EQT CEO Rob McNally and board chairman Jim Rohr are in a pitched battle to maintain their control of the company. They dismiss a plan by Toby and Derek Rice to enhance EQT’s production at a lower cost as something that worked for small potatoes Rice Energy, but couldn’t work for a big, important company like EQT. The Rice boys shoot back that EQT is bloated and lumbering and needs a good house-cleaning. So what is the essence of the Rice plan to get EQT back on track? What’s the Rice boys’ secret sauce?
At Rice Energy, Toby and Derek (and their older brother Dan, now on the EQT board) used mountains of data from every aspect of drilling in order to iterate and get better. The technology they designed and used at Rice Energy to drill wells is “lying dormant” at EQT. The tech is there, it worked before, and many of the wells EQT plans to drill this year are on what used to be Rice Energy leases. Toby and Derek say they can step in, rev up the tech they’ve already pioneered, and save EQT boatloads of money by drilling more/better/faster.
McNally and Rohr dismiss the Rice boys’ claims as so much hot air. Here’s a look at the secret sauce the Rice boys say can save EQT:
Rice Energy Inc. was known for innovation and a heavily technology-based approach to drilling for natural gas. Its former president and his brother, also a top executive, want to bring that same philosophy to the company that acquired it for $6.7 billion in 2017.
Rice Energy, ever since bursting on the scene less than a decade ago, was determined to do things differently. That stretched well beyond the unorthodox naming of its wells — Bigfoot and Batman among them — to a deep, data-driven approach and a laser-like focus on process improvement.
That’s the heart of the Rices’ recipe for success at EQT Corp. (NYSE: EQT). The nation’s largest independent natural gas driller has seen turmoil at the top, several rounds of layoffs and a split of the company since it acquired Rice. The Rices believe the cure for what ails EQT is data-driven approach to well design and execution and the technology is lying dormant, waiting for the Rice Energy management team to unlock it.
“Fortunately our team has done this before in this basin on these assets,” Toby Rice told analysts during a Tuesday conference call laying out the plan.
The plan includes the Rice team going onto the front lines, using technology developed by Rice to digitize workflows and use technology to optimize schedules. That begins with a leasehold management app in land acquisition and flows through design of what it called a Smart Pad Facility Design that automated 90 percent of a well tender’s functions on the pad and allowed a lot to be controlled at a central facility.
EQT has, for its part, put online a real-time operations center at its downtown Pittsburgh headquarters that it showed the Pittsburgh Business Times in 2018.
Toby Rice said 400 workflows were digitized at Rice Energy and the company had real-time data in every corner of its business that allowed it to streamline decision making and operations.
“Improving well economics is something our whole company is designed to do. It’s something we’re driven to do,” Toby Rice said.
He said Rice continued to get better over time, without being spurred by activist pressure.
“Our continuous improvement culture actually generated plans and projects that both improved productivity and decreased costs,” Toby Rice said. “Both of those were keys to driving economics.”
The result will be at least $500 million more in free cash flow a year as well as savings of $7 billion in well costs.
How will this play with shareholders? Several big shareholders have already expressed support and enthusiasm for the Rices. That appears to remain. A source close to D.E. Shaw & Co., a hedge fund that owns 4.5 percent of EQT, remains supportive of the Rice plan. The Rices have said they will continue to press the proposal and nominate director candidates this year.*
*Pittsburgh (PA) Business Times (Feb 5, 2019) – How Rices’ previous data-driven, digital innovation would guide them with EQT
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