From The Wall Street Journal

When EQT Corp.  agreed to buy Rice Energy Inc. for $6.7 billion a little over a year ago to create the country’s largest natural-gas producer, it promised that the combined company would be able to make more by spending less.

Those promises have so far fallen flat, and what many cheered as one of the first deals in a hoped-for wave of consolidation among shale companies is turning out to be a cautionary tale, demonstrating that in fracking, bigger isn’t always better.

EQT shares have plunged around 42%—accounting for EQT’s spinoff of its pipeline business in November—since the deal closed in late 2017, as the efficiencies executives envisioned have failed to materialize. The two Appalachian shale drillers’ combined market value has lost about $4 billion since the deal was announced in June 2017, factoring in the spinoff.

The union officially turned acrimonious last month, when the brothers who ran Rice Energy launched an effort to boot EQT’s current management and take over the merged company, and gained the support of two influential activist hedge funds.

EQT’s acquisition of Rice, which gave it more U.S. natural-gas production by volume thanExxon Mobil Corp. , was largely motivated by the idea of drilling supersize horizontal wells beneath the two companies’ contiguous acreage in the Marcellus Shale, one of the largest gas fields in the world.

Investors in recent years have increasingly lost patience with shale companies, which have spent around $100 billion more than they’ve made over the last decade. Spurred by investors, many shale companies have explored consolidation, hoping that larger combined landholdings and scale would help them turn fracking more profitable. But the EQT-Rice merger got off to a rocky start, partly because of cultural differences between the companies, according to people who have worked for the companies.

The two had taken different roads to become shale-gas players. EQT was a descendant of Equitable Resources Inc., a large utility company with roots in the 19th century, and had been a natural-gas distributor before it got into shale drilling. Rice Energy was formed in 2007 and run by three brothers in their 30s—Daniel, Toby and Derek Rice—who created a lean operation that drilled as quickly as possible.

The siblings developed a reputation as colorful characters in the industry, using wrestler Hulk Hogan’s theme song as hold music at the company’s headquarters and showing up to a bankruptcy auction wearing Mickey Mouse T-shirts and shorts underneath blazers.

Meanwhile, EQT’s utility roots left it with too many middle managers and layers of approval, making it less nimble than Rice on operational decisions, including altering drilling or fracking plans, the people familiar with the companies said.

“We strongly believe the potential of the EQT-Rice merger can still be realized, but a major course correction is needed,” the Rice team said in a statement. “The company has simply not performed.”

EQT declined to comment. In a letter to shareholders last Monday, Chief Executive Robert McNally said the company was “working aggressively to address the legacy operational challenges facing EQT” but didn’t address the Rice effort. Mr. McNally also announced layoffs, which he said would save $50 million annually.

Mergers can often take years to work, and deals don’t always pan out when business environments change or differences within the combined company can’t be resolved. For that reason, it isn’t unheard-of for executives of the acquired company to try to take back control.

The Rice brothers are expected to present their ideas for proposed changes to EQT’s board of directors in coming days. 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.

In a letter to EQT sent Friday, D.E. Shaw said the company’s recent letter to shareholders was “little more than an announcement of layoffs” and didn’t address the issues behind its poor performance. D.E. Shaw reiterated its support for the Rice team’s effort.

“If a constructive resolution isn’t reached swiftly, then the answer is simple: let shareholders vote,” the fund said in the letter.

EQT completed its acquisition of Rice in November 2017. By early 2018, it was falling behind on production plans, leading the company’s management to accelerate plans for fracking and drilling ultralong wells to catch up on production, the people who have worked for the companies said. Unusually wet weather in the Appalachian region in the first quarter of 2018 made it difficult to operate, crimping the company’s production. Also, Steve Schlotterbeck, the CEO around the time of the merger, resigned last March over a dispute with the board of directors about his compensation.

In April, David Schlosser, EQT’s head of exploration, said the company had drilled a 18,670-foot-long well in Pennsylvania. It was one of the longest shale wells ever, and Mr. Schlosser said he thought EQT could drill up to 20,000 feet. But as the company drilled further to untested lengths, it pushed technology to its limits. The decision to drill some of the longest horizontal wells ever in shale rocks turned into a costly misstep costing hundreds of millions of dollars, the people said.

Six months later, the newly appointed CEO, Mr. McNally, told investors that some wells had encountered big problems when pushing past 15,000 feet. Because of those and other operational challenges, the company would need to spend $300 million more than planned in 2018—and would produce about 3% less gas, Mr. McNally said. He added that EQT would limit drilling the ultralong wells and disclosed that Mr. Schlosser was resigning.

Last month, Derek and Toby Rice wrote EQT’s board to demand major changes. They said EQT should pack fewer wells onto its acreage and drill lateral lengths around 12,000 feet to improve the wells’ long-term production. The Rices believe the ultralong wells, which were planned before the deal closed, are technically possible, said a person familiar with the matter, but don’t currently make sense on a large scale.

The Rices wrote again in December to press for installing Toby Rice as chief executive and replacing board chairman James Rohr and three other directors. Daniel Rice IV, who had been Rice Energy’s chief executive, is the only family member currently on EQT’s board. They made more than $1 billion at the time of the sale.

It isn’t clear how receptive the board will be to the Rices’ plan. Moving forward, investors will need to see improved results, said Scott Hanold, managing director of energy research at RBC Capital Markets.

“Were there really any synergies there? That’s a big question for investors,” Mr. Hanold said. “EQT will have to prove that.”

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