basis of our exceptional asset base
and operating expertise.
We believed EQT was serious about adopting Rice Energy’s operating
system across EQT’s portfolio, with the aim of generating significant
cost savings. In fact, EQT itself promoted the synergy potential of the
transaction as being as high as $10 billion over ten years.
We expected EQT to be receptive to making organizational changes at EQT
based on merit and believed EQT would retain at least some of
Rice Energy’s leaders to ensure our Appalachian basin-leading expertise,
modern operations and culture were incorporated into EQT’s decidedly
conventional practices. We thought Rice Energy’s mission – to be the
paradigm for oil and gas exploration and production companies in the
shale generation – would live on and imbue EQT with values consistent
with those of today’s investors, communities and employees.
EQT opted for keeping its own people, operational approach and
culture.
Unfortunately, EQT retained none of Rice’s leaders, executed on none of
the synergy opportunities. Instead, it continues to do business the
same, inefficient, EQT way.
As a result, shareholders have suffered. From the closing of the Rice
Energy transaction in November 2017 until we announced our plan for EQT
in December 2018, EQT’s total shareholder return (including the value of
Equitrans Midstream Corp. stock received in the spin off) was negative
47% according to FactSet, significantly lagging EQT’s peers
(which on average returned negative 23%) and the S&P 500’s 4% gain.2
EQT operates today much like the EQT prior to the Rice Energy
transaction.
EQT today still has the highest costs of any producer in the
Appalachian basin, despite being the only investment grade company among
its peers. Amazingly, EQT’s last-place position will persist even if
EQT’s newly announced cost-savings plan is implemented successfully.
EQT has, in our experience, a harsh internal culture that values
conformity and convention and has a longstanding tradition of promotion
by attrition. We note, for example, that the so-called “new” management
team is just a group of internal survivors (except for one recent hire
resulting from shareholder pressure), with an average tenure at EQT of
more than a dozen years. These new leaders have worked and thrived in
this culture and are likely to perpetuate it.
EQT still has a highly siloed operating structure where
information is treated as personal currency. Despite touting its “Real
Time Operations Centers,” EQT lurches from crisis to crisis because of a
failure to share information, precluding effective long-term planning
and resulting in the inefficient deployment of people and capital.
The combination of high costs, harsh internal culture and siloed
operational structure came to a head for EQT in 2018, when the increased
scale of operations resulting from the Rice Energy transaction strained
EQT beyond the breaking point. EQT’s operational performance declined as
employee morale plummeted and, we understand, internal information flow
ground to a halt.
Despite its current CEO promising on several occasions in 2018 that EQT
was exceeding its synergy guidance from the Rice Energy transaction, EQT
instead continued its tradition of being the high-cost producer, even
dragging up costs on Rice Energy properties and projects through EQT’s
inefficient and chaotic operating model.
In 2018, EQT missed its capital expenditures guidance by $300 million
and its Glassdoor approval rating fell from 3.7 stars to 2.7 stars. Amid
the chaos and operational challenges, EQT’s current CEO (then CFO)
pulled the trigger on a $500 million stock buyback. Two months later, as
EQT revealed its operational issues and the resulting cost overruns,
EQT’s stock experienced a sharp (and predictable) sell-off.
Our attempts to help have been rebuffed.
Following EQT’s poor operating and financial results in 2018, many of
EQT’s largest shareholders urged the Rice Team to get involved. We, too,
were concerned for the falling value of our EQT stock.
We sought to offer our operational expertise and assistance to EQT.
Given the gravity of the situation, we were surprised that EQT’s CEO and
Board refused our help and insisted instead that EQT and its team had
more experience and skill than we could offer and that they didn’t need
or want our help.
EQT’s recent reactive changes are insufficient.
EQT has made some incremental moves as a result of our recent public and
private criticisms and the widespread disappointment among its
shareholders. We even see some early improvements in operations, though
EQT’s CEO admits they were “low hanging fruit.”
Appointing a random assortment of replacement directors and tackling
“low hanging fruit” is not going to create the substantial and
systematic change required to make EQT into the company it can and
should be. We take little solace from EQT’s belated plan to cut 10% from
its extraordinarily high cost base to a level that would still be the
highest in the Appalachian Basin; the hard part is reworking the entire
workflow and planning process to achieve the next 30% or 40% in
cost reduction.
While EQT may be better for replacing its failed old management team
with executives who were further down the organizational chart – and its
Board may be better for having added some new directors in place of
long-tenured ones – shareholders should not be lulled into complacency:
rarely does a company inch its way to optimal performance through
incremental, uncoordinated change.
EQT’s new CEO, it should be remembered, has no upstream operational
experience. He is a financial executive, the former CFO of a services
company and the former CFO of EQT. He also was responsible for EQT’s
so-called “innovation center,” which so badly failed in its mission to
modernize EQT that the center’s operations, according to EQT’s own
reporting, were suspended in 2017 before ultimately closing in 2018.
The opportunity to create substantial value still exists, but we need
your help.
We are writing to ask you to support a transformation of EQT. We are
seeking to create the EQT we expected would result from the merger with
Rice Energy: an energy producer that is modern, digital, environmentally
conscious and employee-empowering.
We believe all stakeholders should support a thoughtful, systematic and
comprehensive plan to transform EQT from a classic, old-world,
brute-force energy extraction company into a modern, values-driven clean
energy producer. That transformation is ambitious and visionary, and
executing it effectively requires a new Board and executive leadership
team.
As we describe in the enclosed proxy statement, we have the strategy
and team to properly execute this vision and to deliver the merger
synergies originally promised to shareholders.
The Rice Team’s plan includes the following:
-
Drive down EQT’s well costs from the highest in the basin to the
lowest. We know how to do this because we did it before in EQT’s
footprint. It can be done again. Some of EQT’s peers are already
operating at these lower cost levels today.
-
Insist on strong leaders. EQT deserves the best leadership team
possible, not a team resulting from attrition. We have 10-15 previous
Rice Energy department leaders who contributed to the operational
success of Rice Energy who stand ready, willing and able to be added
to EQT’s team to implement best practices. Leadership changes will be
driven by what is best for shareholders from both a performance and
continuity perspective, and our pool of talent will not be limited to
only former Rice Energy or current EQT leaders.
-
Digitize EQT’s core operational workflows to enable effective
planning and re-introduce the digital work environment we designed
at Rice Energy that facilitates inter-departmental collaboration. EQT
operates in what we believe is a perpetual state of crisis: it has a
reactive drilling program and a “Real-Time Operations Center” that
scrambles to fix on-site issues. This chaos is evident from the
Company’s haphazard rig mobilizations and small-scale, inefficient
development program. By comparison, 80% of Rice Energy’s development
consisted of large-scale projects, developing upwards of 15 wells at
one time, driving down costs and boosting well productivity.
-
Eliminate curtailments through effective planning. EQT has 10%
of its production base shut-in due to its inability to plan
effectively. Rice Energy did not have these problems and none of EQT’s
peers do, either. Eliminating curtailments represents a $250 million
per year incremental free cash flow opportunity that we have not
included in our base-case projections.
-
Optimize well design and develop other innovations. At Rice
Energy, our science department focused on well design and productivity
and had remarkable success. Instead of shuttering its innovations
center, EQT needs to push the boundaries, test alternative practices
and aim for best performance through innovation. For example, across
all wells in Washington and Greene Counties, Rice Energy produced an
average of approximately 10% more per well than EQT produced from its
wells. The gap had grown to 50% in 2017, before EQT bought Rice
Energy, because of insights we gleaned from our science group.
Notably, our projected incremental free cash flow numbers for EQT do
not include the impact of any uplift in productivity.
-
Instill a culture based on teamwork, transparency, trust and
meritocracy. Such an environment at EQT would substantially
enhance the job satisfaction of EQT’s employees, leading in our
experience to greater loyalty, productivity and performance. A
collective sense of mission, like we had at Rice Energy, is important
for employees and led Rice Energy to be the Number One Workplace in
Pittsburgh.
-
Reduce environmental and communal impacts while enhancing safety. In
2017, Rice Energy was four times more efficient than EQT with respect
to miles traveled for rig moves, drilled nearly twice the horizontal
feet per rig per year and had well productivity 50% higher than EQT.
These efficiencies translate into fewer trucks on the road, lower
emissions, lower fuel consumption, less exposure to safety risks and
less impact on the community.
-
Use capital efficiently to enhance returns and reduce risk. EQT
spent nearly $2 billion on acreage in West Virginia since 2016 on
which it has drilled just ten wells; Rice Energy passed on these
acquisition opportunities and instead allocated similar capital to
acquire assets that became core Rice Energy (and now EQT) assets. No
modern organization can use capital this inefficiently and maintain
its “license” with owners.
We believe the right operating model at EQT can produce incremental
annual cash flow of $500 million above EQT’s January 2019 plan -- from
well cost savings alone. There are also substantial annual cash flow
opportunities in other areas, as highlighted above. And the financial
impact is not the only benefit to our plan: we can reduce energy usage,
improve employee morale, reduce our environmental impact and bolster
community support for EQT’s operation.
In our view, none of these changes, or the resulting cash flow increase,
will occur unless a majority of the Board at EQT is replaced by a
cohesive group of experienced professionals united by a comprehensive
plan and committed to operational excellence and the modernization of
EQT.
Accordingly, the Rice Team will nominate seven exceptional candidates
for election to EQT’s Board of Directors at the annual meeting of
shareholders on July 10. Each of our candidates is committed to
transforming EQT into a model of efficient and responsible energy
production, while driving improved returns for shareholders.
We encourage you to vote for a complete transformation, and not just
incrementalism.
Our Board nominees are:
-
Lydia Beebe. Lydia is the former Corporate Secretary and Chief
Governance Officer of Chevron Corporation and is on the Boards of
Kansas City Southern and Aemetis, Inc. Lydia’s background in
governance and transparency will assist the EQT Board in focusing on
shareholder value creation and drive shareholder engagement and trust.
-
Lee Canaan. Lee is an energy investor at Braeburn Capital
Partners and an energy industry consultant. She serves on the Boards
of Philadelphia Energy Solutions, LLC, and Panhandle Oil and Gas
Inc. Lee has helped to transform companies and has an appreciation for
best practices in overseeing and managing energy companies.
-
Dr. Kathryn Jackson. Kate is the Director of Energy and
Technology Consulting for KeySource, was previously the CTO and Senior
Vice President of Research and Technology at Westinghouse Electric
Company, and is on the Boards of Portland General Electric and Cameco
Corporation. Kate has strong technology expertise and has overseen and
assisted in large-scale culture transformations.
-
John McCartney. John has served on the Boards of nine public
companies, including Rice Energy, and has been Chairman or Vice
Chairman of three. John has broad experience in leading and overseeing
cultural transformations - both as COO of US Robotics and as a
director of several companies - and substantial public company board
experience, with a reputation for leading boards through inclusive
deliberations.
-
Daniel J. Rice. Daniel was the CEO of Rice Energy and serves on
the Board of EQT today. Daniel was a public company CEO and provided
oversight for the digital and cultural transformation of Rice Energy.
-
Toby Z. Rice. Toby was the President and COO of Rice Energy.
Toby oversaw all operations of Rice Energy and spearheaded its digital
and cultural transformation.
-
Hallie Vaderhider. Hallie is the Managing Director of SFC
Management and was previously President & Chief Operating Officer and
Executive Vice President and Chief Financial Officer of Black Stone
Minerals Company. She has served on the boards of five companies.
Hallie has a strong operational and financial background with
extensive experience in the energy sector.
You have a choice at the upcoming annual shareholders meeting.
You can vote with management – endorsing the modest, hoped-for
improvements that EQT has proposed – and stick by a team that has failed
to maximize the return on EQT’s asset base or to create shareholder
value.
Or, you can vote for a transformation, installing a proven group of
energy executives and public company board members who are committed to
ensuring EQT operates efficiently and responsibly and allocates capital
optimally.
WE URGE YOU TO VOTE THE WHITE UNIVERSAL
PROXY CARD AND
VOTE FOR ALL OF THE RICE TEAM’S NOMINEES.
We encourage you to read the enclosed proxy statement, which includes
more information on our proposed nominees and plan, and return the WHITE
universal proxy card, voting FOR all seven of the Rice Team’s nominees
and five of the incumbent directors (we recommend Dr. Philip Behrman,
Janet Carrig, James McManus II, Anita Powers, and Stephen Thorington).
Additional information regarding the proxy contest, as well as the Rice
Team’s proxy statement, proxy card and a presentation to EQT
shareholders is available at www.EQTPathForward.com.
For questions about how to vote your shares, please contact our proxy
solicitor, D.F. King & Co., Inc., at (800) 207-3159.
Sincerely,
The Rice Team
1 Peers for Rice Energy during its time as a public company
include EQT, GPOR, CNX, RRC, AR and COG.
2 Source:
FactSet. Measured from November 13, 2017 to December 9, 2018. Peers for
EQT are CNX, RRC, AR, COG and SWN.
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