Let the fight begin. Yesterday the Rice brothers, Toby and Derek, held a conference call with EQT investors to lay out their detailed proposal for how EQT should be run. The Rice plan includes giving the boot to current EQT CEO Rob McNally and much of top management, and installing Toby as CEO, bringing along 15 Rice alumni to kick-start EQT’s “moribund performance” (our interpretation of what Toby said).
Not only do the Rice boys intend to replace top management, they also intend to replace board members. You need board members in order to make major changes.
Toby says EQT is paying too much to drill–$1,095 per foot for all expenses. He says he can get that number down to $735/foot by using “existing proprietary technology, improved well spacing, and company-wide operational planning.”
In broad brush strokes, EQT dismisses the Rice brothers and their plan as snotty nosed kids who had their fun with their little play thing called Rice Energy, and wouldn’t have a clue how to run a *real* operation like EQT. Rice responds that EQT is old, bloated and full of baggage that needs to be cleaned out. Toby said yesterday, “This is not a personal attack on the current management team, but they simply do not possess the necessary experience or track record to navigate this path forward.” We beg to differ–it IS a personal attack! And the words are flying back and forth.
We couldn’t find a transcript of the entire hour long session, but we do have snippets of what was said from several sources, along with the slide deck Toby and Derek used during the call.
From S&P Global Platts:
Dissident EQT shareholders Toby and Derek Rice on Tuesday said they plan to nominate a slate of candidates to challenge the current EQT board if the company’s leadership does not readily adopt their plan for restructuring the producer’s entire operational strategy.
In a conference call to outline their plans the brothers called on the EQT board to hire Toby Rice to head the revamped company, replacing current CEO Rob McNally, and to hire as many as 15 former Rice executives to rapidly implement changes to the producer’s operations in the Appalachian Basin.
“We are ready to nominate highly qualified director candidates for election at the EQT 2019 annual meeting, in the event that EQT continues to not engage with us in a meaningful and constructive manner,” Toby Rice said on the conference call.
The brothers, founders of Rice Energy, which EQT acquired in November 2017, together own about 3% of the company’s outstanding shares. They are expected to announce their slate of board candidates soon after EQT sets a date for its annual shareholder meeting, which is typically held in April, but which was postponed until June last year to give shareholders time to adjust to a series of corporate changes that the company was undergoing.
In an interview with S&P Global Platts, Toby Rice outlined the plan, which called for the use of existing proprietary technology, improved well spacing, and company-wide operational planning, to bring the average drilling cost down to $735/foot, compared with EQT’s projected all-in drilling expense goal of $1,095/foot.
“Those things combined allow us to effectively plan and that is the key to executing at scale in a large manufacturing mode,” he said.
Rice said EQT has failed to use technology that Rice developed in its last several years as an independent company. The cloud-based, mobile technology, which was accessible by all employees, created “a digital work environment,” and “contained all of the work flows that the entire business needed to execute, to lease land, drill wells, produce wells and market the gas.”
EQT’s decision to not use the technology was driven by the company’s legacy culture, which is resistant to change, Rice said. “They confuse being the biggest with being the best,” he said.
1,000-FOOT WELL SPACING
The Rice brothers’ plan also calls for wells drilled in the Marcellus Shale play to be placed 1,000 feet apart, which they claim would result in an increase of about 10% of per-well estimated ultimate recovery compared with EQT’s 880-foot spacing plan.
Both the current EQT leadership and the Rice brothers’ team seem to agree that 12,000 feet is the optimal average lateral lengths for wells drilled in the Appalachian Basin. However, Toby Rice said EQT continues to experiment with ultra-long laterals of beyond 15,000 feet, a move he called “a little bit of a head-scratcher.”
In its Q3 2018 earnings report, EQT pinned part of the blame for a $300 million increase in its 2018 capital expenditures budget on “the learning curve on ultra-long laterals.”
In 2018, the company drilled 25 wells with ultra-long laterals and this year it plans to drill 20 more, Rice said.
“Your operational risk increases as you go longer than 15,000 feet. When we’re executing in a manufacturing mode, we want to make sure we’re doing it with the highest confidence at the lowest risk,” he said.
EQT’s leadership has challenged the Rice Brother operational plans, saying they failed to account for the challenges faced by EQT, which has much a larger asset base and geographic footprint than Rice Energy had at the time of the merger.
However, Rice pushed back against that argument, saying 90% of EQT’s 2019 planned drilling activities lie within the territory formerly owned by Rice Energy. In a statement Tuesday, EQT spokeswoman Linda Robertson said the company’s leadership continues to stands behind its own long-term development plan.
“We disagree with the analysis put forward by the Rices and look forward to continuing our discussions directly with shareholders,” Robertson said. “EQT remains focused on reducing costs and generating substantial free cash flow to create further value for EQT shareholders.” (1)
From the Pittsburgh Business Times:
Activist shareholders Toby Rice and Derek Rice, locked in a public battle for control of EQT Corp. laid out in greater detail their plans for the Pittsburgh-based driller. The Rices claimed EQT’s management and board failed in vision, design and execution.
The Rice brothers, shareholders of EQT (NYSE: EQT) after Rice Energy’s acquisition in 2017, said they went public after their offers to help and their concerns went largely ignored. Toby Rice, who had been Rice Energy’s president and COO, told a conference call with analysts and journalists that EQT was plagued by what he called baggage: Bureaucracy, silos and older systems.
“These are issues that the company must address in order to reach its full potential,” said Toby Rice.
Toby Rice said EQT has the highest costs among its peers in the Appalachian basin and the current management team — led by CEO Rob McNally and Chairman Jim Rohr — don’t have the experience or track record. He said up to 15 former Rice Energy executives are ready to jump in and a new board is required. Candidates who have been put up for election have been picked to run before the next annual meeting if EQT doesn’t accede to the Rice Team’s demands.
“This transformation is not going to come from legacy leadership,” Toby Rice said.
The Rices amplified their proposals beyond the previous headline, which had focused on cutting well costs and making EQT a low-cost natural gas producer with an extra free cash flow of $500 million a year beyond EQT’s projections. They said EQT needed to boost its technology and planning to become more data-driven, real-time and optimized with better well-design and execution.
“These are not pie-in-the-sky initiatives but rather opportunities we capitalized on while running Rice Energy,” Toby Rice said.
They also pushed back on EQT’s claims, made during a conference call last month, that the Appalachian basin had changed, particularly when it comes to service costs, since the third quarter of 2017 when Rice Energy was still in business. Toby Rice said the team has a firm understanding of service costs and presented data that EQT’s well costs are up 5 percent since 2017 while other natural gas companies have seen their service costs drop 36 percent.
“We are highly confident that Rice’s results can be replicated across EQT’s asset base because it’s essentially the same asset,” Toby Rice said. (2)
From the Pittsburgh Post-Gazette:
If EQT’s strategy for fending off a leadership takeover by the Rice team is to condescend about the quaint little startup these kids built, Toby and Derek Rice’s answer is to bathe flamboyantly in the language of youthful vigor.
Sure, EQT Corp. has a rich history, the brothers said on Tuesday during a conference call with analysts.
“However, with history comes some baggage,” Toby Rice said.
The Rice team — as the brothers refer to themselves and the 15 unnamed, mostly former Rice Energy Inc. executives who stand ready and eager to take the reins at EQT — will bring “new blood and new technology to revive this business.”
EQT acquired Canonsburg-based Rice Energy Inc. for $6.7 billion in 2017.
The brothers first tried to intervene in the affairs of Downtown-based EQT in November 2018, they said, after a growing disappointment that the oil and gas company wasn’t following the blueprint that Rice had laid out during the company “integration period.”
The tone was different then, Toby Rice said in an interview Tuesday with the Post-Gazette after the conference call.
“It was, ‘Listen, you guys have a problem. I’d love to help fix it. In any capacity.’
“I did not go to them and say, ‘I needed to be CEO,’” he said. “There was no ego. This was, ‘I just want to help.’ But management’s response was ignoring that.”
The board of directors ignored them as well, the Rice team said.
Backed by certain shareholders, they are demanding that EQT schedule its annual shareholder meeting for April and let the shareholders — “the real owners” of the company — decide whether to replace the board with Rice-approved picks, and put Toby Rice in charge as CEO.
It wasn’t personal, Toby Rice said, when he concluded that EQT’s current management team simply can’t squeeze all the juice from the company’s assets.
The Rice team’s strategy, he said, involves bringing in the right people and digitizing everything.
Imagine, they said, that Rice’s cutting edge technology platform —- they called it the “shalennial operating system,” because they’re millennials and shale millionaires — is sitting dormant at EQT.
Their argument isn’t just that grandpa doesn’t know how to program the VCR. It’s that he has a supercomputer and doesn’t even know it.
The Rice app that tracked more than 400 tasks needed to run the company — from leasing land to scheduling water trucks at the well site to selling the produced gas — would be the backbone of the Rice team’s efficiency machine, they said.
The Rice team said they agreed with EQT’s current management on how much gas the company should be producing, which acreage it should be developing and how it should be using its cash (buying back shares to help drive up the stock price for existing shareholders, of course).
They just disagree on how to do all that. Namely, they think they can shave $500 million off the cost of delivering this plan beyond what EQT has promised.
They’re simply better at planning their operations, the brothers said, and testing their innovations with data. The things that EQT thinks are cool and innovative — like jamming more sand into fractures to keep them open so the gas can escape into the wellbore — the Rices have already tried and settled on the optimal formula. “We’ve moved on,” Derek Rice said.
Tuesday’s call was a response to criticism leveled at the Rice plan by EQT CEO Rob McNally during the company’s earnings call last month.
At that time, Mr. McNally said EQT was too big and too complex a company for the Rice boys to handle. He also challenged the Rices’ well costs, calculations and assumptions, which the Rice team moved to rebut in a recent slide presentation.
After the Rice conference call on Tuesday, EQT reacted with some polite generics: “We disagree with the analysis put forward by the Rices and look forward to continuing our discussions directly with shareholders,” the company said. “EQT remains focused on reducing costs and generating substantial free cash flow to create further value for EQT shareholders.”
Toby Rice declined to say who the 15 changemakers in waiting are, or who the team plans to nominate to replace the board of directors, except that the candidates will have “relevant shale experience.”
As an aside, he marveled that his brother Danny Rice, former CEO of Rice Energy who now sits on EQT’s board, was not included in the newly formed committee to oversee operations.
“The one person who is most qualified to sit on the operating committee …” he said. (3)
We liked the Post-Gazette reporter’s turn of phrase, which made us chuckle: “Their [Rice boys’] argument isn’t just that grandpa doesn’t know how to program the VCR. It’s that he has a supercomputer and doesn’t even know it.”
Here’s a copy of the slide deck the Rice boys used yesterday:
(1) S&P Global Platts (Feb 5, 2019) – Rice brothers continue push to take over EQT’s board
(2) Pittsburgh (PA) Business Times (Feb 5, 2019) – Rices say they’ll do a better job with EQT than current management
(3) Pittsburgh (PA) Post-Gazette (Feb 5, 2019) – We’re not small potatoes, the Rice team tells EQT; you’re stale
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