The proxy war that’s swirled in recent months around the largest natural gas producer in the Lower 48, EQT Corp., continued on Thursday as CEO Robert McNally dug in further and again dismissed Toby and Derek Rice’s latest assertions, saying their plans to take over the company are “based on flawed assumptions, selective data and an incomplete and misleading story.”
The Rice Energy Inc. co-founders, both in their 30s, want to install a new management team, shake up the board and have Toby take over as CEO. Separately last week, the brothers slammed EQT’s performance during a conference call with investors and again argued that their team could generate far more value for shareholders.
However, McNally shot back during the company’s year-end earnings call, spending most of his prepared remarks telling the Rice brothers how a big company is run.
In the latest rebuttal between the two sides, McNally said the brothers’ claims that Rice Energy’s Appalachian wells once outperformed EQT’s omit key facts and fail to take into account reservoir quality differences and the offset wells developed by EQT in the Upper Devonian. He again stressed that the lower well costs the brothers are pushing for don’t account for the service cost inflation of recent years.
The technology developed by Rice Energy that the brothers say EQT has failed to adopt is in fact being deployed, McNally added, albeit at a slower rate as it’s phased into the company’s “technology ecosystem.” The integration process, he said, takes far longer to complete at a larger company like EQT. There is no “magic app” to reduce expenses for things like land, he said, bluntly noting that you can’t just “wave a magic wand” to cut the “reality” of certain costs.
The brothers are also pushing the company to schedule its annual shareholder meeting for April, when it's historically been held, to bring their board nominees up for a vote if management fails to act on their suggestions. McNally said during the conference call no date has been set.
EQT has faced intense pressure to perform over the last 18 months, a period in which it became the nation’s largest natural gas producer after acquiring Rice for $8 billion, spinning-off its midstream business and overhauling its management team. McNally took over as CEO in November.
The third quarter was particularly painful, with growing pains on sharp display when management was forced to cut 2018 guidance and increase spending after a frenzied stretch of drilling in the wake of the Rice acquisition that put stress on its supply chain, logistics and pad operations. Executives also acknowledged at the time that the company had drilled far too many ultra-long laterals, i.e. longer than 15,000 feet. The horizontals created additional operational challenges that hampered results.
“We are being very cognizant about the proportion of ultra-long laterals...that we are developing simultaneously in our development program,” said Executive Vice President Erin Centofanti, who handles production. She added that the company has focused intently on building a stable operating model, fine tuning various aspects of its program to improve efficiencies.
The improvements are already evident, management said. The company produced 394 Bcfe in the fourth quarter, a 5% increase over 3Q2018 and a 34% increase from the year-ago period, beating Wall Street expectations and exceeding internal guidance.
Full-year production was 1.488 Tcfe, up from 887.5 Bcfe in 2017, the year EQT completed the Rice acquisition, which sharply increased production.
The company announced that it would cut year/year spending in 2019 last month. Like many of it peers, EQT is also guiding for single-digit production growth in the coming years in response to lower gas prices, demand and investor expectations for higher returns.
Given fewer planned turn-in-lines and a focus on controlling costs and stabilizing operational performance, Centofanti said production would decline sequentially in the first and second quarters, but increase slightly in the second half of the year to finish in a forecasted range of 1.470-1.510 Tcfe for 2019.
EQT pitched a plan last month 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.
Those efforts have led to the discovery of another $50 million in cost reductions that are expected to boost free cash flow to $2.9 billion over the next five years. CFO Jimmi Sue Smith said the company would find the additional $50 million in savings by renegotiating contracts for water hauling, temporary water lines, sound wall rentals, maintenance expenses, and implementing water optimization and other process changes.
EQT reported a fourth quarter net loss of $636.7 million (minus $2.50/share), compared with net income of $1.3 billion ($5.83) in the year-ago period. The quarterly loss resulted primarily from goodwill and lease impairments, as well as a loss on derivatives not designated as hedges.
Losses for the full-year were even steeper at $2.2 billion (minus $8.60), compared with net income of $1.5 billion ($8.04) in 2017. The company recorded $3.5 billion of impairments related to divestitures, goodwill charges, and lease expirations and impairments last year. In particular, the company sold its costly 2.5 million net acre legacy position in the Huron formation.