CHARLOTTE, N.C.--(EON: Enhanced Online News)--On December 28, 2016, Chapter IV Investors, LLC (“Chapter IV”), an investment firm with ownership stakes in EQT Corporation (NYSE: EQT), Antero Resources (NYSE: AR) and Range Resources (NYSE: RRC), sent a letter and presentation to the Board of Directors of EQT Corporation (“EQT”) encouraging EQT’s Board to conduct a process to (i) simultaneously evaluate a potential stock-for-stock merger with either Antero Resources (“Antero”) or Range Resources (“Range”) and (ii) contrast these options versus a go-it-alone strategy. If either merger option is consummated, such merger would create the largest and best-positioned natural gas producer in the United States with an expected pro forma enterprise value greater than $25 billion. In addition, the resulting company would control a complementary, high-growth midstream business that would provide cash flow stability and funding to accelerate its high-return E&P business. In Chapter IV’s opinion, an EQT stock-for-stock merger with either Antero or Range would unlock a multi-billion dollar value creation opportunity for EQT shareholders and the shareholders of EQT’s chosen merger partner.
The letter and presentation can be downloaded at http://www.chapterivinvestors.com.
Letter to EQT Board
The full text of the letter is as follows:
December 28, 2016
Board of Directors
625 Liberty Avenue, Suite 1700
Pittsburgh, PA 15222
Attn: David L. Porges, Chairman & Chief Executive Officer
Dear Members of the Board:
I am writing to you on behalf of Chapter IV Investors, LLC (“Chapter IV”), a 6+ year shareholder of EQT Corporation (“EQT”). As this letter and the attached presentation will show, Chapter IV is highly complimentary of EQT management. We applaud the value-creating corporate finance transactions led by soon-to-be-outgoing CEO (but still Chairman), Dave Porges, and we respect the value-added contributions that soon-to-be-incoming CEO, Steve Schlotterbeck, has made to EQT during his tenure at the company. Given the strategic and disciplined decisions that have been made at EQT over time, we know that EQT can continue along its current path as an independent company and that it does not need to acquire, sell or merge with another E&P and/or midstream company.
At the same time, we strongly believe that (i) EQT has a phenomenal opportunity to lead much needed, large-scale consolidation in the Appalachian Basin and (ii) the timing is right for EQT to explore that opportunity in 2017. Specifically, we recommend that the Board of Directors of EQT engage one (or more) investment banking firms to assist the Board in (i) a simultaneous exploration of a possible stock-for-stock merger transaction with either Antero Resources (“Antero”) or Range Resources (“Range”) and (ii) an evaluation of the related feasibility of, and value creation opportunity associated with, each possible transaction. We, at Chapter IV, believe that either transaction has compelling industrial logic and would unlock a multi-billion dollar value creation opportunity for EQT shareholders and the shareholders of EQT’s chosen merger partner.
As the EQT Board undoubtedly knows, Antero and Range are each excellent companies. Like EQT, neither of those companies needs to acquire, sell or merge with another entity. At the same time, we recognize that these two companies’ geographic footprints and their extensive low-cost, high-return resource bases uniquely position each of them to be an attractive potential merger partner for EQT. In addition, these two organizations are led by outstanding executives that would provide important additional management resources appropriate for a pro forma company that would (i) immediately become the largest and best-positioned natural gas producer in the U.S. (with an expected pro forma enterprise value greater than $25 billion) and (ii) also control a complementary, high-growth midstream business that would provide cash flow stability and funding to accelerate its high-return E&P business.
Simply stated, we are confident that an EQT/Antero combination or an EQT/Range combination would create:
- A better E&P business than EQT’s today.
- A greater opportunity set for growth for EQT’s midstream affiliate, EQT Midstream Partners (“EQM”), and greater value for EQT’s current 90% interest in EQT GP Holdings (“EQGP”).
- An organization with significant professional depth in all key areas (including reservoir engineering, operations, marketing, finance and executive leadership) and a sound investment grade balance sheet to drive value creation for multiple decades.
- Significant immediate and long-term EQT shareholder value.
Chapter IV is not advocating for one EQT merger partner versus another, as we believe either merger would unlock a multi-billion dollar value creation opportunity for EQT shareholders and the shareholders of its chosen merger partner. We think the “right” choice requires a careful review of multiple factors and a mutually agreeable exchange of confidential information between EQT and each prospective merger partner. We believe such information exchange would enable management of EQT (and its prospective merger partners) to quantify the shareholder value benefits associated with our preliminary list of certain qualitative “synergy buckets” set forth below:
Potential E&P Related Synergies
|1)||Enhanced present value/well (and well IRRs) could be achieved where contiguous acreage permits longer laterals.|
|2)||Improved capital allocation would result from drilling the best well locations across the merged geographic footprint versus an EQT-only footprint.|
|3)||The pro forma company would have enhanced Marcellus/Utica wet/dry gas production optionality versus an EQT-only business model (important in an ever-changing hydrocarbon price world, which we think will increasingly favor core wet gas versus core dry gas post-2020).|
Realized prices/netbacks would be optimized.
|5)||The pro forma company’s financial flexibility would enable higher production growth from Antero or Range acreage than these two companies could achieve on a stand-alone basis.|
|6)||The pro forma company would offer a bigger/better platform for strategic delineation and optimal development of Deep Utica and Upper Devonian resource potential.|
|7)||Combining databases would provide increased reservoir understanding and likely lead to improved well development.|
Potential Midstream and Marketing Related Synergies
|1)||Coordinated field gathering and compression development should enable reduced/optimized capital spending.|
|2)||Increased pipeline fee income should result from:|
Improved utilization of EQM’s recently completed OVC pipeline.
Optimized design, capacity and throughput at EQM’s in-permit phase Mountain Valley Pipeline.
|3)||EQM’s Equitrans system could be expanded with additional captive volumes.|
|4)||EQGP unit price appreciation should result from improved (and longer-lived) EQM distribution/unit growth.|
|5)||The pro forma company would have increased negotiating leverage with pipeline companies and end-market customers (particularly international buyers of LNG and NGL products).|
Other Potential Synergies
|1)||Strengthened Management Team – While Dave Porges has successfully refocused EQT from its old utility conglomerate days to a highly focused E&P/midstream company today, the E&P side of the business still struggles to gain the market respect that it deserves given its size, growth prospects and low-cost resource base. We believe an EQT merger with Antero or Range would provide important additional management resources appropriate for a pro forma company that would be the largest natural gas producer in the U.S.|
|2)||EQT’s minimally levered balance sheet would be optimized while the pro forma company would retain EQT’s investment grade credit rating with multiple avenues to access favorable financing from capital markets.|
|3)||Significant G&A and other operating expense savings should result.|
|4)||Potential value accretion attributable to follow-on acquisition roll-ups could be significant given the size/financial flexibility of the pro forma company (not to mention the lengthy list of available acquisition targets).|
|5)||Potential value creation could also result from a down-the-road (i.e., post-2020) full separation of the pro forma company’s midstream business from its E&P business if such separation appears necessary to maximize shareholder value.|
Fundamentally, like many other energy investors and many E&P executives whose companies operate in the Appalachian Basin, Chapter IV firmly believes Marcellus/Utica consolidation is necessary. Given the 17 potential “synergy buckets” listed above, and other factors, we, at Chapter IV, believe EQT is perfectly positioned to lead such consolidation and deliver substantial value to its shareholders.
We believe EQT is at an important inflection point. The company has arrived at the end of 2016 having gone through a significant corporate transformation over the last 5 years. EQT has narrowed its focus and is now among the leading producers and midstream companies in the Marcellus/Utica. EQT is also set to undergo an important top management transition in the next 3-15 months. As the EQT Board prepares for the next 5, 10, 15+ years of growth at EQT (and EQM), we think now is the logical time to ask the threshold question – Is EQT better off as one of many comparably-sized independent producers in the Marcellus/Utica or would the company and its shareholders be better off combining with another large southwest Appalachia producer (specifically, Antero or Range), capturing the significant synergies associated with either potential merger and becoming the dominant producer (and gatherer) of natural gas in southwest Appalachia for years to come? We think the latter is an incredibly compelling opportunity that should be explored. We hope you agree with our views.
Certain background information on Chapter IV and further commentary with respect to our recommendations is provided below.
I am the Portfolio Manager of Chapter IV, an investment firm that has been a long-term shareholder of EQT. As Dave knows, Chapter IV is a unique investor in that (i) we focus on making long-term investments, (ii) we think strategically about M&A (and other corporate finance transactions) that can add value to our portfolio companies, (iii) we actively share our ideas with the management of our various portfolio companies and (iv) we do this in a relationship-oriented way (i.e., always supportive of, and never attacking, management). Long-term (i.e., 10+ year) relationships with the senior management teams of superb companies such as Martin Marietta Materials and WestRock (including its predecessor, RockTenn), and our origination (and/or endorsement) of value-accreting transactions for those companies, are good examples of our approach.
Chapter IV’s unique style is a function of my professional career prior to starting the firm. In summary, this involved:
|i)||Specializing in Mergers and Acquisitions while at investment banking firm Kidder, Peabody (1981-1988) (Chapter I);|
|ii)||Being Founder and Managing Partner of a highly successful private equity group, First Union Capital Partners (1988-1998) (Chapter II);|
|iii)||Being Co-Head of First Union’s (and subsequently Wachovia’s) Corporate & Investment Bank, a highly successful turnaround story during my tenure (1999-2004) (Chapter III).|
Along my professional journey, I have had substantial experience in the energy sector, including my private equity group being selected by Rich Kinder to become a founding institutional shareholder of Kinder Morgan in 1997, an experience that positioned me well to understand and evaluate various midstream GP/LP structures and related GP IDR economics (obviously, a key part of EQT’s value today given the significant market value of EQT’s investment in EQGP). In addition, for the past 6+ years, my investment firm has been engaged in continuous and deep research of America’s phenomenal, and still evolving, Shale Revolution, with particular emphasis on the Marcellus/Utica Shale area. These experiences, coupled with my M&A background, are the foundation for Chapter IV’s recommendations to you today.
Before further elaborating on Chapter IV’s aforementioned recommendations to the Board, I want to reemphasize our support of CEO, Dave Porges. We believe Dave has demonstrated a steadfast commitment to shareholder value throughout his CEO tenure. Actions such as (i) EQT’s divestiture of certain midstream assets (i.e., the Langley processing facility and Big Sandy pipeline) in 2011, (ii) the sale of Equitable Gas Company in 2013, (iii) the creation, IPO and development of EQM, (iv) the creation and IPO of EQGP and (v) EQT’s various 2016 Marcellus acreage acquisitions are all actions that we fully endorse. Such transactions demonstrate Dave’s business leadership and strong “financial engineering” acumen (two assets that we think are critical to EQT objectively evaluating the strategic merger options that we recommend EQT exploring in 2017).
Despite these actions, however, we must all recognize that EQT’s December 27, 2016, stock price (of $67.08/share) is approximately 37% below its June 30, 2014, stock price. While this has been disappointing as a shareholder, we see the pullback as a temporary phenomenon created initially by the commodity price pullback of 2014, which was aggravated more recently by regulatory uncertainties impacting pipeline approvals and/or causing delays to anticipated pipeline takeaway in-service dates (thereby deferring additional production growth for various well-positioned Marcellus/Utica producers until 2018-2020 and causing related local basis discounts temporarily depressing EQT’s and many other producers’ net realized prices for natural gas). While EQT’s stock price decline over the past 30 months has been unfortunate, it is important to put such decline into context versus the stock price performances of Antero and Range, both of which are down 60% or more, over a similar time frame.
We believe that EQT, Antero and Range are all trading well below their intrinsic values. We also believe that all three companies would significantly benefit from large-scale consolidation in the Marcellus/Utica (i.e., something more substantial than the various, mostly acreage-oriented, transactions consummated in 2016). As we think about large-scale consolidation opportunities for EQT, merging with Antero or Range are the two most logical options given all three companies’ large presence in the southwest portion of the Marcellus/Utica. Our high-level commentary on Antero and Range follows.
In the case of Antero, we see a company that:
- Successfully acquired significant core Marcellus and Utica acreage in West Virginia and Ohio facilitating the drilling of long laterals and high-return wells.
- Owns a rapidly expanding gathering and compression midstream business (via its 61% LP interest in Antero Midstream (“AM”)) but, unlike EQT, does not own any of the valuable GP IDR interest in AM which was retained by Antero Investment (a private entity controlled by Antero’s original private equity (“PE”) sponsors and the top management of Antero).
- Has over 46% of its shares held by such PE sponsors and Antero top management (who may be highly interested in a merger with EQT, or other transaction, to better position themselves to monetize their publicly traded investment stakes in Antero and their illiquid privately held stake in the General Partner of AM).
- Has a strong management team that had the foresight to put in place an attractive multi-year hedge book that has materially benefited Antero’s reported EBITDA over time (and continues to have significant unrealized value today).
Despite the reported EBITDA stabilizing aspects of Antero’s hedge book and the growing fee income stream associated with Antero’s LP interest in AM, we note that Antero’s December 27, 2016, stock price (of $24.38/share) is approximately 63% below its June 30, 2014, stock price (i.e., significantly underperforming EQT during the past 30 months).
In the case of Range, we see a company that:
- Is considered to be the founder of the Marcellus Shale, having years ago locked up core-of-the-core acreage in southwest Pennsylvania at low per-acre costs.
- Has, in our opinion, the best triple-stack opportunity set in Appalachia (enabling decades of productive Marcellus, Upper Devonian and Deep Utica wells) as well as an attractive stacked pay opportunity set in Louisiana.
- Owns significant core Marcellus acreage in southwest Appalachia, which, based on our analysis, has delivered (and should continue to deliver) better unhedged economics per 1,000 feet of lateral length than Antero’s acreage when both are fully burdened for applicable midstream costs.
Has the best capital deployment optionality of any operator in the
- Low-cost, high-return optionality in the dry gas, wet gas and super-rich gas core areas of southwest Appalachia.
- Low-cost, high-return optionality in southwest Appalachia and Louisiana (the latter, of course, reducing risks associated with Marcellus pipeline takeaway in-service dates, while also providing Range with the opportunity to drill near-term wells offering better unhedged natural gas and NGL netbacks than most, if not all, of its Marcellus/Utica-only peers).
- Has an excellent management team in all key functional areas (i.e., reservoir engineering, operations, marketing, finance and executive).
At the same time, Range is a company that outsources its midstream gathering. Such outsourcing has already provided EQT with significant midstream business (via EQT’s ongoing build-out of Range’s dry gas header system in Washington County, Pennsylvania and other gathering agreements). A merger between EQT and Range could provide EQT with significant additional midstream business opportunities as Range evaluates its longer-term Deep Utica midstream plans. With no stabilizing midstream fee income like EQT has, Range’s December 27, 2016, stock price (of $34.77/share) is approximately 60% below its June 30, 2014, stock price (i.e., also significantly underperforming EQT over the past 30 months).
As previously stated, we believe all three companies (EQT, Antero and Range) are grossly undervalued at current stock prices. Such undervaluation, however, should not preclude the EQT Board from consideration of a stock-for-stock merger with Antero or Range, particularly at a time when the stock prices of Antero and Range have fallen further than EQT’s. Any EQT stock-for-stock merger with Antero or Range is about achieving a “fair” relative value exchange; it is not about absolute value. More importantly, an EQT business combination with Antero or Range is about (i) leading much-needed consolidation in the Marcellus/Utica, (ii) creating an exceptionally strong pro forma organization, (iii) capturing the significant synergies related to each company’s assets being part of one larger pro forma entity and (iv) unlocking the shareholder value creation opportunities associated with such combination.
Of note, an EQT/Antero merger or an EQT/Range merger would result in a similarly sized pro forma company with similar leverage (as can be seen in our enclosed presentation). Also of note is that we are recommending that EQT’s Board only consider stock-for-stock business combinations. This implies two things: (i) the pro forma company will have strong credit statistics and (ii) the exchange ratios that Antero and/or Range may propose would likely be guided by relative stock price ratios over some period of time (implying that any merger proposal made may include little premium or discount to stock price ratios prevailing at the time of proposal). If both Antero and Range choose to make merger proposals to EQT, and our assumption regarding the possible exchange ratios that they may propose is correct, the key issues for EQT’s Board focus would eventually be:
|(i)||Which pro forma business model is best?|
|(ii)||Which acreage position (Antero’s or Range’s) is best?|
|(iii)||What management line-up is best suited to manage the phenomenal pro forma company?|
|(iv)||Which situation offers the best long-term value proposition for EQT shareholders?|
As Dave knows, we have shared detailed preliminary M&A perspectives with EQT, Antero and Range during the course of 2016 and offered our opinions with respect to the rationale of an EQT/Antero merger and an EQT/Range merger with the top management of each company. Given our ongoing belief in the significant value creation opportunity inherent in either transaction, we decided that year-end 2016 (and the start of 2017) was an appropriate time to share with you (and summarize publicly) our recommendations and the rationale behind our ideas.
The purpose of this letter is to request that EQT’s Board formally engage one or more investment bankers to assist the company in maximizing its value by arranging a competitive process whereby Antero and Range (and other parties, if appropriate) are invited to submit, if they so choose, their best bid for a stock-for-stock merger with EQT. Such bid process would, of course, require a mutually agreeable exchange of confidential information, enabling EQT to assess the merits of each business combination while also enabling Antero and Range to assess the merits of combining with EQT. This is important because we believe EQT shareholders would likely own over 50% of the pro forma company’s common stock, with Antero or Range shareholders owning the balance of the company’s common stock.
Assuming that both Antero and Range were interested in submitting merger proposals, we believe the bid process should also enable EQT’s Board to meet the CEOs of Antero and Range and hear from each CEO with respect to why a combination with his organization is best for EQT. Experience has taught me many times that there is a critical link between CEO leadership and shareholder value creation. At the end of the day, our goal is straightforward—we want to create a unique situation where EQT’s Board can choose between two different business models and two different CEO leaders (and compare these options versus a go-it-alone strategy under Steve Schlotterbeck’s leadership). This simply feels like the “right” way to maximize EQT’s long-term value.
Should Antero’s and/or Range’s Board choose not to submit a bid, we would support their Boards’ independent decisions. Alternatively, should one or both of Range and Antero submit a bid, but EQT’s Board determines that EQT shareholders would be better served by going-it-alone, we would support such decision as well. Importantly, even if no transaction were to be consummated, we believe that EQT will be better off in the long run having fully explored the value creation opportunities inherent in our recommendations.
In closing, please know that Chapter IV is willing to assist EQT management and the EQT Board in their respective evaluations of our recommendations (if ever desired by EQT). For now, we merely wish you great success as you pursue EQT shareholder value creation in 2017. We hope you find our recommendations to be constructive. We are confident that we share the same goal of maximizing long-term shareholder value at EQT. In my 30+ years of investment banking, private equity and public equity investing, I have rarely seen such an extraordinary opportunity for value creation as you have in front of you today. Thank you for considering our recommendations.
W. Barnes Hauptfuhrer
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The views expressed in this press release represent the opinions of Chapter IV Investors, LLC and its affiliates (together, “Chapter IV”) and are based on publicly available information and assumptions that Chapter IV believes to be reasonable. There can be no assurance that the information Chapter IV considered is accurate or complete, nor can there be any assurance that our assumptions are correct. Chapter IV is not under any obligation to correct any inaccuracies in any such information or to provide any updated or additional information. Chapter IV has not sought, nor has it received, permission from any third-party to include information about them in this press release. Nothing in this press release should be viewed as indicating the support of any such third party of the views expressed in this press release.
This press release contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “will,” “believes,” “opportunity,” “would,” “could” or the negative of such terms or other variations on such terms or comparable terminology. Statements that describe the potential merger transactions are forward-looking. Any forward-looking statements are based on Chapter IV’s current intent, belief, expectations, estimates and projections. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially. Accordingly, no investor should rely upon forward-looking statements as a prediction of actual results and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
Any representation, statement or opinion expressed or implied in this press release is provided in good faith but only on the basis that no reliance will be placed on its contents. Investors should obtain their own professional advice, conduct their own independent evaluation and make their own decisions with respect to the subject matter of this press release and the companies referred to in this press release. Chapter IV expressly disclaims any responsibility or liability for any loss howsoever arising from any use of or reliance on any of the information included in this press release or any of materials included in the referenced website as a whole or in part by any person.
The fund managed by Chapter IV currently beneficially owns, and has an economic interest in, securities of EQT, Antero and Range. While this fund is oriented toward long-term investing, it is in the business of trading, buying and selling securities. It is possible that there will be developments in the future (including changes in price of such securities) that cause such fund from time to time to sell all or a portion of its holdings of one or more of these securities in open market transactions or otherwise (including via short sales), buy additional securities (in open market or privately negotiated transactions or otherwise), or trade in options, puts, calls or other derivative instruments relating to some or all of such securities. To the extent that Chapter IV discloses information about any position or economic interest in these securities, it is subject to change and Chapter IV expressly disclaims any obligation to update such information.
This press release does not constitute an offer to sell or the solicitation of an offer to buy any interests in any fund managed by Chapter IV.