Page 9 of 10 – SEC Filing
With the help of a leading petroleum
engineering firm with extensive experience in the Appalachian basin and experienced industry operators, we have identified
and mapped out every existing and potential future well location on the combined company’s acreage based upon
publicly-available data, assuming 750 foot spacing in Washington County and, even more generously, 500 foot spacing in Greene
County. Based on this work, we believe it would be impossible for EQT to support its claimed synergy drilling plan of
1,200 wells with 12,000 feet in average lateral length. While the over-simplified maps provided in EQT’s presentations
make the synergy claims seem plausible, a detailed analysis reveals that much of the acreage actually consists of hundreds of
disjointed blocks that are not properly depicted in
management’s map. Moreover, many of the larger blocks of adjacent acres (that in theory would enable longer laterals) have
already been drilled out at least on one side. There is simply not enough undrilled contiguous acreage blocks to enable such
a dramatic improvement in lateral length over what can be accomplished by each company on a standalone basis.
Based on our analysis, we believe a combination
with Rice would only modestly increase average lateral lengths by less than 1,000 feet, not the 4,000 feet increase claimed by
EQT. This modest increase in lateral length would result in approximately $300 million in pre-tax capital savings on a net present
value basis, not the $1.9 billion EQT has claimed. This means that the lateral length drilling synergy benefit to legacy EQT shareholders
of a Rice transaction, which is the crux of EQT’s rationale for this deal, would amount to only approximately $200 million
(given that current EQT shareholders will own 65% of the combined company). Adding this approximately $200 million in drilling
synergy to EQT shareholders’ 65% share of the $600 million in pre-tax synergies from G&A reduction, which amounts to
$390 million, results in a total of approximately $590 million of synergies, despite EQT shareholders paying an acquisition premium
to Rice shareholders of $1.8 billion. In fact, given the massive disparity between EQT’s claims and what our analysis reveals,
we are forced to question whether the Board conducted adequate diligence before approving this transaction.
Hollow Arguments for Delaying
Addressing Sum of the Parts Discount. We understand that EQT management in lobbying for the Rice acquisition has
been suggesting to shareholders that they are unable to commit to a spinoff of the midstream business now before
closing the Rice acquisition without triggering a $500 million tax liability, thus supposedly justifying delaying an
announcement until after the acquisition is completed. This argument, however, runs directly counter to management’s prior
assertion that EQT does not have to tax adjust any of the expected deal synergies because they will be shielded from taxes by
intangible drilling costs (IDC). If this is true, then EQT should be able to shield much if not all of the tax liabilities
arising from announcing a separation prior to closing the Rice acquisition. Moreover, it is highly unlikely that these tax
liabilities would be avoided by waiting to make an announcement until March 31, 2018. Management’s gamesmanship regarding
both the timing and steps to be taken to address the sum of parts discount should give serious pause to any shareholder
considering supporting the Rice acquisition on the hope that EQT will in fact commit to an immediate separation after its
acquisition closes.
