Investors Are Hoping For A Great Rice 2.0 At EQT Corporation

Aug. 30, 2019 10:11 AM ETEQT Corporation (EQT)ETRN24 Comments6 Likes

Summary

  • The Rice Brothers win the proxy battle.
  • This replaces a "good enough management" with a very hard driving "be the best" management.
  • Expectations of the new management will be very high.
  • Stock price action is down, but is above average compared to other gas producers.
  • Finances are in reasonably good shape.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

The Rice Brothers sold their company to EQT Corporation (NYSE:EQT), which made them major shareholders in the EQT Corporation. Recently a Rice Brothers-backed slate of directors won election to the board. Daniel Rice was already on the board of directors. Now Toby Rice joins the board of directors as the new president and CEO of the company. Clearly, the voters want a repeat of the Rice Energy story with EQT. Now the Rice Brothers have to produce on the promises made. Mr. Market will be watching this outcome closely.

This proxy battle put the entrenched management in a tough position. They tried to discredit a management whose company was operating well enough to purchase at a premium to the market. Obviously such a newfound attitude did not sell well. Therefore, a senior management change was the result.

The second-quarter earnings report will not be nearly as important as the direction that new management intends to take the company. Clearly, the management of Rice Energy was an energetic and hard driving group of individuals. Nonetheless, those individuals will now be expected to repeat their success with a much larger company. Plenty of administrators and managers work for this company who were not chosen by the new management. Therefore, the transition to new senior management could be challenging. Nonetheless the odds are probably decent that the new management will succeed to the benefit of shareholders.

Stock Price Action

As far as gas producers perform as a group, this company is an above-average gas stock price performer.

Source: Seeking Alpha Website July 23, 2019

That chart may not look like much, but others the author follows have fared much worse during the gas producer industry carnage.

Source: EQT June 2019 Investor Presentation

Management may have been satisfied with the outperformance compared to the competition. Obviously shareholders voted to voice a different opinion. Shareholders probably want to make money as in capital appreciation. Therefore losing less money than the competition was not a viable outcome for many.

The spinoff of Equitrans (ETRN) did liberate some value. As such, that spinoff did provide a cushion to the debacle that is the gas producing industry. However, obviously a whole lot more value realization was needed. The Rice Brothers promise that better return whether or not they realize it. Given the conditions in the gas producing industry, that means shareholder expectations will be extremely high. Therefore, the future of this company could be very interesting.

Finances

Finances are often behind any change in management. This company has reasonable finances. However, those finances are stretched towards the reasonable boundary. That can agitate some in a market that prizes conservative financing.

Source: EQT June 2019 Investor Presentation

The debt of roughly $5 billion shown in the first slide is more than 2 times EBITDA. That is when some investors and creditors begin to be uncomfortable. This is especially true for a gas producer because gas prices have been weak or falling for some time. The outlook is really not expected to improve much over the current situation.

Helping the situation considerably has to be the nearly 20% ownership of Equitrans Midstream. That would be a highly liquid asset available for liquidation should there ever be a credit crunch on the horizon. Even so, the target for debt to EBITDA probably should be 1.5 or lower.

Predictable Change

Large shareholders know when things are heading in the wrong direction. In this case you had a choice of "proven winners" with a company whose management was less than a "top notch competitor". It is almost as though it knew ahead of time the second-quarter results.

Source: EQT Investor Presentation July 25, 2019

Change does not necessarily happen because of the comparisons shown above. But in this case, there was a clear choice to go with "proven winners" whose track record was good enough for EQT to purchase the company. The suspicion was that management was losing its competitive edge. The latest presentation feeds on that suspicion. But that also means that the Rice Brothers are setting some high expectations.

Simply put, management was not in a position to run a campaign to keep its job with those particular second-quarter results on the way. Pointing fingers was not going to work.

Operational Underpinnings

What comes next is something that the institutional investor is far more likely to pick up upon because they have the staff and the time to find the data and come to a more knowledgeable conclusion. Investors that go to work every day with families and bills to pay are more unlikely to have the time to put in for the conclusion the institutional crowd reached.

Source: EQT Investor Presentation July 25, 2019

Shown above is the difference between good enough and a desire to be the best. Good enough begins to open cracks where unexpected disappointments happen. There are enough headwinds as it is in any commodity industry to allow management to become complacent. Here it is becoming evident that at least in the opinion of new management, the previous management was beginning to become complacent.

The danger here is that the new management is setting some high expectations for the near future. Shareholders could become frustrated because results will primarily reflect past actions for some time. EQT is a large company, so new directions and attitudes take a while to become apparent. However, it is also apparent that this management knows how to handle the press. So management may be able to bridge the gap between vision and results adequately.

The Future

The new management intends to raise the expectations of the workforce. This is far from a guaranteed result. But management appears to be doing what it can to put the proper expectations in place. If employee turnover rises, that could set these ambitious plans back somewhat and frustrate new management. Let's see what happens as the future unfolds.

Source: EQT Investor Presentation July 25, 2019

Usually 100-day plans indicate a fairly hard-driving top management with an above-average desire to succeed. The next two quarterly reports will be critical because they will disclose a lot about the implementation of the plans shown above. Usually managements that tackle these issues ahead of time have a better-than-average chance to succeed.

There was nothing wrong with the previous management except for the fact that expectations were not set high enough. That lackadaisical "good enough" attitude was beginning to set in. Time will tell if this new management was correct about raising expectations and execution levels. Sometimes middle managers "burn out" from the inability to keep up. The risks here of the new strategy are largely personnel implementation risks that will show themselves later as financial results somewhere.

Source: EQT Investor Presentation July 25, 2019

The next six-month forecast probably will not change much regardless of who is at the help. Significant improvements should begin to show in the 2020 guidance.

An investment in this company is probably a bet on the tight management reputation of the Rice Brothers. That is probably a very well deserved bet. Therefore, this investment is probably appealing to long-term investors. Traders may want to wait for more tangible results to appear as well as signs the market is responding to perceived operational improvements. The Rice Brothers take over a company in reasonably good shape that was a formidable competitor to start with. Seeing what they can do with the beginning material will be very interesting over the next five years or so.

I analyze oil and gas companies like EQT Corporation and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies - the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

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