After an eventful annual shareholder meeting on July 10 where activist investors were successful in taking control of its board, EQT Corp. has now had its credit rating downgraded by Moody’s Investors Service Inc.

The New York-based ratings and research firm said July 11 it had changed the rating outlook for EQT—the largest natural gas producer in the U.S.—to negative from stable. Moody’s cited weak gas prices and the successful proxy fight led by Rice brothers, Toby and Derek, as driving the change.

Concurrently, Moody’s also affirmed EQT’s Baa3 senior unsecured notes ratings.

“The prospect of EQT’s weakening cash flow metrics in a weak natural gas price environment is further exacerbated by the substantial uncertainty and disruption arising out of company’s announced board and management changes,” Sreedhar Kona, Moody’s senior analyst, said in a statement on July 11.

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Rice Brothers Take Control Of EQT Board In Proxy Fight

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On July 10, a nine-month proxy battle led by Toby and Derek Rice came to an end when EQT shareholders overwhelmingly voted for all seven Rice-nominated directors plus the five nominees supported by both EQT and the Rice team during the company’s annual meeting.

Toby Rice was later named president and CEO of EQT. He succeeds Robert McNally, who had been named as the company’s CEO in August 2018. The new board also elected John McCartney  to serve as EQT chairman.

The successful proxy battle was a first in the U.S. involving a control slate of directors, in which all of the company and dissident’s nominees appeared on their respective proxy cards, according to law firm Olshan Frome Wolosky LLP.

Still, the change in leadership at EQT has created uncertainty around the roughly 130 year-old company’s future, Kona noted.

“A lack of clarity around the company’s future strategy vis-a-vis capital preservation as well as its ability to successfully execute on its debt reduction plan create additional risk that is reflected in the negative outlook,” he said.

The takeover by the Rice team comes roughly two years after the Rice brothers sold the company they had formed, Rice Energy, to EQT for roughly $8.2 billion. The transaction, which was the most expensive U.S. shale merger of 2017, was comprised of stock and cash plus the assumption of debt.

Through its combination with Rice Energy, EQT’s position in the Marcellus Shale grew to about 1 million total net acres. The company also acquired Rice Energy’s midstream business in the Appalachian Basin.

However, EQT’s operational performance severely declined within a year of closing the transaction. As a result, Rice brothers, Toby and Derek, launched a campaign late last year to transform the company.

The third Rice brother and former CEO of Rice Energy, Daniel, did not participate in the proxy fight as he had joined the EQT board following closing of the merger.

As the new EQT CEO, Toby Rice has pledged to complete the transformation that he and his brother set forth in their proxy campaign. In order to realize “EQT’s full potential,” Rice said he plans to reconstruct the blueprint that had led to Rice Energy’s operational success—its people, technology and planning.

Despite the planned transformation, Kona said EQT still faces a tough road ahead due to the outlook of natural gas prices.

“Should the weak natural gas price environment persist the company’s cash flow metrics will be significantly stressed unless the company achieves meaningful debt reduction,” he added.

Emily Patsy can be reached at epatsy@hartenergy.com.

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