EQT Corp. CEO Robert McNally on Tuesday vigorously defended the country’s largest natural gas producer’s direction, calling a proposal put forward by Rice Energy co-founders to generate more value “fundamentally flawed,” and highlighting a plan to better control costs and improve operations.
McNally’s remarks came after 18 months of rapid change in which EQT was transformed into a gas powerhouse after it acquired Rice for $8 billion, spun-off its midstream business and dramatically reshuffled management. He pitched a plan to generate $350 million of adjusted free cash flow this year, and at least $2.7 billion through 2023. The company also has taken actions to cut $100 million in administrative and well development costs and committed to cut capital costs by another 10% by next year.
“This is a new management team that’s been in the job for two months, and it’s basically a new company, as we’re now a standalone exploration and production company instead of being integrated,” McNally said on Tuesday in an interview with NGI’s Shale Daily. The interview came after EQT released its 2019 capital budget.
“We clearly have a new focus on driving shareholder value and being capital efficient. There's $100 million of costs that have come out of the system, we generated free cash flow in the fourth quarter, our 2019 outlook is significantly better than it was even a couple months ago. I think this team is executing, and our board is supportive of the plan we put forward.”
EQT forecast 2019 production volumes at 1.470-1.510 Tcfe, roughly flat with the 1.488 Tcfe it produced last year. Adjusted for 2018 asset sales, EQT produced 1.447 Tcfe in 2018. The company has budgeted $1.9-2.0 billion for 2019, compared with $2.7 billion last year. The 2019 drilling program, meanwhile, anticipates a 5% increase in production volumes in 2020.
The bulk of this year’s program is in the Marcellus Shale, where plans are to spud 91 net wells in Pennsylvania with an average lateral length of 13,200 feet and another 15 net wells in West Virginia with an average lateral length of 6,500 feet. The company plans to turn-in-line another 124 net Marcellus wells. In the Utica Shale of Ohio, plans are to spud 20 net wells with an average lateral length of 11,200 feet and turn to sales another 23 wells.
EQT is the latest producer to rein-in activity and spending levels as the outlook for gas prices grows bearish, and oil prices plummeted late last year. While Appalachian gas production is expected to increase again this year, growth may not be as robust as it has been.
“I think the growth is going to be like single digits, mid-single digit kind of growth, just given our size, given where we are in the market, given the forward curve for gas prices,” McNally said of the company’s production volumes in the coming years. He sees a similar trend shaping up for other gas producers. “In fact, I think it would be foolish for us to try to grow at 15% or 20% like we have done in the past.”
The company produced 394 Bcfe in the fourth quarter, a 5% increase over 3Q2018, beating Wall Street expectations and exceeding internal guidance. The year-end performance was a turnaround from the third quarter, when management was forced to cut guidance and increase spending after a frenzied stretch of drilling in the wake of the Rice acquisition put stress on its supply chain, logistics and pad operations.
McNally took over as CEO in November after the company completed spinning off Equitrans Midstream Corp. His predecessor left the company early last year after a dispute with the board over compensation. The general counsel, chief investor relations officer and president of exploration and production, among others, also have since been replaced.
EQT laid off about 100 employees earlier this month, accounting for about one-half of the $100 million in costs it plans to cut. The other half is to be driven by optimized water handling processes, fleet rationalization, and other drilling and completion process changes. This month’s workforce reduction was aimed at reducing management layers.
Prior to that, McNally said he cut three executive positions that directly reported to him on his first day on the job. He also cut senior management in the production segment shortly after that.
“We removed a big layer of management that I believed was not on the same page in terms of what the strategy was and what the culture was that we’re trying to develop,” he said.
Soon after he took over, Toby and Derek Rice came forward with a plan to generate more free cash flow, arguing that a course correction was needed and said the company is severely undervalued. The Rice family owns more than seven million shares of EQT, and the brothers were supported by other shareholders.
“It was a bit of a blindside, but we took it seriously and evaluated the claims they made,” McNally said. “As we said today, we disagree with their claims, and I think that we laid out the facts.”
A presentation the Rice brothers delivered last week was “fundamentally flawed,” McNally told financial analysts during a call on Tuesday to discuss the company’s guidance. He said it did not “represent a viable path to generate incremental free cash flow versus the EQT plan,” primarily because it failed to acknowledge the size of the company.
As part of its plans to appease shareholders, EQT is searching for a COO and expects to have an announcement by the end of March. When asked if Toby, who formerly served as Rice COO, is being considered for the position, McNally said “we would be happy to consider him, but he has indicated that he wants the CEO role, which is not what we’re hiring for.”
The company also has created a standing board committee tasked with an ongoing review of the company’s operations and capital deployment.
“This team has gelled quickly, we have changed the direction of the company from being volume-focused to efficiency focused and have made real progress in a short amount of time,” McNally said, adding that he has confidence the company can continue cutting costs next year. “Given more time and the ability to dig in further, I think that we’re going to find more that we can do,” he said. “I think we’re on the right path here.”
In a statement on Tuesday, the Rice brothers indicated a proxy fight could be ahead. They said while they remain open to negotiating with the company, they plan to ask shareholders at the annual meeting to replace directors with those who would support replacing McNally with Toby.
“EQT’s presentation today does not address the fundamental concerns being raised across EQT’s shareholder base -- that management lacks the relevant operational experience, track record and vision to realize the value of EQT’s underlying assets,” the Rice brothers said.
Analysts at Tudor, Pickering, Holt & Co. said the announcements were a “step in the right direction, as 2019 capital efficiency screens better versus expectations, and management demonstrates its commitment to optimizing the development cost structure.” The firm said hiring a COO could further help boost confidence in operations.
EQT’s stock fell by more than 5% on Tuesday afternoon to close at $19.99/share during a day of broader losses across the market.