Rice Brothers Write to EQT’s Board: Realizing EQT’s Potential

Smart Money
  • Completion of the merger in November 2017 between EQT and Rice Energy, created a world-class asset in the core of the Appalachian Basin, setting the table for peer-leading capital efficiency and returns
  • Belief in the tremendous potential of EQT’s assets was underscored by the fact that we took ~80% of the merger consideration in EQT stock; as of today, Rice family owns over 7 million shares
  • Rice Team continues to believe strongly in the potential of EQT’s assets, but unfortunately EQT’s operational performance has translated into a severely depressed stock price that is not reflective of the underlying value of the assets
  • EQT trades at or below PDP value, with no value ascribed to EQT’s core undeveloped acreage; EQT’s valuation metrics of ~3.4x 2019E EBITDA and ~$2,000/mcfepd represent a significant discount to Appalachian peers
  • EQT must add proven operational experience to the Board and senior management team– in particular, individuals with experience in large-scale operational planning
  • Rice Team is willing to oversee the transformation needed to achieve these results
  • Have a proven, detailed business plan to generate an incremental $400-600 million of pre-tax free cash flow per year above EQT’s current plans, equaling greater than $1.0 billion of FCF/year
  • EQT’s current and budgeted well costs can be significantly improved
    • 2018 well development budget of $2.5bn implies Marcellus well costs of $1,250/ft
    • Goals of $1,000/ft in 2018 and $900/ft in 2019 represent no improvement to their 2017 development plan which was established well before the RICE merger and contemplated shorter lateral lengths
    • RICE and peers have already demonstrated an ability to achieve much lower well costs/ft
  • Improved planning will increase value
    • Should streamline their organizational structure and break down silos to facilitate inter-departmental collaboration
    • Should increase operational and logistical efficiency to lower well costs and reduce shut-ins and system constraints
    • Should improve planning through a coordinated operations schedule to reduce costs of drilling and subsequent derivative operations (completions, production, marketing, etc)
    • EQT needs 2x the number of rigs to drill the same horizontal footage as RICE and other industry peers
    • EQT is expected to curtail 170bcfe of gas volumes in 2019 (>10% of production) due to system constraints, fuel/LUF, operational reductions and wellhead constraints
  • The Rice Plan:
    • Decreased well costs+ 1,000’ spacing =>$1.0bn of annual FCF generation
    • Lower well costs to $750/ft in the Marcellus
    • Combo-Development;represents wells and pads developed simultaneously, similar to the massive“cube development” projects in the Permian; each of these projects represent$150-200 million of capital and is only possible with a coordinated operating system and cannot be executed in a siloed organizational structure
    • Wider spacing =better capital efficiency; widening spacing improves EURs by 10%+ while only cutting core inventory by 2 years
  • Realizing EQT’s potential: Next Steps
    • EQT must add proven operational experience to the board and senior management
    • Rice Team has a track record of delivering basin-leading well costs
    • Rice Team has a clear plan that has been executed before, and is ready, willing and able to execute it again
    • With the proper authority and Board support, Rice Team will oversee the transformation needed to achieve these types of results
    • Focused on results and willing to work constructively with the current Board to reach a solution for the benefit of all shareholders
      • However, prepared to nominate identified director candidates for election to the EQT Board if necessary

Team Rice – Realizing EQT’s Potential (Letter), December 10, 2018

Team Rice – Realizing EQT’s Potential (Presentation), December 10, 2018

Image Source: Team Rice Presentation to EQT’s Board (12/10/18)

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