DE Shaw Letter On How To Create Value For EQT
Dear Dave, Steve, and other Members of the Board:
I am writing to you on behalf of certain investment funds advised by D. E. Shaw & Co., L.P. that in the aggregate own an approximately 4.0% interest in the common stock and equivalents of EQT Corporation (the “Company” or “EQT”). Having conducted extensive analysis, which we detail in the accompanying presentation,1 we believe that EQT is substantially undervalued. Further, we believe that EQT’s Board can remedy this undervaluation by announcing a plan today that, pro forma for the acquisition of Rice Energy Inc., can unlock $8 billion of value for shareholders (representing a 50% increase to EQT’s stock price) and that can be completed during the first half of 2018.
We have been shareholders of EQT for nearly two years and appreciate the dialogue we have had with Dave and Steve. We also understand why investors are frustrated with the Company and its current strategy. In our view, these frustrations are justified in light of (i) the Company’s poor equity performance, particularly given its low leverage and mix of premier midstream and production assets, (ii) the Company’s outlay of $1.85 billion (approximately 17% of its current market capitalization) to acquire additional acreage, despite the Company’s own share price consistently reflecting negative value for undeveloped acreage, and (iii) the uncertain benefits the Company stands to achieve through the acquisition of Rice given the lack of a clear plan to unlock value following the transaction.
To date, EQT’s commitments around the Rice transaction and responses to public shareholder frustration have been inadequate. Despite asking shareholders to approve a substantial acquisition that would result in 35% dilution, EQT has said that it will take eighteen months to develop a “path” toward addressing its persistent sum-of-the-parts discount and likely another twelve months to carry out whatever that path may be. In its response to public criticism of the Rice transaction, EQT has missed an opportunity to provide a clear value creation plan to its shareholders. Instead, EQT management has described the potential for an additional $7.5 billion in synergies without providing a commitment to achieve any portion of them—the kind of communication that puts valuable credibility at risk.
EQT’s Board and Management Can Do More for Shareholders
We believe that EQT should lay out a clear path forward that shows how the Rice acquisition will unlock value for shareholders. In furtherance of this goal, we have carried out extensive research, including working with leading reserve engineers, consulting with former C-level midstream and E&P executives, and retaining tax and corporate counsel to evaluate various transaction structures. In the accompanying presentation, we set forth a plan that allows EQT to acquire Rice and to deliver substantial value to shareholders. We believe the plan is readily executable, can be completed during the first half of 2018, and can result in 50% share price appreciation. The plan consists of the following three actions:
1. Carry Out a Separation of Production and Midstream Businesses.
Following the consummation of the Rice acquisition, EQT Corporation should separate into EQT Production and EQT Midstream. As we detail in the accompanying presentation, we believe that separation is the best path forward and will leave both entities stronger and better able to pursue their respective strategic goals. Additionally, we believe that any tax drag from such a separation following immediately after the Rice acquisition would be immaterial (approximately $1 per share) compared to the opportunity to unlock value of approximately $30 per share or more.
2. Restructure Midstream Businesses Through a Merger of EQM and RMP.
EQT Midstream should simplify its structure by merging EQM and RMP. As we detail in the presentation, this combination would allow the businesses to achieve considerable operational and capital synergies while substantially increasing the incentive distribution rights collected by EQGP, thereby benefitting all parties (EQT, EQM, RMP, and EQGP). Despite RMP’s relatively weak negotiating position given EQT’s ability to control the pace and location of development, we believe that a straightforward no-premium merger is in the best interest of all parties.
3. Appoint Experienced Midstream Executives to the Board of EQT.
Although EQT Midstream represents approximately 40% of EQT Corporation’s equity value and $8 billion in potential value to be unlocked, EQT’s Board lacks any independent directors with executive midstream experience or public company restructuring experience.
We have advised you of the availability of specific candidates with directly relevant experience as former C-level executives of large-capitalization, public, midstream companies. We are encouraged that the Board seems to recognize that these individuals would be valuable additions, and we encourage you to add them to the Board immediately. The addition of the highly accomplished candidates that we have suggested or others with comparable experience would be a tremendous asset to EQT’s Board and in turn to EQT shareholders.
We Look Forward to Working Constructively Together
For years, we, and other EQT shareholders, have taken comfort in management’s acknowledgement of the Company’s sum-of-the-parts discount and the need to address it eventually. Now, on the eve of a significant transaction that will result in substantial equity dilution for EQT shareholders, the time has come for EQT’s Board and management to unlock value for EQT shareholders—not by invoking vague and uncertain potential synergies, but by proposing a clearly articulated plan that can be executed promptly. We look forward to working constructively together for the benefit of all EQT shareholders.