[Editor's note: A version of this story appears in the August 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Has the oil and gas industry ever before witnessed what took place last month at EQT—in which a disgruntled investor effectively staged a coup to seize control of the board and management of a major E&P company, and then took over operations? Then again, has the management team of an acquired and long-closed company ever said, “We want our assets back because we think we can do better than you”—and get them?

Never.

Sure, we’ve seen individual E&P shareholders become “activist investors” and buy up a sizeable interest to shake up management. Think Carl Icahn and his impact on Chesapeake Energy Corp. and in SandRidge Energy Inc. Fir Tree Capital Management wrested control of Halcón Resources Corp. and continues to look for an exit. Lion Point Management took formidable stakes in Resolute Energy Corp. and Carrizo Oil & Gas Inc. and pushed for sales of each earlier this year—and each did.

But neither Icahn, nor Fir Tree’s Evan Lederman, nor Lion Point’s Didric Cederholm took the captain’s chair to run the company according to their visions.

Toby Rice did.

But the Rice team was not your typical activist shareholder. Brothers Toby, Derek and Daniel—the operational braintrust behind Rice Energy Corp.—became sizeable investors when EQT bought the brothers’ Appalachian start-up for $6.7 billion (before debt) in December 2017, much of that in equity consideration. Then the value of that equity quickly went south.

It can be debated as to why. EQT’s CEO at acquisition, Steve Schlotterbeck, left the company on short notice and temporarily adrift. The newly appointed CEO, Robert McNally, was heralded as having 20 years of oil and gas experience, but his resume was absent of E&P leadership. And the company was focused on—or distracted by—the separation of its midstream assets from the upstream.

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When operational snafus arose last fall, sending capex up and production targets down, investors were spooked. EQT’s stock plunged 75% since the merger, and the Rice brothers lost hundreds of millions. The anticipated merger synergies that were to create upside had evaporated. And the Rices went into action to either turn around the ship or take it over.

Now, following an 80% investor vote of confidence to reconstruct the board to the Rice team’s makeup, Toby Rice is CEO of the nation’s largest gas producer by volume. His mandate: make EQT as successful as Rice Energy once was. The measure will be shareholder returns.

But the world has changed since the Rice brothers last ran an E&P company. Generalist investors have wholesale abandoned the sector, leaving only hard-core, grizzled oil-and-gas-addicted investors to play. And natural gas prices trending below $2.50 don’t help with investability or cash flow.

Can the Rice brothers save EQT?

Existing investors think so, evidenced by the overwhelming board vote. The Rice team’s 100-day plan calls for implementing techniques to deliver well-cost savings of 33% predicated on simultaneous development of large pads, integrating digital and analytical technologies that were forward-thinking and successful at Rice, and streamlining midstream and water infrastructure.

“The Rice team is in an enviable position,” said Welles Fitzpatrick, a SunTrust Robinson Humphrey analyst, following the vote, “as it has the opportunity to tell a resurrection story and grab attention from investors in a market where others are struggling. Given the team is familiar with the assets already, it may not take as long for the activist group to make meaningful changes as other proxy battles would have.”

Can this type of coup ever happen again? According to Parkman Whaling’s Michael Hanson, unlikely.

“I’m sure there will be many postmortems held and case studies written about the ‘Rice Revolution,’ as board rooms around the industry wonder if what happened at EQT could happen to them. While general underperformance and a broken business model will continue to drive shareholder activism, I doubt coups like Rice’s vs. EQT will become the norm,” he wrote in an email newsletter.

And why not?

“How many shareholders in energy today really care enough to spend the time and capital to mount a proxy war? It’s so much easier to sell and focus on other companies or industries that might provide a better opportunity to make money,” he said, but, “if I had lost a significant portion of my net worth and had a good idea to right the ship, I’d put up a fight too,” he said.

They did. They won. Now they must execute, because everybody is watching to see how this story ends.

I have a request. I consider the readership of Oil and Gas Investor as a community, and I’d like to encourage your feedback. The editorial team strives to bring you the most relevant stories and information to help you drive your business decisions, but what do you think? Would you let me know what content is most relevant to you—and what more you would like to see? Email me at stoon@hartenergy.com.

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