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Jana Partners’ Letter to EQT – Opposing Rice Deal and Pushing for Separation of E&P and Midstream Businesses

Jana Partners – Letter to EQT’s Board of Directors, July 5, 2017

  • Jana Partners and industry experts with whom we have partnered own almost 6% of outstanding shares of EQT
  • Invested in EQT because we believe that EQT trades at a substantial discount to its intrinsic value and has an opportunity to unlock value potential by immediately separating its E&P and midstream businesses into two separate companies, which we estimate could create as much as $4.5Bn of value for EQT shareholders
  • Astounded by the news that, rather than pursuing value creation through a separation, EQT is proposing an acquisition of Rice at a substantial premium which would delay the possibility and potentially increase the cost (given tax limitations created by the deal) of an EQT separation, dilute EQT shareholders’ upside from future separation, unnecessarily increase complexity of EQT, and immediately destroy shareholder value
  • EQT’s claimed financial benefits for EQT stakeholders cannot be justified:
    • By financing the transaction with 90+ million shares of EQT stock, Company is diluting EQT shareholders’ upside in a future separation of EQT should the Company pursue one (management blithely acknowledged that EQT’s stock is undervalued in its announcement of the Rice deal)
    • While EQT claims that Rice acquisitions would generate $2.5Bn of NPV synergy value through G&A savings and increased capital efficiency, acquisition premium of $1.8Bn exceeds EQT shareholders’ 65% pro forma ownership of the claimed synergy value, which amounts to only $1.6Bn, meaning on day one EQT shareholders would be transferring an additional $200M of value to Rice
    • EQT’s calculation of the $2.5Bn of synergies created by the transaction appears highly questionable and we estimate that actual synergies could fall short by $1.3Bn; with only 65%, or less than $800M, of these synergies accruing to EQT shareholders against an acquisition premium of $1.8Bn, EQT shareholders would be giving away an additional $1Bn of value
  • Even were the synergy analysis to add up, many of the synergies cited to justify the acquisition are opportunities which Rice can pursue on its own rather than unique opportunities generated by the transaction – and thus, fall outside any logical definition of a synergy
    • Any EQT shareholder who thinks Rice offers an attractive value or is interested in accessing opportunities which are available to Rice can simply purchase Rice stock without having to pay nearly a 40% premium and diluting the value of their EQT stock
  • Transaction actually reduces EQT’s reserves-to-production ratio and the duration of its Marcellus drilling inventory and an apparent uplift in well returns in the core of the Marcellus is overstated given that reported data on EQT’s Marcellus well returns are dragged down by being bundled together with the Company’s lower returning Upper Devonian wells
  • Claimed benefits from having access to Rice’s dropdown inventory are already embedded in Rice’s value, with any enhancement of EQT’s value coming at the expense of EQT’s pro forma ownership in Rice Midstream Partners
  • While EQT also claims that the transaction gives it the ability to buy undervalued shares in the future, issuing a large amount of undervalued equity today to repurchase undervalued stock in the future is a perversion of basic corporate finance principles
    • In any case, EQT could simply repurchase its undervalued stock today and that value would be fully captured by EQT shareholders rather than divided up with Rice shareholders
  • Apart from enabling the Company to drill longer laterals and any improvements in future well returns, there is little logic apparent in this transaction – this improved well returns is again already captured in the claimed synergy value of the transaction which as explained above is dwarfed by the acquisition premium they would be paying
  • There is no unique science, technology, or know-how that would be obtained by acquiring Rice that could be applied to EQT; likewise, EQT management’s drilling program does not accelerate the standalone Rice plan and therefore does not pull forward reserves that Rice was unable to exploit in a timely fashion
  • Not surprising that upon announcement of the proposed transaction EQT shares fell by 9% (largest single-day drop in more than 5 years)
  • If EQT were to consummate this transaction, Company would potentially be required to put off a separation for 2 years to avoid realizing “built-in” tax gains for certain Rice assets that would be part of a spinoff and potentially as much as five years to preserve certain Rice tax attributes
  • For these reasons, intend to oppose this transaction and believe based on discussions with other shareholders that most other EQT shareholders will as well
  • Going forward, believe that it may be necessary to add new Board members who will do a better job of safeguarding shareholder interests and thus are prepared if necessary to nominate highly-qualified and independent nominees who have each made substantial personal investments in EQT’s stock
    • Potential Board nominees led the Atlas Energy complex to create billions of dollars of shareholder value through transactions including a separation of that company’s Marcellus-based E&P and midstream businesses

Appendix: Value Transfer to Rice Shareholders

synergy

Image Source: EQT Corp
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