The Rice brothers, who control EQT Corp., Americas largest natural gas producer, argue fracking can help green the world.
By Chris Helman
EQT Corp. is a long-standing player in the energy industry.Going back 133 years to Pennsylvania’s earliest days of gas drilling, the headquarters were located in a granite-and glass tower in Pittsburgh. You wouldn’t know that from a visit at the office of Toby Z. Rice, its 39 year-old chief executive. Rice works from a converted taekwondo class upstairs from a Pennsylvania-run liquor store in suburban Carnegie. This is just 15 minutes from the city center. The dojo is home to a life-sized Iron Man, with a gorilla mask on his head, graffiti-inspired art, and a Don’t Tread on Me Gadsden banner.
How did this unconventional Millennial manage to become the country’s largest producer natural gas? Teaming up with family, he was able to luck into the Marcellus Shale Formation at the right moment and made very large bets.
Toby Rice’s brothers, Daniel, 41, & Derek, 36, are his partners in gas exploration. Their father funded $70 million loans to finance the capital. They have been successful in leveraging that stake, and the three of them now total more than $700,000,000.
Marcellus is a shale deposits that extend underground from New York City to West Virginia. This layer of rock became valuable quickly thanks to Fracking technology just as the brothers entered the gas business.
Toby, Daniel, Derek grew up in Boston and lived with their mother after their parents divorced. The boys learned business from their Armenian-immigrant aunts and uncles who were entrepreneurs. Their mother was a chef, and Daniel Rice III, their father, managed a natural resource portfolio at BlackRock. He was a successful hedge fund manager and decided that his sons should be doing something big with it. Daniel the younger said that he planted the seed in our heads.
They had to prepare. Daniel studied oil and gas at Transocean, Tyco, Tyco and Tudor, Pickering, Holt & Co. Derek then became a petroleum geologist, specializing the new field of drilling shale. Toby, an All American college baseball player, was not drafted. He worked as a roughneck at an Texas oil rig earning $9 an hr (plus $2 in safety pay) and then quit to pursue a masters degree in hydraulic fracturing. Rice Energy was founded in 2007 by the trio.
This was during the early days of fracking. The Barnett, a shale-gas field located near Fort Worth in Texas, was the first to be developed. The Marcellus Shale of Pennsylvania was the target of the brothers, as Chesapeake Energy and other larger operators were also beginning to lease land there. Toby lived from his truck, searching for landowners to make lease deals on property that had been overlooked by the big men.
Toby states that I’ve sat at the kitchen tables of more landowners and farmers than any politician in this area. Daniel says, “You start layering scraps upon scraps, and suddenly there is room for four wells.” After Toby’s $2,300 check to 4-H Club of Washington County in Pennsylvania, their father stopped paying attention to the numbers. He had outbid Range Resources to win a charity auction. It’s a great way to get noticed. Derek says that we stormed the basin.
Drill bits are used by frackers to bore down two miles to intersect a thin layer shale that is rich in hydrocarbons. Then, they turn sideways through this shale layer. After cementing the pipe into the hole, the driller uses pinpoint tools to blast holes in it. Next, he injects millions of gallons water and sand at high pressure down the pipe to fracture the rock.
Rice brothers believed in overdoing things. They used three times as much sand per foot of lateral distance than others. If they could produce 4,000 MCFs per hour, the Barnett had shale wells. An MCF (or 1,000 cubic feet) has 8.6 gallons gasoline’s energy content. Rice Energy was producing Marcellus wells at 30,000 MCF per hour.
We were just hoping for something similar to the Barnett. Instead, we were in the first phase of the largest natural gas field, according to Derek. He lived in a trailer on rig site and washed at truck stops. They shared a meal together with each new employee and named drilling projects in honor of comic book heroes.
The Rice Energy trio raised $1B in a 2014 public offer. Daniel was chief executive. Another $400M was raised for a sister company, which owned pipelines. Derek claims that they knew they were not more intelligent than anyone else. Our peers would likely copy our designs. Then supply will skyrocket. The Marcellus’ gas production has skyrocketed to 35 billion cubic yards (BCF) per day, which is nearly a third the U.S. total.
Daniel says that mentally, we were ready to run the company for ever. However, EQT offered $6.7 Billion in stock and cash plus $1.5 Billion in debt. The Rice family received $200 million in cash, and almost 3% of EQT shares. EQT Midstream Partners bought the Rice-founded Pipeline Partnership for $2.4 billion.
The Rices received calls from unhappy shareholders soon after the deals were closed. EQT’s capital budget was $300 million over-spent under Robert McNally, its CEO. It was drilling poorly drilled wells where Rice had been a success. Derek says, “We gave them our drilling schedule for three-years.” After three months, they didn’t know what to do. The share price for EQTs dropped by 45%
Time for a proxy battle. Institutional investors supported the Rice slate of seven board member, which won 80% of votes. In July 2019, McNally was gone and Toby Rice was elected. (Daniel sits on the EQT board, while Derek is an advisor. The new boss reduced staff by 25% to 650 and invested in sensors and software. His Salesforce-enabled dashboard allows the boss to see the conditions of 3,000 wells on 600 locations spread across 1.6million acres.
EQT acquired Chevrons Marcellus operations from Chevrons Marcellus for $735M and Alta Resources, worth $2.9 billion, in recent months. These expansions have pushed EQT to daily gas production levels of 5.5 BCF per day, surpassing No. 2 ExxonMobil.
Sometimes, big bets can prove to be costly. Commodity producers often use options and futures to lock in prices and presell production volumes. Toby went too far with his hedges, and was surprised by the increase in gas prices. His option trades accounted for $3 billion of 2021’s profits. Analysts believe that EQT will deliver $2 billion in cash flow by 2022, net income plus depreciation and maintenance-level capex, on revenue of $5billion. Its shares have increased 40% since Toby took it over, trailing industry peers.
Many environmentalists and politicians would like to see frackers go out of business. Take a look at the numbers, Rices counter: The biggest reason that annual U.S. carbon dioxide emissions have fallen nearly 1 billion tons annually since 2005 is due to the shale gas revolution, which saw power plants switch from coal-fired coal to natural gas. China has seen an increase in its annual emissions of 4.7 billion tons over the same period. Coal use is on the rise. EQT is looking at the possibility of liquefying Marcellus gas and exporting it from the Philadelphia area. It will help to mitigate climate change if that fuel reaches Asia and replaces coal.
What about the potential for methane leaking into the atmosphere, which is a greenhouse gas that is more potent then carbon dioxide? Toby Rice pulls up the dashboard which displays details of his business.
$20 million program to replace 9,000 valves at well sites that were fitted with pneumatics with electric ones that leak almost zero methane. Project Canary, which monitors industrial emissions, was asked to install the latest laser-based sniffers. Chris Romer, founder of Canary, boasts that these sensors can tell if a rig worker has eaten beans for lunch. It costs 2 cents to certify gas as responsibly produced. This certification can also be sold at a premium of 3-13 cents per MCF.
We weren’t going after popular things such as solar and wind. We were pursuing things that make an impact.
Less than 25% of Rice brothers fortune is represented by shares in EQT. Rice Investment Group has sponsored two special purpose acquisitions companies. We were not interested in the popular things like solar or wind. Derek says that we were pursuing things that make a real difference. One of those SPACs went to Archaea Energy. This company is one of the most prominent operators and developers for projects to capture fugitive gas that comes from landfills. This gas is a big source of tax credits. It can generate $15 per MCF in revenue, compared to $5 for regular gas. Nick Stork, 37, Archaea founder and CEO, said that we sell a carbonized energy product to people who still need to use fossil fuels. The Rice brothers control a quarter the shares, valued at $600 million.
Toby believes that he still has much to prove. It will be necessary to outgrow the converted Taekwondo studio. He takes a visitor to a rundown mill complex at Chartiers Creek and Whiskey Creek, in Carnegie, Pennsylvania, where he drives his Dodge truck. Toby sees a revival despite the fact that so many of its mills have closed. Toby hopes to repurpose and reconstruct a number of warehouses and factories. This will create spaces where staff will be happy to work, even if it is not necessary, and where they can contribute to the creation of a shalennial environment. He promises that we will go back to lunch with each new hire.
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