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Activist Pushes EQT on a Merger with Antero or Range

Summary of Letter & Presentation – Chapter IV Investors, December 28, 2016

  • Writing to Board of EQT as a 6+ year shareholder
  • Highly complimentary of EQT management but strongly believes that:
    • EQT has an opportunity to lead much needed, large-scale consolidation in the Appalachia
    • Timing is right for EQT to explore in 2017
    • Specifically recommend engaging with an investment bank to simultaneously explore a possible stock-for-stock merger with either Antero or Range
  • Neither companies need to acquire, sell, or merge with another entity but their footprints and low-cost, high return resource bases uniquely position them to be a merger partner for EQT
  • Potential E&P-related synergies:
    • Enhanced present value and well IRRs through contiguous acreage and longer laterals
    • Improved capital allocation from drilling best locations of the merged footprint
    • Enhanced Marcellus/Utica and wet/dry production optionality
    • Realized prices/netbacks optimization
    • Financial flexibility would enable higher production growth
    • Offer a bigger/better platform for strategic delineation
    • Increased reservoir understanding and improved well development
  • Potential Midstream and Marketing-related synergies:
    • Coordinated field gathering and compression development enabling reduced capital spending
    • Increased pipeline fee income from OVC and MVC pipelines
    • Equitrans could be expanded with additional captive volumes
    • EQGP unit price appreciation resulting from improved EQM distribution growth
    • Combined company to have more leverage with pipeline companies and end-market customers
  • Other potential synergies:
    • Strengthened management team
    • EQT’s minimally levered balance sheet and investment credit rating to be capitalized
    • G&A and opex savings
    • Potential value accretion from follow-on acquisitions and roll-ups
    • Potential value creation from a down-the-road full separation of upstream/midstream
  • Believes that EQT, Antero, and Range are all trading well below their intrinsic values and they would significantly benefit from large-scale consolidation
  • Antero:
    • Over 46% of shares held by PE sponsors and top management who may be highly interested in a merger with EQT
    • Significant unrealized value today in multi-year hedge book
  • Range:
    • Best capital deployment optionality of any operator in the Marcellus/Utica (dry gas, wet gas, super-rich gas in Appalachia and optionality in Louisiana)
  • Key issues for EQT’s Board focus would be:
    • Which pro forma business model is best?
    • Which acreage position is best?
    • What management line-up is best suited to manage the company?
    • Which situation offers the best long-term value for EQT shareholders?

According to the letter, W. Barnes Hauptfuhrer is the portfolio manager of Chapter IV. Chapter IV i) focuses on making long-term investments, ii) thinks strategically about M&A that can add value to portfolio companies, iii) actively shares ideas with management of various portfolio companies, and iv) engages with management in a relationship-oriented way.

EQT Corporation (NYSE: EQT) operates as an integrated energy company in the Appalachia. EQT Production is a major player in the Appalachian Basin for over 125 years. EQT GP (NYSE: EQGP) was formed to own interests in EQT Midstream (NYSE: EQM), an MLP formed to own, operate, acquire and develop midstream assets in the Appalachia. As of January 5, 2017, EQT had a market capitalization of $11.3B and an enterprise value of $15.6B.

Image Source: Darden’s 2014 University of Virginia Investing Conference, Credit: Andrew Shurtleff

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